UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
Commission File Number 333-63825
SCOTIA PACIFIC COMPANY LLC
(Exact name of Registrant as specified in its charter)
DELAWARE 68-0414690
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
P. O. BOX 712 95565
125 MAIN STREET, 2ND FLOOR (Zip Code)
SCOTIA, CALIFORNIA
(Address of Principal
Executive Offices)
Registrant's telephone number, including area code: (707) 764-2330
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
The Registrant is a limited liability company wholly owned by an affiliate
of the Registrant.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A)
AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheet at June 30, 1999 and December 31, 1998
Statement of Income (Loss) for the three and six months
ended June 30, 1999 and 1998
Statement of Cash Flows for the six months ended June 30,
1999 and 1998
Condensed Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signature
APPENDIX A - GLOSSARY OF DEFINED TERMS
SCOTIA PACIFIC COMPANY LLC
BALANCE SHEET
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5.6 $ 31.9
Receivables from Pacific Lumber 4.0 2.9
Prepaid timber harvesting costs 3.1 2.6
Other prepaid expenses and current assets 0.3 0.5
------------ ------------
Total current assets 13.0 37.9
Timber and timberlands, net of accumulated
depletion of $245.1 and $243.1, respectively 270.9 252.0
Property and equipment, net of accumulated
depreciation of $8.7 and $7.9, respectively 15.0 14.4
Deferred financing costs, net 21.7 22.5
Restricted cash 3.7 16.6
Other assets 2.4 2.3
------------ ------------
$ 326.7 $ 345.7
============ ============
LIABILITIES AND MEMBER DEFICIT
Current liabilities:
Due to Pacific Lumber $ 1.1 $ 0.8
Accrued interest 28.2 28.4
Other accrued liabilities 1.4 1.7
Long-term debt, current maturities 15.9 8.2
------------ ------------
Total current liabilities 46.6 39.1
Long-term debt, less current maturities 846.5 859.5
------------ ------------
Total liabilities 893.1 898.6
------------ ------------
Contingencies
Member deficit (566.4) (552.9)
------------ ------------
$ 326.7 $ 345.7
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
SCOTIA PACIFIC COMPANY LLC
STATEMENT OF INCOME (LOSS)
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
1999 1998 1999 1998
------------ ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Log sales to Pacific Lumber $ 8.4 $ 24.8 $ 14.7 $ 34.5
------------ ----------- ------------ -------------
Operating expenses:
General and administrative 2.3 1.8 4.7 3.3
Depletion and depreciation 1.4 3.4 2.8 5.0
------------ ----------- ------------ -------------
3.7 5.2 7.5 8.3
------------ ----------- ------------ -------------
Operating income 4.7 19.6 7.2 26.2
Other income (expense):
Interest and other income 0.1 0.6 0.5 1.3
Interest expense (16.3) (6.5) (32.6) (13.2)
------------ ----------- ------------ -------------
Income (loss) before income taxes (11.5) 13.7 (24.9) 14.3
Provision in lieu of income taxes - (5.6) - (5.8)
------------ ----------- ------------ -------------
Net income (loss) $ (11.5) $ 8.1 $ (24.9) $ 8.5
============ =========== ============ =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
SCOTIA PACIFIC COMPANY LLC
STATEMENT OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (24.9) $ 8.5
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Gain on sale of assets (0.2) -
Provision in lieu of income taxes - 5.8
Depletion and depreciation 2.8 5.0
Amortization of deferred financing
costs 0.8 0.6
Increase (decrease) in cash resulting
from changes in:
Receivables (1.0) (6.9)
Prepaid expenses and other assets (0.6) (0.7)
Accrued interest (0.2) (0.4)
Other accrued liabilities - 0.2
Other - 0.1
------------ ------------
Net cash provided by (used for)
operating activities (23.3) 12.2
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (15.9) (2.9)
Restricted cash withdrawals used to acquire
timberlands 12.9 -
Net proceeds from sale of assets 0.3 -
------------ ------------
Net cash used for investing activities (2.7) (2.9)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on Timber Notes (5.4) (10.8)
Incurrence of deferred financing costs (0.2) -
Dividends paid - (6.7)
Other changes in restricted cash - 0.3
Member contributions 5.3 0.6
------------ ------------
Net cash used for financing activities (0.3) (16.6)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (26.3) (7.3)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 31.9 20.9
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5.6 $ 13.6
============ ============
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Assumption of net tax liabilities by Pacific
Lumber $ - $ 5.2
Contribution of timber and timberlands by
Pacific Lumber 6.1 -
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 32.0 $ 13.0
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
SCOTIA PACIFIC COMPANY LLC
CONDENSED NOTES TO FINANCIAL STATEMENTS
1. GENERAL
The information contained in the following notes to the financial
statements is condensed from that which would appear in the annual
financial statements; accordingly, the financial statements included herein
should be reviewed in conjunction with the financial statements and
related notes thereto contained in the Form 10-K. Any capitalized terms
used but not defined in these Condensed Notes to Financial Statements are
defined in the "Glossary of Defined Terms" contained in Appendix A.
Accounting measurements at interim dates inherently involve greater
reliance on estimates than at year end. The results of operations for the
interim periods presented are not necessarily indicative of the results to
be expected for the entire year.
The financial statements included herein are unaudited; however,
they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary to present fairly the financial
position of the Company at June 30, 1999, the results of operations for the
three and six months ended June 30, 1999 and 1998 and the cash flows for the
six months ended June 30, 1999 and 1998. 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.
There were no reconciling differences between the Company's net
income and comprehensive income for either of the three and six month
periods ended June 30, 1999 and 1998.
2. HEADWATERS TRANSACTIONS
As described in Note 4 below, on September 28, 1996, the Pacific
Lumber Parties entered into the Headwaters Agreement with the United States
and California which provided 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 were owned by Salmon Creek, with the
remaining 700 acres being owned by the Company (Pacific Lumber owned the
timber and related timber harvesting rights on the Company's acreage). On
March 1, 1999, the Pacific Lumber Parties, the United States and California
consummated the Headwaters Agreement. Salmon Creek received $299.9 million
for its 4,900 acres, and for its 700 acres, Pacific Lumber received the
7,700 acre Elk River Timberlands which Pacific Lumber contributed to the
Company in June 1999. Of these proceeds, $285.0 million was deposited
into an escrow account held by an escrow agent and are to be made available
as necessary to support the Timber Notes, and may be released only under
certain circumstances. As of June 30, 1999, the Escrowed Funds were $288.2
million, which includes interest earned.
The Company and Pacific Lumber also entered into the Owl Creek
Agreement and the Grizzly Creek Agreement with California regarding the
future sale to California of the Owl Creek and Grizzly Creek groves. The
Owl Creek Agreement provides for the Company to sell the Owl Creek grove to
California, no later than June 30, 2002, for the lesser of the appraised
fair market value or $79.7 million. At California's option, 25% of the
payment may be paid upon closing with three equal annual installments
thereafter and without interest. The sale of the Owl Creek grove will not
be reflected in the Company's financial statements until it has been
concluded. With respect to the Grizzly Creek Agreement, California may
purchase from Pacific Lumber, no later than October 31, 2000, a portion of
this grove for a purchase price determined based on fair market value, but
not to exceed $19.9 million. The net proceeds from the Grizzly Creek grove
will be placed into an escrow account (on the same basis as the net
proceeds from the sale of the Headwaters Timberlands) unless, at the time
of receipt of such proceeds, the Escrowed Funds are no longer held in an
escrow account. California also has a five year option under the Grizzly
Creek Agreement to purchase additional property adjacent to the Grizzly
Creek grove which is within the Grizzly Creek conservation area.
3. RESTRICTED CASH
Cash and cash equivalents include restricted cash held for debt
service payments on the Timber Notes of $4.6 million and $28.4 million at
June 30, 1999 and December 31, 1998, respectively.
Long-term restricted cash represents the amount deposited into an
account held by the trustee under the indenture governing the Timber Notes.
At June 30, 1999 and December 31, 1998, long-term restricted cash primarily
consists of $3.3 million and $16.1 million which is remaining from the $25
million of the proceeds deposited into the Prefunding Account.
4. CONTINGENCIES
Regulatory and environmental matters play a significant role in
the Company's business, which is subject to a variety of California and
federal laws and regulations as well as the Final HCP, Final SYP and
Pacific Lumber's 1999 TOL, 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 operations, prior to 1998 they had not had a
significant adverse effect on the Company's financial position, results of
operations or liquidity. However, the Company's results of operations for
1998 and for 1999 through the date of this report were adversely affected
by certain regulatory and environmental matters, including during the
second half of 1998 through the date of this report, the absence of a
sufficient number of available THPs to enable the Company to conduct its
operations at historic levels.
On September 28, 1996, the Pacific Lumber Parties entered into
the Headwaters Agreement with the United States and California which
provided the framework for the acquisition of the Headwaters Timberlands by
the United States and California. Consummation of the Headwaters Agreement
was also conditioned upon, among other things, approval of an SYP,
approval of a Multi-Species HCP and issuance of the Permits. As further
described in Note 2 "Headwaters Transactions," on March 1, 1999, the
Pacific Lumber Parties, the United States and California consummated the
Headwaters Agreement. In addition to the transfer of the Headwaters
Timberlands by the Pacific Lumber Parties described in Note 2, the Final
SYP and the Final HCP were approved and the Permits were issued. The
Pacific Lumber Parties and California also executed the California
Agreement.
The Final SYP complies with certain California Board of Forestry
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. An SYP must demonstrate that the average annual harvest
over any rolling ten-year period will not exceed the LTSY harvest level and
that a timber company's projected timber inventory is capable of sustaining
the LTSY harvest level in the last decade of the 100-year planning period.
The Final SYP is effective for 10 years and may be amended by Pacific
Lumber subject to approval by the CDF. The Final SYP is subject to review
after five years. 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.
Several species, including the northern spotted owl, the marbled
murrelet, the coho salmon and the steelhead trout, have been listed as
endangered or threatened under the ESA and/or the CESA. The Final HCP and
the Permits allow incidental "take" of these and certain other listed
species so long as there is no "jeopardy" to the continued existence of
such species. The Final HCP identifies the measures to be instituted in
order to minimize and mitigate the anticipated level of take to the
greatest extent practicable. The Final HCP not only provides for the
Company's compliance with habitat requirements for the northern spotted
owl, the marbled murrelet, the coho salmon and the steelhead trout, it also
provides for issuance of Permits for thirteen additional species that are
or may be listed in the future. The Final HCP and related Permits have a
term of 50 years, and, among other things, include the following protective
measures: (i) setting aside timberlands as marbled murrelet conservation
areas; (ii) establishing streamside "no-cut" and limited cut buffers and
identifying mass wasting areas of concern based on an assessment of each of
the Company's watersheds to be completed within five years; (iii) limiting
harvesting activities during certain times of the year and during wet
weather conditions, and (iv) making certain specified improvements to the
Company's roads. The Final SYP is also subject to the foregoing
provisions. The Company believes that the Final SYP and the Final HCP
should in the long-term expedite the preparation and facilitate approval of
its THPs, although the Company is experiencing difficulties in the THP
submission and approval process as it implements these agreements.
Under the Federal Clean Water Act, the EPA is required to
establish TMDLs in water courses that have been declared to be "water
quality impaired." The EPA and the North Coast Regional Water Quality
Control Board are in the process of establishing TMDLs for seventeen
northern California rivers and certain of their tributaries, including
certain water courses that flow within the Company's timberlands. The
final TMDL requirements applicable to the Company's timberlands may require
aquatic measures that are different from or in addition to the
prescriptions to be developed pursuant to the watershed analysis process
contained in the Final HCP.
Lawsuits are pending and threatened which seek to prevent the
Company from implementing the Final HCP and/or the Final SYP, implementing
certain of the Company's approved THPs or carrying out certain other
operations. On or about January 29, 1999, the Company received the EPIC
Notice Letter which alleges various violations of the ESA and challenges,
among other things, the validity and legality of the Permits. On or about
May 21, 1999, EPIC and other environmental groups sent the Supplemental
EPIC Notice Letter, incorporating the EPIC Notice Letter and threatening to
sue the Company, MAXXAM, Pacific Lumber, Salmon Creek and various
government agencies for alleged violations of the ESA relating to various
aspects of the Headwaters Agreement. Separately, on March 31, 1999, the
EPIC-SYP/Permits lawsuit was filed which alleges various violations of the
CESA and CEQA, and challenges, among other things, the validity and
legality of the Permits issued by California and the Final SYP. On March
31, 1999, the USWA lawsuit was filed which also challenges the validity and
legality of the Final SYP. The Company believes that appropriate
procedures were followed throughout the public review and approval process
concerning the Final Plans, and the Company is working with the relevant
state and federal agencies to defend these challenges. Although
uncertainties are inherent in the final outcome of the EPIC Notice Letter,
the Supplemental EPIC Notice Letter, the EPIC-SYP/Permits lawsuit and the
USWA lawsuit, the Company believes that the resolution of these matters
should not result in a material adverse effect on its financial condition
or results of operations or the ability to harvest timber. While the
Company expects environmentally focused objections and lawsuits to
continue, it believes that the Final HCP, Final SYP and the Permits should
enhance its position in connection with these continuing challenges and,
over time, reduce or minimize such challenges.
5. MEMBER DEFICIT
A reconciliation of the activity in member deficit is as follows
(in millions):
<TABLE>
<CAPTION>
Six Months
Ended
June 30, 1999
-------------
<S> <C>
Balance at beginning of period $ (552.9)
Net loss (24.9)
Member contributions 11.4
------------
Balance at end of period $ (566.4)
============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the response to
Part I, Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any
capitalized terms used but not defined in this Item are defined in the
"Glossary of Defined Terms" contained in Appendix A.
This Quarterly Report on Form 10-Q contains statements which
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a
number of places in this section and in Part II. Item 1. "Legal
Proceedings." Such statements can be identified by the use of forward-
looking terminology such as "believes," "expects," "may," "estimates,"
"will," "should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of
strategy. Readers are cautioned that any such forward-looking statements
are not guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from 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 Form 10-Q and the Form 10-K identify other factors
that could cause such differences. No assurance can be given that these
are all of the factors that could cause actual results to vary materially
from the forward-looking statements.
RESULTS OF OPERATIONS
General
The Mbfe concept was used in structuring the Timber Notes in
order to take account of the relative values of the species and categories
of timber included in the Company's timberlands. 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's timberlands
was assigned a value in Mbfe equal to a fraction of a Mbfe. This fraction
was generally determined by dividing the SBE Price applicable to such
species and category for the first half of 1998 by the SBE Price applicable
to old growth redwood for the first half of 1998. Historical harvest
volumes reflected in this report are stated on a Mbfe basis.
The New Master Purchase Agreement generally contemplates that all
sales of logs by the Company to Pacific Lumber will be at the SBE Price.
Harvest Value Schedules setting forth the SBE Prices 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 regions. 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.
Seasonality
Logging operations on the Company's timberlands are highly
seasonal and have historically been significantly higher in the months of
April through November than in the months of December through March.
Management expects that the Company's revenues and cash flows will continue
to be markedly seasonal. The impact of seasonality on the Company's
results is expected to become more pronounced than it has been historically
because of the harvesting, road use, wet weather and other restrictions
imposed by the Final HCP. As a result, a substantial majority of the
future harvesting on the Company's timberlands can be expected to be
concentrated during the period from June through October of each year.
Some of these restrictions may be modified under the adaptive management
provision contained in the Final HCP, and as a result of the watershed
analysis process to be performed over the five-year period which commenced
March 1, 1999. See Note 4 to the Financial Statements.
Log sales to Pacific Lumber
Net sales from logs were $8.4 million and $24.8 million for the
three months ended June 30, 1999 and 1998, respectively. The volume of log
deliveries for such periods represented approximately 12,400 Mbfe and
35,900 Mbfe, respectively. Net sales from logs were $14.7 million and
$34.5 million for the six months ended June 30, 1999 and 1998,
respectively. This represents a log volume of 23,400 Mbfe and 50,600 Mbfe,
respectively. Substantially all of the decrease in net sales between
periods was due to the decline in the volume of log deliveries, which was
due largely to the absence of a sufficient number of available THPs. See
"--Trends" for further discussion of the factors affecting the supply of
approved THPs.
Operating income and income (loss) before income taxes
Operating income was $4.7 million and $19.6 million for the three
months ended June 30, 1999 and 1998, respectively. Operating income was
$7.2 million and $26.2 million for the six months ended June 30, 1999 and
1998, respectively. The decline in operating income is principally due to
the decrease in log sales discussed above and an increase in general and
administrative expense due to higher road maintenance costs under the New
Services Agreement and professional and consulting services. Income (loss)
before income taxes was $(11.5) million and $13.7 million for the three
months ended June 30, 1999 and 1998, respectively. Income (loss) before
income taxes was $(24.9) million and $14.3 million for the six months ended
June 30, 1999 and 1998, respectively. In addition to the decline in
operating income, income (loss) before income taxes was also affected by an
increase in interest expense which was the result of the issuance of the
Timber Notes in July 1998.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See above for cautionary information with respect to
such forward-looking statements.
The Escrowed Funds, including accumulated interest, were $288.2
million as of June 30, 1999 and are to be made available as necessary to
support the Timber Notes. The Escrowed Funds will be released by the
Escrow Agent only in accordance with the terms of the Escrow Agreement.
On July 16, 1999, the Line of Credit Agreement was extended for
an additional year to July 16, 2000. Interest on initial borrowings
outstanding for less than six months was increased to the Base Rate (as
defined in the agreement) plus 0.25% or a one month or six month LIBOR rate
plus 1%.
On the July 20, 1999 note payment date, the Company had $6.5
million in cash available to pay the $31.6 million of interest due on the
Timber Notes. The Company borrowed the remaining $25.1 million in funds
under the terms of the Line of Credit Agreement. In addition, the Company
paid approximately $2.8 million of principal on the Timber Notes (the
amount equal to Scheduled Amortization) using funds received as a capital
contribution from Pacific Lumber. Funds for the $2.8 million principal
payment were provided from the Escrowed Funds and were released in
accordance with the terms of the Escrow Agreement. The indenture governing
the Timber Notes was amended to allow the capital contribution from Pacific
Lumber to be applied as a principal payment.
The Company believes that it will not generate sufficient cash
from operations to pay all of the interest on the Timber Notes on the
January 20, 2000 payment date. However, the Company expects that funds
sufficient to meet debt service obligations on the Timber Notes on such
date will either be made available from funds borrowed under the Line of
Credit Agreement, through capital contributions from Pacific Lumber or
a direct or indirect parent corporation, or from the use of funds now
held under the Escrow Agreement.
With respect to long-term liquidity, the Company believes that,
without giving effect to any use of the funds held under the Escrow
Agreement, its existing cash and funds available under the Line of Credit
Agreement, together with its ability to generate sufficient levels of cash
flows from operations over the long term, should provide sufficient funds
to meet its long-term working capital, capital expenditures and required
debt service obligations. If the Company generates excess funds after the
payment of operating expenses, capital expenditures, interest, premiums and
required principal payments, it may at its option either pay dividends,
retain these funds for internal purposes or make voluntary principal
payments. Cash flows from operations may continue to be adversely affected
if the Company does not experience improvements in the THP submission and
approval process, or if inclement weather conditions or seasonal operating
restrictions under the Final HCP hamper harvesting operations. Cash flows
from operations would also be adversely affected if additional judicial or
regulatory restrictions are imposed on the Company's harvesting activities,
or if the Final Plans are not implemented in accordance with the Company's
current expectations.
TRENDS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See above for cautionary information with respect to
such forward-looking statements.
Regulatory and environmental matters play a significant role in
the Company's business, which is subject to a variety of California and
federal laws and regulations, as well as the Final HCP, Final SYP and Pacific
Lumber's 1999 TOL, dealing with timber harvesting practices, 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. The Company has also
been adversely affected by a lack of available logs as a result of a severely
diminished supply of available THPs. Prior to the consummation of the
Headwaters Agreement on March 1, 1999, the reduced number of approved THPs
was attributable to several factors, including a significantly reduced
level of THPs submitted by the Company to the CDF during 1998 and during
the first two months of 1999 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, responding to comments on the Combined Plan,
assessing and responding to federal and state proposals and changes
concerning the Combined Plan and evaluating the Final Plans, (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 (in
accordance with the New Additional Services Agreement) with responding to
newly filed litigation involving certain of the Company's approved THPs and
(b) implementation of a provision contained in the Pre-Permit Agreement
which required, for the first time, a licensed geologist to review
virtually all of the Company's THPs prior to submission to the CDF. The
Company 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 emerged in applying the requirements embodied in the Pre-Permit
Agreement to the Company's THPs, certain of which requirements imposed new
forestry practices that applied solely to operations on the Company's
timberlands.
With the consummation of the Headwaters Agreement, Pacific Lumber
has completed its work in connection with preparation of the Final Plans;
however, significant additional work continues to be required in connection
with their implementation. The remainder of 1999 will be a transition year
for the Company with respect to the filing and approval of its THPs.
Certain of the THPs which were approved by the CDF prior to March 1, 1999
were grandfathered under the Implementation Agreement, and are harvestable
subject to the harvesting restrictions prescribed under the THPs and
satisfaction of certain agreed conditions. The remaining THPs which were
in the process of being reviewed but were not yet approved by the CDF at
the time of the consummation of the Final Plans each require varying
degrees of revisions. The Company believes that the rate of submissions of
THPs and the review and approval of THPs during at least the third quarter
will continue to be slower than the Company has historically experienced
as the Company, the CDF and other agencies develop procedures for
implementing the Final Plans. Nevertheless, the Company anticipates that
after a transition period, the implementation of the Final Plans will
streamline the process of preparing THPs and potentially shorten the time
to obtain approval of THPs.
There can be no assurance that the Company will not continue to
experience difficulties in receiving approvals of its THPs similar to those
it has been experiencing. Furthermore, there can be no assurance that
certain pending legal, 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 the Company's financial position, results of operations or
liquidity. See Part II. Item 1. "Legal Proceedings" and Note 4 to the
Financial Statements for further information regarding regulatory and
legal proceedings affecting the Company.
YEAR 2000
Management has completed its assessment of modifications to and
testing of the Company's critical information technology and embedded
technology. 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 modification costs and the costs
associated with new systems were less than $50,000. Systems modification
costs were being expensed as incurred. Costs associated with new systems
were capitalized and will be amortized over the life of the product.
In addition to addressing the Company's internal systems,
management has identified key vendors that could be impacted by year 2000
issues, and surveys have been conducted regarding their compliance efforts.
Management is evaluating the responses to the surveys and making 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 except with respect to the cogeneration
plant, has completed the required modifications and testing. Modifications
and testing of the cogeneration plant are expected to be completed by the
end of the third quarter of 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 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 remedied at
minimal cost 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 encountered 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Form 10-K for information
concerning material legal proceedings with respect to the Company. The
following material developments have occurred with respect to such legal
proceedings subsequent to the filing of the Form 10-K.
TIMBER HARVESTING LITIGATION
With respect to the Mateel action, this case has been set for
trial on November 15, 1999.
On March 31, 1999, the EPIC-SYP/Permits lawsuit was filed against
the Company, Pacific Lumber, Salmon Creek, and others in the Superior Court
of Sacramento County (subsequently transferred to the Superior Court of
Humboldt County pursuant to Pacific Lumber's motion). This action alleges,
among other things, that the CDF and the CDFG violated the CEQA and the
CESA with respect to the Final SYP and the Permits issued by California.
The plaintiffs seek, among other things, injunctive relief to set aside the
CDF's and the CDFG's decisions approving the Final SYP and the Permits
issued by California.
On March 31, 1999, the USWA lawsuit was also filed against the
Company, Pacific Lumber and Salmon Creek in the California Superior Court
of Sacramento County (subsequently transferred to the Superior Court of
Humboldt County pursuant to Pacific Lumber's motion). This action alleges,
among other things, violations of the Forest Practice Act in connection
with the CDF's approval of the Final SYP. The plaintiffs seek to prohibit
the CDF from approving any THPs relying on the Final SYP.
The Company believes that appropriate procedures were followed
throughout the public review and approval process concerning the Final
Plans, and the Company is working with the relevant state and federal
agencies to defend the USWA lawsuit and the EPIC-SYP/Permits lawsuit.
Although uncertainties are inherent in the final outcome of the EPIC-
SYP/Permits lawsuit and the USWA lawsuit, the Company believes that the
resolution of these matters should not result in a material adverse effect
on its financial condition or results of operations or the ability to
harvest timber.
With respect to the EPIC lawsuit described in the Form 10-K, on
May 5, 1999, the Court dissolved the preliminary injunction, granted the
defendants' motion for summary judgment and dismissed the case as moot.
HUNSAKER MATTER
With respect to the Hunsaker action described in the Form 10-K,
on March 30, 1999, the Court dismissed the lawsuit with prejudice and
ordered the plaintiffs to pay the defendants' costs with respect to the
lawsuit. On April 30, 1999, the plaintiffs filed a notice of appeal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
A. EXHIBITS:
<S> <C>
*4.1 First Supplemental Indenture, dated as of July 16, 1999, to the
Indenture between the Company and State Street Bank and
Trust Company regarding the Company's Class A-1, Class A-2 and
Class A-3 Timber Collateralized Notes
*4.2 First Amendment, dated as of July 16, 1999, to the Line of Credit
Agreement among the Company, the financial institutions party
thereto and Bank of America National Trust and Savings
Association, as agent
*27 Financial Data Schedule for the six months ended June 30, 1999
* Included with this filing
B. REPORTS ON FORM 8-K:
None.
</TABLE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized, who has signed this report on
behalf of the Registrant and as the principal financial and accounting
officer of the Registrant.
SCOTIA PACIFIC COMPANY LLC
Date: August 13, 1999 By: /s/ GARY L. CLARK
Gary L. Clark
Vice President - Finance and
Administration
(Principal Financial and
Accounting Officer)
APPENDIX A
GLOSSARY OF DEFINED TERMS
California Agreement: An agreement between the Pacific Lumber Parties and
California regarding the enforcement of the California bill which
authorized state funds for the purchase of the Headwaters Timberlands
while imposing certain environmental restrictions on the remaining
timberlands held by the Pacific Lumber Parties
CDF: California Department of Forestry and Fire Protection
CDFG: California Department of Fish and Game
CEQA: California Environmental Quality Act
CESA: California Endangered Species Act
Combined Plan: The combined SYP and Multi-Species HCP released by Pacific
Lumber and the Company for public review and comment in July 1998
Company: Scotia Pacific Company LLC, a limited liability company wholly
owned by Pacific Lumber
Elk River Timberlands: The 7,700 acres of timberlands transferred to
Pacific Lumber upon the consummation of the Headwaters Agreement
EPA: Environmental Protection Agency
EPIC: Environmental Protection Information Center, Inc.
EPIC lawsuit: An action entitled Environmental Protection Information
Center, Inc., Sierra Club v. The Pacific Lumber Company, Scotia
Pacific Holding Company and Salmon Creek Corporation (No. C-98-3129)
filed August 12, 1998 in the United States District Court for the
Northern District of California
EPIC Notice Letter: A notice received by the Company on or about January
29, 1999 from EPIC and the Sierra Club of their intent to sue Pacific
Lumber, the Company and several federal agencies under the ESA
EPIC-SYP/Permits lawsuit: An action entitled Environmental Protection
Information Association, Sierra Club v. California Department of
Forestry and Fire Protection, California Department of Fish and Game,
The Pacific Lumber Company, Scotia Pacific Company LLC, Salmon Creek
Corporation, et al. (No. 99CS00639) filed March 31, 1999 in the
Superior Court of Sacramento County and transferred to the Superior
Court of Humboldt County on July 13, 1999 (No. CV-990445)
ESA: The federal Endangered Species Act
Escrow Agent: The agent holding the Escrowed Funds under the Escrow
Agreement
Escrow Agreement: The agreement covering the Escrowed Funds
Escrowed Funds: Proceeds of $285.0 million received by Salmon Creek in
connection with the sale of the Headwaters Timberlands, plus accrued
interest, which have been deposited into an escrow account pursuant to
the Escrow Agreement as necessary to support the Timber Notes
Final HCP: The Multi-Species HCP approved on March 1, 1999 in connection
with the consummation of the Headwaters Agreement
Final Plans: The Final HCP and the Final SYP
Final SYP: The SYP approved on March 1, 1999 in connection with the
consummation of the Headwaters Agreement
Forest Practice Act: The California Forest Practice Act
Form 10-K: The Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the fiscal year ended December
31, 1998
GIS: The geographical information system of the Company
Grizzly Creek Agreement: The agreement entered into by the Company and
Pacific Lumber with California regarding the future sale of a portion
of the Grizzly Creek grove
Grizzly Creek Grove: A grove of approximately 1,000 acres of primarily old
growth timber owned by Pacific Lumber on land owned by the Company
Harvest Value Schedule: A schedule setting forth the SBE Prices published
bi-annually by the California Board of Equalization applicable to the
timber sold during the period covered by the schedule for purposes of
computing timber yield taxes
Headwaters Agreement: The September 28, 1996 agreement between the Pacific
Lumber Parties, the United States and California which provided the
framework for the acquisition by the United States and California of
the Headwaters Timberlands
Headwaters Timberlands: Approximately 5,600 acres of Pacific Lumber
timberlands consisting of two forest groves commonly referred to as
the Headwaters Forest and the Elk Head Springs Forest which were sold
to the United States and California on March 1, 1999
Hunsaker action: An action entitled William Hunsaker, et al. v. Charles E.
Hurwitz, The Pacific Lumber Company, MAXXAM Group Inc., MXM Corp.,
Federated Development Company and Does (1-50) (No. C98-4515) filed
November 24, 1998 in the United States District Court for the Northern
District of California
Implementation Agreement: The Implementation Agreement with Regard to
Habitat Conservation Plan agreed to in connection with the
consummation of the Headwaters Agreement
June 1998 SBE Prices: SBE Prices applicable to the six month period ended
June 30, 1998
Line of Credit Agreement: The agreement between a group of lenders and the
Company pursuant to which the Company may borrow in order to pay
interest on the Timber Notes
LTSY: Long-term sustained yield
Mateel action: An action entitled Mateel Environmental Justice Foundation
v. Pacific Lumber, Scotia Pacific Holding Company, Salmon Creek
Corporation and MAXXAM Group Inc. (No. DR 980301) brought on May 27,
1998 in the Superior Court of Humboldt County
MAXXAM: MAXXAM Inc.
Mbfe: A concept developed for use in structuring the Timber Notes; under
this concept one thousand board feet, net Scribner scale, of residual
old growth redwood timber equates to one Mbfe
MGHI: MAXXAM Group Holdings Inc., a wholly owned subsidiary of MAXXAM
MGI: MAXXAM Group Inc., a wholly owned subsidiary of MGHI
Multi-Species HCP: A habitat conservation plan covering multiple species
New Additional Services Agreement: An agreement whereby the Company is to
provide certain services to Pacific Lumber in return for which the
Company is paid a fee
New Master Purchase Agreement: The agreement entered into between Pacific
Lumber and the Company that governs all purchases of logs by Pacific
Lumber from the Company after July 19, 1998
Owl Creek Agreement: The agreement entered into by the Company with
California regarding the future sale of the Owl Creek grove
Owl Creek Grove: A grove of approximately 900 acres of primarily old
growth timber owned by the Company
Pacific Lumber: The Pacific Lumber Company, an indirect, wholly owned
subsidiary of MGI
Pacific Lumber Parties: Pacific Lumber, including its subsidiaries and
affiliates, and MAXXAM
Permits: The incidental take permits issued by the United States and
California pursuant to the Final HCP
Prefunding Account: Restricted cash held in an account by the trustee
under the indenture governing the Timber Notes to enable the Company
to acquire timberlands
Pre-Permit Agreement: The February 27, 1998 Pre-Permit Application
Agreement in Principle entered into by Pacific Lumber, MAXXAM and
various government agencies regarding certain understandings that they
had reached regarding the Multi-Species HCP, the Permits and the SYP
Salmon Creek: Salmon Creek Corporation, a wholly owned subsidiary of
Pacific Lumber
SBE Price: The applicable stumpage price for a particular species and
category of log, as set forth in the most recent Harvest Value
Schedule 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
Scheduled Amortization: The amount of principal which the Company must pay
through each Timber Note payment date in order to avoid prepayment or
deficiency premiums
Supplemental EPIC Notice Letter: A notice sent to the Company, MAXXAM,
Pacific Lumber, Salmon Creek and various government agencies on or
about May 21, 1999 from EPIC, the Sierra Club and other environmental
groups incorporating the EPIC Notice Letter and alleging violations of
the ESA relating to various aspects of the Headwaters Agreement
SYP: Sustained yield plan establishing long-term sustained yield harvest
levels for a company's timberlands
THP: Timber harvesting plan required to be filed with and approved by the
CDF prior to the harvesting of timber
Timber Notes: The Company's $867.2 million original aggregate principal
amount of 6.55% Series B Class A-1 Timber Collateralized Notes, 7.11%
Series B Class A-2 Timber Collateralized Notes and 7.71% Series B
Class A-3 Timber Collateralized Notes due July 20, 2028
TMDLs: Total maximum daily load limits
TOL: Timber operator's license allowing the holder to conduct timber
harvesting operations
USWA lawsuit: An action entitled United Steelworkers of America, AFL-CIO,
CLC, and Donald Kegley v. California Department of Forestry and Fire
Protection, The Pacific Lumber Company, Scotia Pacific Company LLC and
Salmon Creek Corporation (No. 99CS00626) filed on March 31, 1999 in
the Superior Court of Sacramento County and transferred to the
Superior Court of Humboldt County on July 13, 1999 (No. CV-990452)
SCOTIA PACIFIC COMPANY LLC
and
STATE STREET BANK AND TRUST COMPANY, as Trustee
FIRST SUPPLEMENTAL INDENTURE
Dated as of July 16, 1999
to
INDENTURE
Dated as of July 20, 1998
6.55% Class A-1 Timber Collateralized Notes
7.11% Class A-2 Timber Collateralized Notes
7.71% Class A-3 Timber Collateralized Notes
Due 2028
FIRST SUPPLEMENTAL INDENTURE, dated as of July 16, 1999, between
SCOTIA PACIFIC COMPANY LLC, a Delaware limited liability company (the
"Issuer"), and State Street Bank and Trust Company, a Massachusetts trust
company, as Trustee (the "Trustee").
WHEREAS, the Issuer and the Trustee executed an Indenture dated
as of July 20, 1998 (the "Indenture"), in respect of the Issuer's 6.55%
Class A-1 Timber Collateralized Notes, 7.11% Class A-2 Timber
Collateralized Notes and 7.71% Class A-3 Timber Collateralized Notes;
WHEREAS, for all purposes of this First Supplemental Indenture,
except as otherwise defined or unless the context otherwise requires, terms
used in capitalized form in this First Supplemental Indenture and defined
in the Indenture have the meanings specified in the Indenture;
WHEREAS, Section 10.1 of the Indenture permits the Issuer and the
Trustee to amend, supplement or otherwise amend or modify the Indenture as
hereinafter provided; and
WHEREAS, all conditions and requirements necessary to make this
First Supplemental Indenture a valid, binding and legal instrument in
accordance with its terms have been performed and fulfilled and the
execution and delivery hereof have been in all respects duly authorized;
NOW, THEREFORE, in consideration of the above premises, each
party agrees, for the benefit of the other and for the equal and ratable
benefit of the holders of the Notes, as follows:
ARTICLE I
AMENDMENTS
The Indenture is hereby amended as follows:
Section 1.1 Section 5.7 of the Indenture is hereby amended by
adding thereto a new subsection (g), to read in its entirety as follows:
(g) Notwithstanding the foregoing provisions of this Section
5.7, (i) the Issuer may, prior to 1:00 P.M. on the Note Payment Date
occurring on July 20, 1999, transfer (or arrange or cause to be
transferred) to the Trustee funds not subject to the Lien of the Deed of
Trust with written instructions that such funds be used to make a voluntary
principal payment, and/or a payment of Non-Registration Premiums, on the
Timber Notes and (ii) the Trustee shall, on such Note Payment Date, apply
the funds so transferred to the Trustee to make a payment of principal,
and/or a payment of Non-Registration Premiums, on the Timber Notes in
accordance with the written instructions referred to in the preceding
clause (i); provided, however, that no principal payment may be made
pursuant to this Section 5.7(g) if and to the extent that such principal
payment would cause a Prepayment Premium to be payable on the Timber Notes
of any Class. If funds are transferred to the Trustee pursuant to this
Section 5.7(g) with written instructions from the Issuer that such funds be
used to make a voluntary principal payment on the Timber Notes, the Trustee
may assume without inquiry that such principal payment would not cause a
Prepayment Premium to be payable on the Timber Notes of any Class. The
Issuer shall give to the Trustee at least two (2) Business Days' notice of
any proposed principal payment and/or payment of Non-Registration Premiums
pursuant to this Section 5.7(g). Principal payments payable pursuant to
this Section 5.7(g) shall be paid, first, to the holders of the Class A-1
Timber Notes (pro rata in proportion to the unpaid principal amount of the
outstanding Timber Notes of such Class) until the Class A-1 Timber Notes
have been paid in full, second, to the holders of the Class A-2 Timber
Notes (pro rata in proportion to the unpaid principal amount of the
outstanding Timber Notes of such Class) until the Class A-2 Timber Notes
have been paid in full and, third, to the holders of the Class A-3 Timber
Notes (pro rata in proportion to the unpaid principal amount of the
outstanding Timber Notes of such Class).
ARTICLE II
MISCELLANEOUS PROVISIONS
Section 2.1 Indenture. Except as amended hereby, the
Indenture and the other Operative Documents are in all respects ratified
and confirmed and all their terms shall remain in full force and effect.
Section 2.2 Governing Law. The laws of the State of New York
shall govern this First Supplemental Indenture without giving effect to
applicable principles of conflicts of law to the extent that the
application of the laws of another jurisdiction would be required to be
governed thereby.
Section 2.3 Successors and Assigns. All agreements of the
Issuer in this First Supplemental Indenture shall bind its successors and
assigns.
Section 2.4 Multiple Counterparts. This First Supplemental
Indenture may be executed in any number of counterparts, each of which
shall be an original; but such counterparts shall together constitute but
one and the same instrument.
Section 2.5 Effectiveness. The provisions of this First
Supplemental Indenture shall become effective immediately upon its
execution and delivery by the Trustee in accordance with the provisions of
Article 10 of the Indenture.
Section 2.6 Trustee Disclaimer. The Trustee accepts the
amendment of the Indenture effected by this First Supplemental Indenture
and agrees to execute the trust created by the Indenture as hereby amended,
but only upon the terms and conditions set forth in the Indenture,
including the terms and provisions defining and limiting the liabilities
and responsibilities of the Trustee, which terms and provisions shall in
like manner define and limit its liabilities and responsibilities in the
performance of the trust created by the Indenture as hereby amended, and,
without limiting the generality of the foregoing, the Trustee shall not be
responsible in any manner whatsoever for or with respect to any of the
recitals or statements contained herein, all of which recitals or
statements are made solely by the Issuer, or for or with respect to (i) the
validity, efficacy or sufficiency of this First Supplemental Indenture or
any of the terms or provisions hereof, (ii) the proper authorization hereof
by the Issuer by limited liability company action or otherwise, (iii) the
due execution hereof by the Issuer, or (iv) the consequences (direct or
indirect and whether deliberate or inadvertent) of any amendment herein
provided for, and the Trustee makes no representation with respect to any
such matters.
IN WITNESS WHEREOF, the parties have caused this First
Supplemental Indenture to be duly executed as of the date first written
above.
SCOTIA PACIFIC COMPANY LLC
By: /S/ GARY L. CLARK
Name: Gary L. Clark
Title: Vice President--Finance and
Administration
STATE STREET BANK AND TRUST
COMPANY,
as Trustee
By: /S/ EARL DENNISON
Name: Earl Dennison
Title: Vice President
THIS FIRST AMENDMENT TO CREDIT AGREEMENT ("First Amendment"), dated as
of July 16, 1999, is entered into by and among SCOTIA PACIFIC COMPANY LLC,
a Delaware limited liability company (the "Company"), BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION, as agent for itself and the Banks
(the "Agent"), and the several financial institutions parties to the Credit
Agreement (collectively, the "Banks").
RECITALS
A. The Company, Banks, and Agent are parties to a Credit Agreement
dated as of July 20, 1998 (the "Credit Agreement") pursuant to which the
Agent and the Banks have extended certain credit facilities to the Company.
The Scheduled Termination Date thereunder has been extended pursuant to
Section 2.13 thereof to July 16, 2000.
B. The Company has requested the consent of the Required Banks to
certain amendments to the Indenture. The Banks are willing to provide such
consent, subject to the terms and conditions of this First Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Defined Terms. Unless otherwise defined herein, capitalized
terms used herein shall have the meanings, if any, assigned to them in the
Credit Agreement.
2. Amendment to Credit Agreement. Effective upon the Amendment
Effective Date (as defined below), the following shall be added as Section
2.14 of the Credit Agreement:
2.14 Supplemental Interest.
The Company shall pay to the Agent for the account of each Bank
supplemental interest on the Principal Amount of all outstanding
Advances of such Bank ("Supplemental Interest"), in addition to the
interest provided under Section 2.7, in an amount equal to 0.25% per
annum (computed as provided in Section 2.9) on such Principal Amount
outstanding from time to time after the Amendment Effective Date (as
defined in the First Amendment hereto). Supplemental Interest and
interest accrued thereon pursuant to this Section 2.14 shall be due
and payable as and to the extent funds are available for payment of
Supplemental Liquidity Provider Interest pursuant to and as defined in
the Indenture. Any Supplemental Interest and any interest accrued
thereon by operation of this sentence that remains unpaid on any
Monthly Deposit Date shall, as of that Monthly Deposit Date, compound
and shall thereafter itself accrue interest, until payment in full of
all Supplemental Interest and interest accrued thereon, at the rate
that would then be applicable to Base Rate Advances as provided in
Section 2.7(c) plus an additional 0.25% per annum.
3. Consent to Amendments.
(a) Effective upon the Amendment Effective Date, the Banks
signatories to this First Amendment consent to the amendment of the
Indenture substantially in the form of the First Supplemental Indenture
attached hereto as Exhibit A (the "First Indenture Amendment").
(b) Effective upon the Consent Effective Date (as defined
below), the Banks signatories to this First Amendment consent to an
additional amendment to the Indenture and an amendment to the Securities
Account Control Agreement, approved as to form in advance in writing by the
Agent, to accomplish (1) the revisions to the Indenture reflected in the
composite conformed pages of the Indenture delivered to the Banks with the
memorandum to the Agent and its counsel dated July 8, 1999 from counsel to
the Company, (2) corresponding changes to the forms of Monthly Trustee
Certificate and the Note Payment Trustee Certificate (as defined in the
Indenture) to reflect the revisions reflected in that memorandum, and (3)
such other amendments to the Indenture as do not subordinate the right of
the Banks to receive payment pursuant to the Indenture or accelerate the
minimum principal amortization of the Timber Notes as have been approved in
advance in writing by the Agent (collectively, the "Second Indenture
Amendment").
4. Representations and Warranties. The Company hereby
represents and warrants to the Agent and the Banks, as of the Amendment
Effective Date, as follows:
(a) No Indenture Default or Indenture Event of Default
exists.
(b) The execution, delivery and performance by the Company
of this First Amendment have been duly authorized by all necessary limited
liability company and other action and do not and will not require any
registration with, consent or approval of, notice to or action by, any
person (including any governmental agency) in order to be effective and
enforceable. Without limiting the foregoing, this First Amendment has been
approved by a resolution of the Board of Managers of the Company, including
all Independent Managers and does not require consent of the Trustee or
Rating Agency Confirmation or consent of the Noteholders (as those terms
are defined in the Indenture). The Credit Agreement as amended by this
First Amendment constitutes the legal, valid and binding obligations of the
Company, enforceable against it in accordance with its terms, without
defense, counterclaim or offset as of the date hereof, except as
enforceability may be limited by applicable bankruptcy, insolvency, or
similar laws affecting the enforcement of creditors' rights generally or
by equitable principles relating to enforceability.
(c) All representations and warranties of the Company
contained in the Credit Agreement are true and correct, except that the
term "Offering Memorandum" shall be deemed to include subsequent filings by
the Company with the Securities and Exchange Commission.
(d) The Company is entering into this First Amendment on
the basis of its own investigation and for its own reasons, without
reliance upon the Agent and the Banks or any other person.
(e) The First Indenture Amendment does not require Rating
Agency Confirmation or consent of the Noteholders (as those terms are
defined in the Indenture).
5. Amendment Effective Date. This First Amendment, other than
the consent contained in Section 3(b), will become effective upon the first
Business Day (the "Amendment Effective Date") that each of the following
conditions precedent has been satisfied:
(a) The Agent has received from the Company and the
Required Banks a duly executed original, or telefacsimile of such executed
original, of this First Amendment.
(b) The Company has paid to the Agent for the account of
the Banks the sum of $157,976 in immediately available funds, representing
a nonrefundable amendment fee, which funds the Agent agrees to distribute
to the Banks in accordance with their Pro Rata Shares.
6. Consent Effective Date. The consent contained in Section
3(b) will become effective upon the date (the "Consent Effective Date")
that the Company obtains Rating Agency Confirmation (as defined in the
Indenture) with respect to the Second Indenture Amendment.
7. Reservation of Rights. The Company acknowledges and agrees
that the execution and delivery by the Agent and the Banks of this First
Amendment shall not be deemed to create a course of dealing or otherwise
obligate the Agent or the Banks to enter into similar amendments under the
same or similar circumstances in the future
8. Miscellaneous.
(a) Except as herein expressly amended, all terms,
covenants and provisions of the Credit Agreement are and shall remain in
full force and effect and all references therein to such Credit Agreement
shall henceforth refer to the Credit Agreement as amended by this First
Amendment.
(b) This First Amendment shall be binding upon and inure to
the benefit of the parties hereto and thereto and their respective
successors and assigns. No third party beneficiaries are intended in
connection with this First Amendment.
(c) This First Amendment shall be governed by and construed
in accordance with the law of the State of New York.
(d) This First Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
(e) This First Amendment, together with the Credit
Agreement, contains the entire and exclusive agreement of the parties
hereto with reference to the matters discussed herein and therein. This
First Amendment supersedes all prior drafts and communications with respect
thereto. This First Amendment may not be amended except in accordance with
the provisions of Section 10.1 of the Credit Agreement.
(f) If any term or provision of this First Amendment shall
be deemed prohibited by or invalid under any applicable law, such provision
shall be invalidated without affecting the remaining provisions of this
First Amendment or the Credit Agreement, respectively.
(g) Company confirms its obligations under Section 10.4(b)
of the Credit Agreement to reimburse the Agent for all costs and expenses
incurred by the Agent in connection with this First Amendment.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this First Amendment as of the date first above written.
SCOTIA PACIFIC COMPANY LLC
By: /S/ GARY L. CLARK
Gary L. Clark
Title: Vice President -- Finance
and Administration
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /S/ MICHAEL BALOK
Michael Balok
Title: Managing Director
THE BANK OF NOVA SCOTIA
By: /S/ JAMES S. YORK
James S. York
Title: Vice President
KEYBANK NATIONAL ASSOCIATION
By: /S/ MARY K. YOUNG
Mary K. Young
Title: Commercial Banking Officer
U.S. BANK NATIONAL ASSOCIATION
By: /S/ JANICE T. THEDE
Janice T. Thede
Title: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet and consolidated statement of operations
and is qualified in its entirety by reference to such consolidated financial
statements together with the related footnotes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 5,600
<SECURITIES> 0
<RECEIVABLES> 4,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,000
<PP&E> 516,000
<DEPRECIATION> 245,100
<TOTAL-ASSETS> 326,700
<CURRENT-LIABILITIES> 46,600
<BONDS> 862,400
0
0
<COMMON> 0
<OTHER-SE> (566,400)
<TOTAL-LIABILITY-AND-EQUITY> 326,700
<SALES> 14,700
<TOTAL-REVENUES> 14,700
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,600
<INCOME-PRETAX> (24,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,900)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
