FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993 Commission File Number 1-
9204
THE PACIFIC LUMBER COMPANY
(Exact name of Registrant as Specified in its Charter)
DELAWARE 13-3318327
(State or other (I.R.S. Employer
jurisdiction Identification Number)
of incorporation or
organization)
P. O. BOX 37
125 MAIN STREET 95565
SCOTIA, CALIFORNIA (Zip Code)
(Address of Principal
Executive Offices)
Registrant's telephone number, including area code: (707) 764-2222
__________________
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
None.
__________________
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 / /
Shares of Common Stock outstanding at March 15, 1994: 100
All of the Registrant's voting stock is held by an affiliate of
the Registrant.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
(J)(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH
THE REDUCED DISCLOSURE FORMAT.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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THE PACIFIC LUMBER COMPANY
PART I
ITEM 1. BUSINESS
GENERAL AND REFINANCING
The Pacific Lumber Company and its subsidiaries
(collectively referred to herein as the "Company" or "Pacific Lumber,"
unless the context indicates otherwise), which has been in continuous
operation for 125 years, engages in all 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.
On March 23, 1993 (the "Closing Date"), the Company
transferred (the "Transfer") approximately 179,000 acres of
timberlands (the "Subject Timberlands"), its geographical information
system and certain other assets to its newly-formed wholly owned
subsidiary, Scotia Pacific Holding Company ("SPHC"), in exchange for
(i) the assumption by SPHC of $323.4 million of the Company's public
indebtedness consisting of all of the Company's 12% Series A Senior
Notes due July 1, 1996 (the "Series A Notes") and a portion of the
Company's 12.2% Series B Senior Notes due July 1, 1996 (the "Series B
Notes"), and (ii) all of SPHC's outstanding common stock. SPHC was
organized as a special purpose Delaware corporation to facilitate the
Transfer and the offering of the Timber Notes described below. The
Subject Timberlands consist substantially of residual old growth and
young growth redwood and Douglas-fir timber. On the Closing Date, the
Company and SPHC entered into a Master Purchase Agreement, a Services
Agreement, an Additional Services Agreement and certain other
agreements providing for a variety of ongoing relationships. See "--
Relationships with SPHC and Britt Lumber." On the Closing Date, the
Company also transferred to its newly-formed wholly owned subsidiary,
Salmon Creek Corporation ("Salmon Creek"), in exchange for all of
Salmon Creek's common stock, approximately 3,000 contiguous acres of
its virgin old growth redwood timber, together with approximately
3,000 additional acres of adjacent timberlands owned by the Company
which could not be readily segregated from such virgin old growth
redwood timberlands (collectively, the "Salmon Creek Property").
The Company retained the exclusive right to harvest (the
"Pacific Lumber Harvest Rights") approximately 8,000 non-contiguous
acres of the Subject Timberlands consisting substantially of virgin
old growth redwood and virgin old growth Douglas-fir timber located on
numerous small parcels throughout the Subject Timberlands. In
addition, the Company retained its lumber milling, manufacturing,
cogeneration and related facilities, as well as approximately 11,000
acres of real property located in Humboldt County, California, which
do not constitute part of the Subject Timberlands (collectively, the
"Pacific Lumber Real Property"). The Pacific Lumber Real Property
consists of the town of Scotia, the land on which the Company's
sawmills, manufacturing facilities and related facilities are located
and areas adjacent thereto, certain potential residential and
commercial development sites and other areas, including timberlands
owned by the Company which could not be readily segregated from the
foregoing properties. The Company is milling logs and producing and
marketing lumber products from timber located on the timberlands of
SPHC, the Company and Salmon Creek in substantially the same manner as
conducted prior to the Transfer. The Company is, pursuant to the
Master Purchase Agreement, harvesting and purchasing from SPHC all or
substantially all of the logs harvested from the Subject Timberlands.
See "--Relationships with SPHC and Britt Lumber."
On the Closing Date, the Company consummated its offering of
$235 million aggregate principal amount of 10 1/2% Senior Notes due
2003 (the "Senior Notes") and SPHC consummated its offering of $385
million aggregate principal amount of 7.95% Timber Collateralized
Notes due 2015 (the "Timber Notes"). The net proceeds of such
offerings, together with cash and marketable securities, were used to
redeem all
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of the Company's outstanding public indebtedness (including the
amounts assumed by SPHC), to make required deposits into certain
accounts for the benefit of the holders of the Timber Notes, to repay
the Company's cogeneration loan and to pay a $25.0 million dividend to
MAXXAM Properties Inc. ("MPI"), a wholly owned subsidiary of MAXXAM
Group Inc. ("MGI"). MGI is wholly owned by MAXXAM Inc. ("MAXXAM").
See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and Investing
and Financing Activities." Substantially all of SPHC's assets,
including the Subject Timberlands, were pledged as security for the
Timber Notes.
TIMBERLANDS
The Company owns and manages approximately 187,000 acres of
commercial timberlands in Humboldt County in northern California.
These timberlands contain approximately three-quarters redwood and
one-quarter Douglas-fir timber. The Company's acreage is virtually
contiguous, is located in close proximity to its sawmills and contains
an extensive (1,100 mile) network of roads. These factors
significantly reduce harvesting costs and facilitate the Company's
forest management techniques. The extensive roads throughout the
Company's timberlands facilitate log hauling, serve as fire breaks and
allow the Company's foresters access to employ forest stewardship
techniques which protect the trees from forest fires, erosion, insects
and other damage.
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 selectively harvested in the
past.
The Company has engaged in extensive efforts, at relatively
low cost, to supplement the natural regeneration of timber and
increase the amount of timber on its timberlands. 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, the Company supplements
natural redwood regeneration by planting redwood seedlings. Douglas-
fir timber grown on the Company's timberlands is regenerated almost
entirely by planting seedlings. During the 1992-93 planting season
(December through March), the Company planted approximately 488,000
redwood and Douglas-fir seedlings at a cost of approximately $215,500.
HARVESTING PRACTICES
The ability of the Company to sell logs or lumber products
will depend, in part, upon its ability to obtain regulatory approval
of timber harvesting plans ("THPs"). THPs are required to be filed
with the California Department of Forestry ("CDF") prior to the
harvesting of timber and are designed to comply with existing
environmental 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. The
method of harvesting as set forth in a THP is chosen from among a
number of accepted methods based upon suitability to the particular
site conditions. The Company maintains a detailed geographical
information system covering its timberlands (the "GIS"). The GIS
covers numerous aspects of the Company's properties,
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including timber type, tree class, wildlife data, roads, rivers and
streams. By carefully monitoring and updating this data base, the
Company's foresters are able to develop detailed THPs which are
required to be filed with and approved by the CDF prior to the
harvesting of timber.
The Company principally harvests trees through selective
harvesting, which harvests only a portion of the trees in a given
area, as opposed to clearcutting, which harvests an entire area of
trees in one logging operation. Selective harvesting generally
accounts for over 90% (by volume on a net board foot basis) of the
Company's timber harvest in any given year. Harvesting by
clearcutting is used only when selective harvesting methods are
impractical due to unique conditions. Selective harvesting allows the
remaining trees to obtain more light, nutrients and water thereby
promoting faster growth rates. Due to the size of its timberlands and
conservative harvesting practices, the Company has historically
conducted harvesting operations on approximately 5% of its timberlands
in any given year.
PRODUCTION FACILITIES
The Company 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 the Company's timberlands. Since 1986, the Company has
implemented numerous technological advances which have increased the
operating efficiency of its production facilities and the recovery of
finished products from its timber. Over the past three years, the
Company's annual lumber production has averaged approximately 249
million board feet, with approximately 228, 264 and 256 million board
feet produced in 1993, 1992 and 1991, respectively. The Company
operates a finishing plant which processes rough lumber into a variety
of finished products such as trim, fascia, siding and paneling. These
finished products include the industry's largest variety of customized
trim and fascia patterns. The Company also enhances the value of some
grades of common grade lumber by cutting out knot-free pieces and
reassembling them into longer or wider pieces in the Company's
state-of-the-art end and edge glue plant. The result is a standard
sized upper grade product which can be sold at a significant premium
over common grade products.
The Company dries the majority of its upper grade lumber
before it is sold. Upper grades of redwood lumber are generally
air-dried for six to eighteen 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. The Company 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. The Company also maintains several large enclosed storage
sheds which hold approximately 25 million board feet of lumber.
In addition, the Company owns and operates a modern
25-megawatt cogeneration power plant which is fueled almost entirely
by the wood residue from the Company's milling and finishing
operations. This power plant generates substantially all of the
energy requirements of Scotia, California, the town adjacent to the
Company's timberlands owned by the Company where several of its
manufacturing facilities are located. The Company sells surplus power
to Pacific Gas and Electric Company. In 1993, the sale of surplus
power to Pacific Gas and Electric Company accounted for approximately
2% of the Company's total revenues.
In April 1992, an earthquake and a series of aftershocks
occurred in northern California which produced a significant amount of
damage in and around the area where the Company's forest products
operations are
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located. Standing timber on the Company's timberlands suffered
virtually no damage; however, among other damage, a large number of
kilns used by the Company to dry upper grade redwood lumber and two
sawmills were damaged, including one sawmill which was not operational
for a period of approximately six weeks. The Company maintains
insurance coverage with respect to damage to its property and the
disruption of its business from earthquakes. Consistent with its past
practices and the owners of most other timber tracts in the United
States, the Company does not maintain earthquake or fire insurance in
respect of standing timber.
PRODUCTS
Lumber
The Company primarily produces and markets lumber. In 1993,
the Company sold approximately 240 million board feet of lumber, which
accounted for approximately 82% of the Company'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 the Company's largest product category,
constituting approximately 81% of the Company's total lumber revenues
and 67% of the Company's total revenues in 1993. Redwood is
commercially grown only along the northern coast of California and
possesses certain unique characteristics which 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
old growth trees and is characterized by an absence of knots and other
defects and a very fine grain, is used primarily in more costly and
distinctive interior and exterior applications. During 1993, upper
grade redwood lumber products accounted for approximately 25% of the
Company's total lumber production volume (on a net board foot basis),
49% of its total lumber revenues and 40% of its total revenues.
Common grade redwood lumber, the Company'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. In 1993, common grade
redwood lumber accounted for approximately 48% of the Company's total
lumber production volume (on a net board foot basis), 32% of its total
lumber revenues and 26% of its total revenues.
Douglas-fir lumber is used primarily for new construction
and some decorative purposes and is widely recognized for its
strength, hard surface and attractive appearance. Douglas-fir is
grown commercially along the west coast of North America and in Chile
and New Zealand. Upper grade Douglas-fir lumber is derived primarily
from old growth Douglas-fir timber and is used principally in finished
carpentry applications. In 1993, upper grade Douglas-fir lumber
accounted for approximately 5% of the Company's total lumber
production volume (on a net board foot basis), 8% of its total lumber
revenues and 6% of its total revenues. 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.
In 1993, common grade Douglas-fir
<PAGE>
lumber accounted for approximately 22% of the Company's total lumber
production volume, 11% of its total lumber revenues and 9% of its
total revenues.
Logs
The Company currently sells certain logs that, due to their
size or quality, cannot be efficiently processed by its mills into
lumber. The purchasers of these logs are largely Britt Lumber Co.,
Inc. ("Britt"), an affiliate of the Company, and surrounding mills
which do not own sufficient timberlands to support their mill
operations. In 1993, log sales accounted for approximately 10% of the
Company's total revenues. See "--Relationships with SPHC and Britt
Lumber" below.
Except for the agreement with Britt described below, the
Company does not have any significant contractual relationships with
any third parties relating to the purchase of logs. The Company has
historically not purchased significant quantities of logs from third
parties; however, the Company 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 the Company. See also Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Operating Income" for a description
of 1993 log purchases by the Company due to inclement weather
conditions.
Wood Chips
In 1990, the Company installed a whole-log chipper to
produce wood chips from hardwood trees which were previously left as
waste. These chips primarily are sold to third parties for the
production of facsimile and other specialty papers. In 1993, hardwood
chips accounted for approximately 3% of the Company's total revenues.
The Company also produces softwood chips from the wood
residue and waste from its milling and finishing operations. These
chips are sold to third parties for the production of wood pulp and
paper products. In 1993, softwood chips accounted for approximately
3% of the Company's total revenues.
BACKLOG AND SEASONALITY
The Company's backlog of sales orders at December 31, 1993
and 1992 was approximately $16.0 million and $15.4 million,
respectively, the substantial portion of which was delivered in the
first quarter of the succeeding fiscal year.
The Company has historically experienced lower first and
fourth quarter sales due largely to the general decline in
construction-related activity during the winter months. As a result,
the Company'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 the Company's lumber products. The Company's
policy is to maintain a wide distribution of its products both
geographically and in terms of the number of customers. The Company
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 60% of these sales in
1993.
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Common grades of Douglas-fir lumber are sold primarily in California.
In 1993, no single customer accounted for more than 6% of the
Company's total revenues. Exports of lumber accounted for
approximately 4% of the Company's total lumber revenues in 1993. The
Company markets its products through its own sales staff which focuses
primarily on domestic sales.
The Company actively follows trends in the housing,
construction and remodeling markets in order to maintain an
appropriate level of inventory and assortment of product. Due to its
high quality products, large inventory, competitive prices and long
history, the Company believes that it has a strong degree of customer
loyalty.
COMPETITION
The Company's lumber is sold in highly competitive markets.
Competition is generally based upon a combination of price, service
and product quality. The Company'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 the Company'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 the Company's
lumber products. The Company 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 the Company competes with numerous large and
small lumber producers.
EMPLOYEES
As of March 1, 1994, the Company had approximately 1,200
employees.
RELATIONSHIPS WITH SPHC AND BRITT LUMBER
On the Closing Date, the Company and SPHC entered into a
Services Agreement (the "Services Agreement") and an Additional
Services Agreement (the "Additional Services Agreement"). Pursuant to
the Services Agreement, the Company provides operational, management
and related services with respect to the Subject Timberlands
containing timber of SPHC ("SPHC Timber") not performed by SPHC's own
employees. Such services include the furnishing of all equipment,
personnel and expertise not within the SPHC's possession and
reasonably necessary for the operation and maintenance of the Subject
Timberlands containing SPHC Timber. In particular, the Company is
required to regenerate SPHC Timber, prevent and control loss of SPHC
Timber by fires, maintain a system of roads throughout the Subject
Timberlands, take measures to control the spread of disease and insect
infestation affecting SPHC Timber and comply with environmental laws
and regulations, including measures with respect to waterways,
habitat, hatcheries and endangered species. The Company also is
required (to the extent necessary) to assist SPHC personnel in
updating the GIS and to prepare and file, on SPHC's behalf, all
pleadings and motions and otherwise diligently pursue appeals of any
denial of any THP and related matters. As compensation for these and
the other services to be provided by the Company, SPHC pays a fee
which is adjusted on January 1 of each year based on a specified
government index relating to wood products. The fee was $100,000 per
month in 1993 and is expected to be approximately $114,000 per month
in 1994. Pursuant to the Additional Services Agreement, SPHC provides
the Company with a variety of services, including (a) assisting the
Company to operate, maintain and harvest its own timber properties,
(b) updating and providing access to the GIS with respect to
information concerning the Company's own timber properties, and (c)
assisting the Company with
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its statutory and regulatory compliance. The Company pays SPHC 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 and SPHC also entered into a Master Purchase
Agreement on the Closing Date (the "Master Purchase Agreement"). The
Master Purchase Agreement governs all purchases of logs by the Company
from SPHC. Each purchase of logs by the Company from SPHC is made
pursuant to a separate log purchase agreement (which incorporates the
terms of the Master Purchase Agreement) for the SPHC 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 must be at
least equal to the SBE Price (as defined below). The Master Purchase
Agreement provides that if the purchase price equals or exceeds (i)
the price for such species and category thereof set forth on the
structuring schedule applicable to the Timber Notes and (ii) the SBE
Price, then such price shall be deemed to be the fair market value of
such logs. The 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" published by the California State Board of Equalization
("SBE") applicable to the timber sold during the period covered by
such Harvest Value Schedule. Such Harvest Value Schedules are
published for purposes of computing yield taxes and generally are
established every six months. As the Company purchases logs from SPHC
pursuant to the Master Purchase Agreement, the Company is responsible,
at its own expense, for harvesting and removing the standing SPHC
Timber covered by approved THPs and, thus, the purchase price thereof
is based upon "stumpage prices." Title to the harvested logs does not
pass to the Company until the logs are transported to the Company's
log decks and measured. Substantially all of SPHC's revenues are
derived from the sale of logs to the Company under the Master Purchase
Agreement.
In connection with the Transfer, the Company, SPHC and
Salmon Creek also entered into a 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, on the Closing Date, the Company entered into an
Environmental Indemnification Agreement with SPHC pursuant to which
the Company agreed to indemnify SPHC 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 Subject Timberlands. In
particular, the Company is liable with respect to any contamination
which occurred on the Subject Timberlands prior to the Transfer.
On the Closing Date, the Company entered into an agreement
with Britt (the "Britt Agreement") which governs the sale of logs by
the Company and Britt to each other, the sale of hog fuel (wood
residue) by Britt to the Company for use in the Company's cogeneration
plant, the sale of lumber by the Company and Britt to each other, and
the provision by the Company of certain administrative services to
Britt (including accounting, purchasing, data processing, safety and
human resources services). The logs which the Company 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 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 at
applicable market prices, and administrative services are provided by
the Company based on the Company's actual costs and an allocable share
of the Company's overhead expenses consistent with past practice.
<PAGE>
REGULATORY AND ENVIRONMENTAL FACTORS
Regulatory and environmental issues play a significant role
in Pacific Lumber's forest products operations. Pacific Lumber's
forest products operations are subject to a variety of California, and
in some cases, federal laws and regulations dealing with timber
harvesting, endangered species, and air and water quality. These laws
include the California Forest Practice Act (the "Forest Practice
Act"), which requires that timber harvesting operations be conducted
in accordance with detailed requirements set forth in the Forest
Practice Act and in the regulations promulgated thereunder by the
California Board of Forestry (the "BOF"). The federal Endangered
Species Act (the "ESA") and California Endangered Species Act (the
"CESA") provide in general for the protection and conservation of
specifically listed fish, wildlife and plants which have been declared
to be endangered or threatened. The California Environmental Quality
Act ("CEQA") provides, in general, for protection of the environment
of the state, including protection of air and water quality and of
fish and wildlife. In addition, the California Water Quality Act
requires, in part, that Pacific Lumber's operations be conducted so as
to reasonably protect the water quality of nearby rivers and streams.
Pacific Lumber does not expect that compliance with such existing laws
and regulations will have a material adverse effect on its timber
harvesting practices or future operating results. There can be no
assurance, however, that future legislation, governmental regulations
or judicial or administrative decisions would not adversely affect
Pacific Lumber.
Additional BOF regulations (i.e., late succession forest
stand rules and sensitive watershed rules) went into effect March 1,
1994. These new regulations require, among other things, the
inclusion of more information in THPs (concerning, among other things,
timber generation systems, the presence or absence of fish, wildlife
and plant species, and potentially impacted watersheds) and
modification of certain timber harvesting practices to comply with the
new regulations. In early March 1994, the BOF also approved
silviculture with sustained yield rules. The Office of Administrative
Law (the "OAL") is expected to (i) approve these proposed regulations,
(ii) request additional review, information or action and resubmittal
to the OAL, or (iii) reject the proposed regulations. These proposed
regulations are scheduled to become effective on May 1, 1994, and if
approved, will require additional information to be included in THPs
(concerning, among other things, compliance with long-term sustained
yield objectives) and modifications of certain timber harvesting
practices (including the creation of buffer zones between harvest
areas and increases in the amount of timber required to be retained
in a harvest area).
Various groups and individuals have filed objections with
the CDF regarding the CDF's actions and rulings with respect to
certain of Pacific Lumber's THPs, and the Company expects that such
groups and individuals will continue to file objections to certain of
Pacific Lumber's THPs. In addition, lawsuits are pending which seek
to prevent Pacific Lumber from implementing certain of its approved
THPs. These challenges have severely restricted Pacific Lumber's
ability to harvest virgin old growth timber on its property during the
past few years. To date, litigation with respect to Pacific Lumber's
THPs relating to young growth and residual old growth timber has been
limited; however, no assurance can be given as to the extent of such
litigation in the future. See Item 3. "Legal Proceedings--
Environmental Litigation."
In June 1990, the U.S. Fish and Wildlife Service (the
"USFWS") designated the northern spotted owl as threatened under the
ESA. The State of California also has adopted regulations designed to
protect the northern spotted owl, although the northern spotted owl
has not been listed as threatened or endangered under the CESA. The
owl's range includes all of the Company's timberlands. The ESA and
its implementing regulations generally prohibit harvesting operations
in which individual owls might be killed, displaced or injured or
which result in significant habitat modification that could impair the
survival of individual owls or the species as a whole. Since 1988,
biologists have conducted inventory and habitat
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utilization studies of northern spotted owls on Pacific Lumber's
timberlands. The USFWS has given its full concurrence to a northern
spotted owl management plan (the "Owl Plan"), a comprehensive wildlife
management plan submitted by Pacific Lumber with respect to the
northern spotted owl. Pacific Lumber incorporates this plan into each
THP filed with the CDF and is no longer required to receive individual
approval of its northern spotted owl conservation practices in
connection with each THP it submits. The Owl Plan enables Pacific
Lumber to expedite the approval process with respect to its THPs.
Both federal and state agencies continue to review and consider
possible additional regulations regarding the northern spotted owl.
It is uncertain if such additional regulations will become effective
or their ultimate content.
On March 12, 1992, the marbled murrelet was approved for
listing as endangered under the CESA. Pacific Lumber has
incorporated, and will continue to incorporate, additional mitigation
measures into its THPs to protect and maintain habitat for marbled
murrelets on its timberlands. The California Department of Fish and
Game (the "CDFG") requires Pacific Lumber to conduct pre-harvest
marbled murrelet surveys and to provide certain other site specific
mitigations in connection with its THPs covering virgin old growth
timber and unusually dense stands of residual old growth timber. Such
surveys can only be conducted during April to July, the murrelets'
nesting and breeding season. Accordingly, such surveys are expected
to delay the approval process with respect to certain of the THPs
filed by Pacific Lumber. The results of such surveys could prevent
Pacific Lumber from conducting certain of its harvesting operations.
In October 1992, the USFWS issued its final rule listing the marbled
murrelet as a threatened species under the ESA in the tri-state area
of Washington, Oregon and California. In January 1994, the USFWS
proposed designation of critical habitat for the marbled murrelet
under the ESA. This proposal is subject to public comment, hearings
and possible future modification. Both federal and state agencies
continue to review and consider possible additional regulations
regarding the marbled murrelet. It is uncertain if such additional
regulations will become effective or their ultimate content.
Pacific Lumber's wildlife biologist is conducting research
concerning the marbled murrelet on Pacific Lumber's timberlands and is
currently developing a comprehensive management plan for the marbled
murrelet (the "Murrelet Plan") similar to the Owl Plan. Pacific
Lumber is continuing to work with the USFWS and the other government
agencies on the Murrelet Plan. It is uncertain when the Murrelet Plan
will be completed and approved.
In October 1993, the USFWS received a petition proposing
listing the coho salmon (which is found on Pacific Lumber's property)
as threatened or endangered.
Laws and regulations dealing with Pacific Lumber's
operations are subject to change and new laws and regulations are
frequently introduced concerning the California timber industry. A
variety of bills are currently pending in the California legislature
and the U.S. Congress which relate to the business of Pacific Lumber,
including the protection and acquisition of old growth and other
timberlands, endangered species, environmental protection and the
restriction, regulation and administration of timber harvesting
practices. For example, the U.S. Congressman for the congressional
district in which Pacific Lumber is located has introduced a bill
which would, among other things, incorporate within the boundaries of
an existing national forest approximately 42,000 acres of Pacific
Lumber's timberlands and would designate approximately 12,000 acres of
Pacific Lumber's timberlands to be studied for possible inclusion
within such national forest. Corresponding legislation has been
introduced in the California legislature. These 54,000 acres
constitute approximately 30% of Pacific Lumber's timberlands. Since
this and the other bills are subject to amendment, it is premature to
assess the ultimate content of these bills, the likelihood of any of
the bills passing or the impact of any of these bills on the financial
position or results of operations of the Company. Furthermore, any
bills which are passed are subject to executive veto and court
challenge. In addition to
<PAGE>
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, however, impossible
to assess the effect of such matters on the future operating results
or financial position of the Company.
ITEM 2. PROPERTIES
A description of the Company's properties is included under
Item 1 above.
ITEM 3. LEGAL PROCEEDINGS
MERGER LITIGATION
During the mid-to-late 1980's, Pacific Lumber was named as
defendant along with several other entities and individuals, including
MAXXAM and MGI, in various class, derivative and other actions brought
in the Superior Court of Humboldt County by former stockholders of
Pacific Lumber relating to the cash tender offer (the "Tender Offer")
for the shares of Pacific Lumber by a subsidiary of MGI and the
subsequent merger (the "Merger"), as a result of which Pacific Lumber
became a wholly-owned subsidiary of MGI (the "Humboldt County
Lawsuits"). The Humboldt County Lawsuits which remain open are
captioned: Fries, et al. v. Carpenter, et al. (No. 76328) ("Fries
State"); Omicini, et al. v. The Pacific Lumber Company, et al. (No.
76974) ("Omicini"); Thompson, et al. v. Elam, et al. (No. 78467)
("Thompson State"); and Russ, et al. v. Milken, et al. (No. DR-85429)
("Russ"). The Humboldt County Lawsuits generally allege, among other
things, that in documents filed with the Securities and Exchange
Commission (the "Commission"), the defendants made false statements
concerning, among other things, the estimated value of Pacific
Lumber's assets, financing for the Tender Offer and the Merger and
minority stockholders' appraisal rights, and that the individual
directors of Pacific Lumber breached certain fiduciary duties owed
stockholders and other constituencies of Pacific Lumber. MGI and
MAXXAM are alleged to have aided and abetted these violations and
committed other wrongs. The Thompson State, Omicini and Fries State
suits seek compensatory damages in excess of $1 billion, exemplary
damages in excess of $750 million, rescission and other relief. The
Russ suit does not specify the amount of damages sought. There has
been no activity in the Fries State case since 1987 nor in the Omicini
case since 1986. The Thompson State and Russ actions are stayed
pending the outcome of the In re Ivan F. Boesky Multidistrict
Securities Litigation described below.
In 1988, the plaintiffs in the Fries State action filed
another action entitled Fries, et al. v. Hurwitz, et al. (No. 88-3493
RMT), in United States District Court, Central District of California
("Fries Federal") against Pacific Lumber, MGI, MAXXAM and others.
Fries Federal repeats many of the allegations and seeks damages and
relief similar to that contained in the Humboldt County Lawsuits, and,
among other things, asserts that the defendants violated RICO and the
Hart-Scott-Rodino Antitrust Improvements Act, and further alleges
that, as a result of alleged arrangements between Ivan F. Boesky and
others, MGI beneficially owned, for purposes of the Company's bylaws,
more than 5% of the Company's outstanding shares so that the Merger
required the approval of 80% of the outstanding shares rather than a
majority. In 1988, plaintiffs in the Thompson State action and others
filed a complaint in the United States District Court, Central
District of California, entitled Thompson, et al. v. MAXXAM Group
Inc., et al. (No. 88-06274) ("Thompson Federal"). The defendants in
the Thompson Federal action include Pacific Lumber, MGI, MAXXAM and
others. This action, as amended, repeats the allegations, asserts
claims and seeks damages and relief similar to that contained in the
Fries Federal and Fries State actions.
<PAGE>
In May 1989, the Thompson Federal and Fries Federal actions
were consolidated in the In re Ivan F. Boesky Multidistrict Securities
Litigation in the United States District Court, Southern District of
New York (MDL No. 732 M 21-45-MP) ("Boesky"). An additional action
filed in November 1989, entitled American Red Cross, et al. v.
Hurwitz, et al. (No. 89 Civ 7722) ("American Red Cross"), has been
consolidated with the Boesky action. The American Red Cross action
contains allegations and seeks damages and relief similar to that
contained in the Russ, Thompson Federal and Fries Federal actions. In
September 1990, the Court in the Boesky action certified a class of
plaintiffs comprised of persons who sold their shares in Pacific
Lumber on or after September 27, 1985. Various plaintiffs in the
Boesky action have opted out of the certified class of plaintiffs and
are prosecuting their claims individually within the Boesky
proceeding. The Boesky action has been set for trial commencing April
11, 1994.
In September 1989, seven past and present employees of
Pacific Lumber brought an action against Pacific Lumber, MAXXAM, MGI,
certain current and former directors and officers of Pacific Lumber,
MAXXAM and MGI, and First Executive Life Insurance Company ("First
Executive") (subsequently dismissed as a defendant) in the United
States District Court, Northern District of California, entitled
Kayes, et al. v. Pacific Lumber Company, et al. (No. C89-3500)
("Kayes"). Plaintiffs purport to be participants in or beneficiaries
of Pacific Lumber's former Retirement Plan (the "Retirement Plan") for
whom a group annuity contract was purchased from Executive Life
Insurance Company ("Executive Life") in 1986 after termination of the
Retirement Plan. The Kayes action alleges that the Pacific Lumber,
MAXXAM and MGI defendants breached their ERISA fiduciary duties to
participants and beneficiaries of the Retirement Plan by purchasing
the group annuity contract from First Executive and selecting First
Executive to administer the annuity payments. Plaintiffs seek, among
other things, a new group annuity contract on behalf of the Retirement
Plan participants and beneficiaries. This case was dismissed on April
14, 1993 and was refiled as Jack Miller, et al. v. Pacific Lumber
Company, et al. (No. C-89-3500-SBA) ("Miller") on April 26, 1993; the
Miller case was dismissed on May 14, 1993. These dismissals have been
appealed. On October 28, 1993, a bill amending ERISA, was passed by
the U.S. Senate which appears to be intended, in part, to overturn the
District Court's dismissal of the Miller action and to make available
certain remedies. This bill has not been voted upon by the House of
Representatives. It is impossible to say if the bill will be enacted
or if enacted its ultimate content.
In June 1991, the U.S. Department of Labor filed a civil
action entitled Lynn Martin, Secretary of the U.S. Department of Labor
v. The Pacific Lumber Company, et al. (No. 91-1812-RHS) ("DOL civil
action") in the United States District Court, Northern District of
California, against Pacific Lumber, MAXXAM, MGI and certain of their
current and former officers and directors. The allegations in the DOL
civil action are substantially similar to that in the Kayes action.
The DOL civil action has been stayed pending resolution of the Kayes
and Miller appeals.
Management is of the opinion that the outcome of the
foregoing litigation is unlikely to have a material adverse effect on
the Company's consolidated financial position. Management is unable
to express an opinion as to whether the outcome of such litigation is
unlikely to have a material adverse effect on the Company's results of
operations in respect of any fiscal year.
In April 1991, the California Commissioner of Insurance (the
"Commissioner") filed for conservatorship of Executive Life in Los
Angeles County Superior Court in proceedings entitled Insurance
Commissioner of the State of California v. Executive Life Insurance
Co. and Does 1-1000 (Case No. BS006912) ("Executive Life
Conservatorship"). In September 1993, the final rehabilitation plan
for Executive Life (the "Plan") was closed. The Commissioner expects
that for nearly all policyholders who chose to remain with Aurora
National Life Assurance Corporation, the new owner and successor of
<PAGE>
Executive Life ("Aurora"), such persons will receive full payments.
Policyholders who chose to "opt-out" of the Plan (i.e., chose to
terminate their policy and cash in at a discounted rate), will be paid
in accordance with their choice to opt-out.
ENVIRONMENTAL LITIGATION
Various actions, similar to each other, have been filed
against Pacific Lumber, MAXXAM, MGI, various state officials and
others, alleging, among other things, violations of the Forest
Practice Act, the CEQA, ESA, CESA, and/or related regulations. These
actions seek to prevent Pacific Lumber from harvesting certain of its
THPs. The Sierra Club, et al. v. State Board of Forestry, et al. (No.
82371) action in Superior Court of Humboldt County, filed by the
Sierra Club and the Environmental Protection Information Center
("EPIC") in 1988, relates to two THPs for approximately 82 and 237
acres, respectively, of virgin old growth timber. On appeal, the
Court of Appeal overturned the Superior Court's decision upholding the
BOF's approval of the two THPs. Pacific Lumber appealed the Court of
Appeal decision and in June 1992 the California Supreme Court granted
Pacific Lumber's petition for review. This matter is still pending
before the California Supreme Court. Harvesting has been stayed
pending outcome of the appeal.
The Sierra Club, et al. v. The California Department of
Forestry, et al. (No. 82983) and Sierra Club, et al. v. The California
Department of Forestry, et al. (No. 83428) actions in the Superior
Court of Humboldt County, each filed by the Sierra Club and EPIC in
1988, relate to two THPs for approximately 230 and 226 acres,
respectively, of virgin old growth timber. Initially, the Superior
Court ruled in favor of Pacific Lumber and dismissed these cases.
After plaintiffs' appeal, the cases were remanded to Superior Court
for trial. On remand, the decision of the Superior Court in each
action prevented Pacific Lumber from harvesting the contested THP.
Both decisions were appealed to the Court of Appeal, which in December
1993, affirmed the trial court's judgments reversing the approval of
the THPs. In February 1994, Pacific Lumber sought review of this case
by the California Supreme Court. In March 1994, the California
Supreme Court affirmed the decision of the Court of Appeal, but
ordered the decision of the Court of Appeal depublished, rendering it
without precedential value. The Sierra Club, et al. v. The California
Department of Forestry, et al. (No. DR84664) action in the Superior
Court of Humboldt County, filed by the Sierra Club and EPIC in 1989,
seeks substantially the same relief requested in the Sierra Club
action No. 83428 cited above. After the Superior Court dismissed this
action and imposed sanctions on plaintiffs based on the pending
resolution of Sierra Club III, the plaintiffs appealed the sanction
decision. The Court of Appeal remanded the action back to the
Superior Court for further review.
The EPIC v. The California Department of Forestry, et al.
(No. 90CP0341) action in Superior Court of Humboldt County, filed by
EPIC in May 1990, relates to a THP for approximately 378 acres of
virgin old growth timber. A nearly identical action in Superior Court
of Humboldt County, entitled Sierra Club v. The California Department
of Forestry, et al. (No. 90CP0405), was brought by the Sierra Club in
June 1990. These actions were subsequently consolidated and after a
trial on the merits, the Superior Court in June 1992 issued its
judgment in favor of Pacific Lumber and affirming the BOF's approval
of this THP. The trial court's decision was appealed and the matter
is still pending before the Court of Appeal. Except for certain
previously felled trees, all timber harvesting operations have been
stayed pending the outcome of the appeal.
The EPIC, et al. v. California State Board of Forestry, et
al. (No. 91CP244) action in the Superior Court of Humboldt County,
filed by the Sierra Club and EPIC in 1991, related to a THP for
approximately 237 acres of virgin old growth timber ("THP 90-237").
After the Superior Court reversed the BOF's approval of this THP,
certain modifications were made to the THP which was then unanimously
approved
<PAGE>
by the BOF. The Superior Court later issued judgment in favor of
Pacific Lumber. On appeal, the Court of Appeal in October 1993
affirmed the trial court's judgment approving THP 90-237. In April
1993, EPIC filed another action with respect to THP 90-237 entitled
Marbled Murrelet, et al. v. Bruce Babbitt, Secretary, Department of
Interior, et al. (No. C93-1400) in the U.S. District Court for the
Northern District of California, alleging an unlawful "taking" of the
marbled murrelet. The Court has dismissed the federal and state
agency defendants and limited plaintiffs' claims against Pacific
Lumber. In January 1994, plaintiffs appealed the dismissal of the
state and federal defendants. Harvesting has been stayed pending
outcome of the trial which is scheduled to commence in July 1994.
The Lost Coast League v. The California Department of
Forestry, et al. (No. 94DR0046) action in Superior Court of Humboldt
County, filed in February 1994, relates to a THP for approximately 121
acres of primarily virgin old growth timber. On March 10, 1994, the
Court heard plaintiff's request for a preliminary injunction, took the
matter under submission, and issued a stay of timber harvesting while
the Court reviews the matter.
Pacific Lumber's management believes that the matters
described above are unlikely to have a material adverse effect on
Pacific Lumber's financial position or results of operations. See
Item 1. "Business--Regulatory and Environmental Factors" above for a
description of regulatory and similar matters which could effect
Pacific Lumber's timber harvesting practices and future operating
results.
Pacific Lumber is also involved, directly and indirectly, in
various other legal proceedings relating to its timber harvesting
operations. For example, Redwood Coast Watersheds Alliances v.
California State Board of Forestry, et al. (No. 932123), in the
Superior Court of San Francisco, California, challenges certain BOF
regulations; Marbled Murrelet, et al. v. Bruce Babbitt, et al. (No.
C92-522WDR), in the U.S. District Court for the Western District of
Washington, challenges the USFWS's delay in listing as threatened, and
designating critical habitat for, the marbled murrelet under the ESA;
The Pacific Lumber Company v. California State Board of Forestry (No.
366197), in the Superior Court of Sacramento County, California,
challenges the denial of two Pacific Lumber THPs for the harvest of
approximately 558 acres of virgin old growth timber; The Pacific
Lumber Company v. California Department of Fish & Game, et al.
(No. 370562), in the Superior Court of Sacramento County, California,
challenges the listing of the marbled murrelet as endangered under the
CESA; Northwest Forest Resource Council, et al. v. Bruce Babbitt, et
al. (No. 93-1579), in the U.S. District Court, District of Columbia,
challenges the listing of the marbled murrelet as a threatened species
under the ESA in the tri-state area of Washington, Oregon and
California; and Sierra Club, et al. v. California State Board of
Forestry, et al. (No. 95104), in the Superior Court of San Francisco
County, California, challenges the approval of certain BOF
regulations.
OTHER LITIGATION MATTERS
Pacific Lumber is also involved in other claims and
litigation, both as plaintiff and defendant, in the ordinary course of
business. Pacific Lumber's management believes that the outcome of
such other litigation will not have a material adverse effect upon
Pacific Lumber's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE> PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock is indirectly held entirely by
MGI, which is a wholly owned subsidiary of MAXXAM. Accordingly, the
Company's common stock is not traded on any stock exchange and has no
established public trading market. On February 24, 1994, the Company
paid dividends of $5.7 million which represents the entire amount
permitted at December 31, 1993. The Company declared and paid
dividends in the amount of $25.0 million on its common stock in 1993.
No dividends were declared or paid in 1992 or 1991.
On August 4, 1993, all of the Company's issued and
outstanding common stock was pledged as collateral for MGI's $100.0
million 11 1/4% Senior Secured Notes due 2003 and $126.7 million 12
1/4% Senior Secured Discount Notes due 2003 (collectively referred to
herein as the "MGI Notes"). See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Notes to the Consolidated Financial Statements appearing in Item 8.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto
appearing in Item 8. The following table presents selected historical
operational and financial information for the years ended December 31,
1993, 1992 and 1991.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1993 1992 1991
----- ----- -----
(In millions of dollars,
except shipments and
prices)
<S> <C> <C> <C>
Shipments:
Lumber (1):
Redwood upper grades . . . . . . . 68.3 76.6 86.7
Redwood common grades . . . . . . . 114.5 128.6 138.3
Douglas-fir upper grades . . . . . 10.7 10.2 11.7
Douglas-fir common grades . . . . . 46.4 56.0 37.8
------- -------- --------
Total lumber . . . . . . . . . . . 239.9 271.4 274.5
======= ======== ========
Logs (2) . . . . . . . . . . . . . . . . 36.5 34.9 32.3
======= ======== ========
Wood chips (3) . . . . . . . . . . . . . 149.1 202.7 168.4
======= ======== ========
Average sales price:
Lumber (4):
Redwood upper grades . . . . . . . $ 1,275 $ 1,141 $ 1,085
Redwood common grades . . . . . . . 492 446 358
Douglas-fir upper grades . . . . . 1,218 1,125 1,033
Douglas-fir common grades . . . . . 447 298 262
Logs (4) . . . . . . . . . . . . . . . . 555 382 338
Wood chips (5) . . . . . . . . . . . . . 83 83 79
Net sales:
Lumber, net of discount . . . . . . . . $ 173.0 $ 169.2 $ 161.9
Logs . . . . . . . . . . . . . . . . . . 20.2 13.3 10.9
Wood chips . . . . . . . . . . . . . . . 12.4 16.9 13.4
Cogeneration power . . . . . . . . . . . 3.8 3.7 4.8
Other . . . . . . . . . . . . . . . . . 1.2 1.2 1.2
------- -------- --------
Total net sales . . . . . . . . . . $ 210.6 $ 204.3 $ 192.2
======= ======== ========
Operating income . . . . . . . . . . . . . . $ 51.2 $ 60.1 $ 51.1
======= ======== ========
Loss before income taxes, extraordinary item
and cumulative effect of changes in $ (4.0) $ (2.1) $ (11.0)
accounting principles . . . . . . . . . . . . ======= ======== ========
Net loss . . . . . . . . . . . . . . . . . . $ (10.5) $ (2.1) $ (11.0)
======= ======== ========
Capital expenditures . . . . . . . . . . . . $ 10.5 $ 8.3 $ 6.1
======= ======== ========
<FN>
--------------------
(1) Lumber shipments are expressed in millions of board feet.
(2) Log shipments are expressed in millions of board 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.
</TABLE>
<PAGE>
Shipments
Lumber shipments in 1993 were 239.9 million board feet, a
decrease of 12% from 271.4 million board feet in 1992. This decrease was
attributable to an 11% decrease in redwood common lumber shipments, a 14%
decrease in shipments of Douglas-fir lumber and an 11% decrease in
shipments of upper grade redwood lumber. The Company believes the
decrease in total lumber shipments was caused primarily by a decline in
construction related activity resulting from weak economic conditions in
the Western region of the United States and, to a lesser extent, by the
difficulties related to weather conditions in the West and Midwestern
United States during 1993. Log shipments in 1993 were 36.5 million feet
(net Scribner scale), an increase of 5% from 34.9 million feet in 1992.
Lumber shipments in 1992 of 271.4 million board feet decreased
1% from 274.5 million board feet in 1991. This decrease was attributable
to a 12% decrease in upper grade redwood shipments and a 7% decrease in
redwood common lumber shipments, partially offset by a 34% increase in
shipments of Douglas-fir lumber. During the second quarter of 1992, the
Company experienced lumber production delays attributable to the
earthquake and aftershocks which struck Humboldt County, California in
April. The earthquake and related aftershocks disabled, for a period of
approximately six weeks, a large number of the kilns used to dry the
upper grade redwood lumber and the sawmill which produces a significant
portion of the Company's upper grade redwood lumber. The Company
initiated additional shifts at two of its other sawmills in order to
minimize the impact of the lost production. The increased production at
one of the sawmills was predominantly from Douglas-fir logs that had
recently been salvaged from an area that experienced a forest fire in
1990. These factors resulted in substantially increased shipments of
Douglas-fir lumber and the decline in shipments of redwood lumber
discussed above. Log shipments in 1992 of 34.9 million feet increased 8%
from 32.3 million feet in 1991. The increase in log shipments resulted
primarily from the sale, to unaffiliated parties during the second
quarter of 1992, of certain logs salvaged from the 1990 forest fire that
were not of a suitable quality for the Company's sawmills, partially
offset by decreased sales of logs to Britt.
Net sales
Revenues from net sales of lumber and logs for 1993 increased
by approximately 6% from 1992. This increase was principally due to a
12% increase in the average realized price of upper grade redwood lumber,
a 45% increase in the average realized price of log sales, a 50% increase
in the average realized price of common grade Douglas-fir lumber and a
10% increase in the average realized price of redwood common lumber,
partially offset by decreased shipments of lumber, as previously
discussed. The decrease in other sales for 1993 as compared to 1992 was
attributable to decreased sales of wood chips resulting from the closure
of a pulp mill by one of the Company's customers.
Revenues from net sales of lumber and logs for 1992 increased
by approximately 6% from 1991. This increase was principally due to a
24% increase in the average realized price of redwood common lumber,
higher shipments of common grade Douglas-fir lumber, a 5% increase in the
average realized price of upper grade redwood lumber, a 14% increase in
the average realized price of common grade Douglas-fir lumber and a 13%
increase in the average realized price of log sales, partially offset by
lower shipments of upper and common grades of redwood lumber. The
increase in other sales for 1992 as compared to 1991 was attributable to
increased sales of wood chips, partially offset by lower sales of
electrical power resulting from damage sustained by the Company's
cogeneration facility during the earthquake and aftershocks in April
1992.
<PAGE>
Operating income
Operating income for 1993 decreased by approximately 15% as
compared to 1992. This decrease was primarily due to the additional cost
of logs purchased from third parties, lower shipments of high margin wood
chips and higher overhead costs, partially offset by the increase in
sales of lumber and logs, as previously discussed. The Company arranged
for the purchase of a significant number of logs earlier in the year in
response to concerns regarding inclement weather conditions hindering
logging activities on the Company's timberlands during the first five
months of 1993. The cost associated with the purchase of logs from third
parties significantly exceeds the Company's cost to harvest its own
timber. As a result of the Company's last-in, first-out (LIFO)
methodology of accounting for inventories, a substantial portion of the
additional cost associated with the purchased logs was charged to cost of
sales in the third quarter of 1993. Cost of goods sold for 1992 was
reduced by a $3.3 million business interruption insurance claim as a
result of the April 1992 earthquake. The business interruption insurance
claim represents partial compensation for the added costs and lower
realized gross margins on lumber sales, primarily due to lost production
capacity of the Company's drying kilns as described above under
"Shipments." Cost of goods sold for 1993 includes a reduction of $1.2
million reflecting an additional business interruption insurance claim.
Operating income for 1992 increased by approximately 18% as
compared to 1991. This increase was principally attributable to the
factors impacting shipments and sales, as previously discussed. Cost of
goods sold for 1991 reflects a benefit of $3.3 million due to a reduction
of the Company's LIFO inventories.
Cost of goods sold as a percentage of sales was approximately
55%, 48% and 49% for 1993, 1992 and 1991, respectively. The increase for
1993 reflects the impact of purchased logs as discussed above. Logging
costs have increased primarily due to the harvest of smaller diameter
logs and, to a lesser extent, compliance with environmental regulations
relating to the harvesting of timber and litigation costs incurred in
connection with certain THPs filed by the Company. See "--Trends."
During the past few years, the Company has significantly increased its
production of manufactured lumber products by assembling knot-free pieces
of common grade lumber into wider and longer pieces in the Company's end
and edge glue plant. This manufactured lumber results in a significant
increase in lumber recovery and produces a standard size upper grade
product which is sold at a premium price compared to common grade
products of similar dimensions. The Company has instituted 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,
automated lumber handling and the modification of its production
scheduling to increase cogeneration power revenues.
Loss before income taxes, extraordinary item and cumulative
effect of changes in accounting principles
The loss before income taxes, extraordinary item and cumulative
effect of changes in accounting principles increased for 1993 as compared
to 1992. This increase was primarily due to the decrease in operating
income, partially offset by a decrease in interest expense. The loss
before income taxes, extraordinary item and cumulative effect of changes
in accounting principles decreased for 1992 as compared to 1991,
primarily due to the increase in operating income and a decrease in
interest expense. Investment and other income for 1992 includes
estimated minimum insurance recoveries of $1.6 million for earthquake
damage incurred in April 1992. Investment and other income for 1991
includes the pre-tax gain of $3.5 million resulting from the sale of the
Company's San Mateo County, California timberlands in June 1991 for $7.5
million. Interest expense decreased in 1993 as compared to 1992 due to
lower interest rates resulting from the refinancing of the Company's
long-term debt during the first quarter of 1993. See "--Financial
Condition and Investing and Financing Activities." Interest expense
decreased in 1992 as compared to 1991
<PAGE>
primarily due to the repurchase of $15.5 million principal amount of
long-term debt in 1991 (see Note 5 to the Consolidated Financial
Statements).
Extraordinary item
The refinancing of the Company's outstanding public
indebtedness on March 23, 1993, consisting of the Series A Notes, the
Series B Notes and the 12 1/2% Senior Subordinated Debentures due July 1,
1998 (the "Debentures;" the Series A Notes, the Series B Notes and the
Debentures are collectively referred to as the "Old Pacific Lumber
Securities"), resulted in an extraordinary loss of $10.8 million, net of
related income taxes of $5.6 million. The extraordinary loss consists
primarily of the redemption premiums paid and the write-off of
unamortized deferred financing costs on the Old Pacific Lumber
Securities. See Note 5 to the Consolidated Financial Statements.
Cumulative effect of changes in accounting principles
As of January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes
("SFAS 109") and Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions
("SFAS 106") as more fully described in Notes 6 and 7 to the Consolidated
Financial Statements. The cumulative effect of the change in accounting
principle for the adoption of SFAS 109 increased results of operations by
$5.0 million. The cumulative effect of the change in accounting
principle for the adoption of SFAS 106 reduced results of operations by
$2.3 million, net of related income taxes of $1.6 million. The new
accounting method has no effect on the Company's cash outlays for
postretirement benefits, nor will the cumulative effect of the change in
accounting principle affect the Company's compliance with its existing
debt covenants. The Company reserves the right to amend or terminate
these benefits.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
As of December 31, 1993, the Company had consolidated working
capital of $71.7 million and long-term debt of $565.2 million (net of
current maturities and restricted cash deposited in the Liquidity Account
described below) as compared to $83.8 million and $513.4 million,
respectively, at December 31, 1992. The increase in long-term debt was
due to the issuance of additional debt in connection with the refinancing
described below. The decline in working capital was primarily due to the
decline in operating income, the payment of the $25.0 million dividend
made in connection with the refinancing of the Company's long-term debt
(as described below) and the impact of recording a current deferred
income tax liability in connection with the implementation of the new
accounting standard for income taxes. The Company anticipates that cash
flows from operations, together with existing cash, marketable securities
and available sources of financing, will be sufficient to fund the
Company's working capital requirements; however, due to its highly
leveraged condition, the Company is more sensitive than less leveraged
companies to factors affecting its operations, including governmental
regulation affecting its timber harvesting practices, increased
competition from other lumber producers or alternative building products
and general economic conditions.
During the years ended December 31, 1993, 1992 and 1991, the
Company's operating income before depletion and depreciation ("operating
cash flow") amounted to $76.6 million, $90.1 million and $83.2 million,
respectively, which exceeded interest accrued on all of its indebtedness
in those years by $17.4 million, $24.5 million and $14.5 million,
respectively.
On the Closing Date, the Company consummated the Transfer,
consisting of the transfer of approximately 179,000 acres of the Subject
Timberlands, its geographical information system and certain
<PAGE>
other assets to SPHC, in exchange for (i) the assumption by SPHC of
$163.8 million of the Company's Series A Notes and $159.6 million of the
Company's Series B Notes and (ii) all of SPHC's outstanding common stock.
SPHC was organized as a special purpose Delaware corporation to
facilitate the Transfer and the offering of the Timber Notes. The
Subject Timberlands consist substantially of residual old growth and
young growth redwood and Douglas-fir timber. On the Closing Date, the
Company and SPHC entered into a Master Purchase Agreement, a Services
Agreement and certain other agreements providing for a variety of ongoing
relationships. On the Closing Date, the Company also transferred to
Salmon Creek, its newly-formed wholly owned subsidiary, in exchange for
all of Salmon Creek's common stock, the Salmon Creek Property, consisting
of approximately 3,000 contiguous acres of its virgin old growth redwood
timber together with approximately 3,000 additional acres of adjacent
timberlands owned by the Company which could not be readily segregated
from such virgin old growth redwood timberlands.
The Company retained the Pacific Lumber Harvest Rights,
representing the exclusive right to harvest approximately 8,000 non-
contiguous acres of the Subject Timberlands consisting substantially of
virgin old growth redwood and virgin old growth Douglas-fir timber
located on numerous small parcels throughout the Subject Timberlands. In
addition, the Company retained its lumber milling, manufacturing,
cogeneration and related facilities, as well as the Pacific Lumber Real
Property, consisting of approximately 11,000 acres of real property
located in Humboldt County, California, which do not constitute part of
the Subject Timberlands. The Pacific Lumber Real Property consists of
the town of Scotia, the land on which the Company's sawmills,
manufacturing facilities and related facilities are located and areas
adjacent thereto, certain potential residential and commercial
development sites and other areas, including timberlands owned by the
Company which could not be readily segregated from the foregoing
properties. The Company expects to continue to mill logs and produce and
market lumber products from timber located on its timberlands and the
timberlands of SPHC and Salmon Creek in substantially the same manner as
conducted prior to the Transfer. It is anticipated that the Company
will, pursuant to the Master Purchase Agreement, harvest and purchase
from SPHC all or substantially all of the logs harvested from the Subject
Timberlands.
On the day of the Transfer, the Company issued $235.0 million
aggregate principal amount of the Senior Notes and SPHC issued $385.0
million aggregate principal amount of the Timber Notes. The net proceeds
from the sale of the Senior Notes and the Timber Notes, together with the
Company's existing cash and marketable securities, were used by the
Company and SPHC to redeem all of the Old Pacific Lumber Securities, to
fund the initial deposit to a liquidity account for the benefit of the
holders of the Timber Notes (the "Liquidity Account"), to repay the
Company's cogeneration facility loan and to pay a $25.0 million dividend
to a subsidiary of MGI.
A significant portion of the Company's consolidated assets are
owned by SPHC, and the Company expects that SPHC will provide a major
portion of the Company's future operating cash flow. The holders of the
Timber Notes have priority over the claims of creditors of the Company
with respect to the assets and cash flow of SPHC. Under the terms of the
indenture governing the terms of the Timber Notes (the "Timber Note
Indenture"), SPHC will not have available cash for distribution to
Pacific Lumber unless SPHC's cash flow from operations exceeds the
amounts required by the Timber Note Indenture to be reserved for the
payment of current debt service (including interest, principal and
premiums) on the Timber Notes, capital expenditures and certain other
operating expenses. The Timber Note Indenture prohibits SPHC from
incurring any additional indebtedness for borrowed money and limits the
business activities of SPHC to the ownership and operation of its timber
and timberlands and actions reasonably incidental thereto. The Timber
Notes are structured to link, to the extent of cash available, the deemed
depletion of SPHC's timber (through the harvest and sale of logs) to
required amortization of the Timber Notes. The actual required amount of
<PAGE>
such 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 SPHC must pay (on a cumulative
basis) through any Timber Note payment date in order to avoid an Event of
Default (as defined in the Timber Note Indenture) is Rated Amortization.
Rated Amortization on the Timber Notes is as follows: years ending
December 31, 1994 - nil; 1995 - $5.7 million; 1996 - $8.3 million; 1997 -
$8.5 million; 1998 - $8.7 million; thereafter - $345.8 million. If all
payments of principal are made in accordance with Rated Amortization, the
payment date on which SPHC will pay the final installment of principal is
July 20, 2015. The amount of principal which SPHC must pay through each
Timber Note payment date in order to avoid payment of prepayment or
deficiency premiums is Scheduled Amortization. If all payments of
principal are made in accordance with Scheduled Amortization, the payment
date on which SPHC will pay the final installment of principal is July
20, 2009. Scheduled Amortization on the Timber Notes is as follows:
years ending December 31, 1994 - $13.1 million; 1995 - $13.6 million;
1996 - $14.1 million; 1997 - $16.2 million; 1998 - $19.3 million;
thereafter - $300.7 million. On July 20, 1993 and January 20, 1994, SPHC
repaid approximately $8.0 million and $8.1 million, respectively, of the
aggregate principal amount outstanding on the Timber Notes in accordance
with Scheduled Amortization.
The Company expects that, consistent with SPHC's purposes and
its need to fund operating and capital expenses, substantially all of
SPHC's available cash will be distributed to the Company periodically.
Once appropriate provision for current debt service on the Timber Notes
and expenditures for operating and capital costs are made and in the
absence of certain Trapping Events (as defined in the Timber Note
Indenture) or outstanding judgments, the Timber Note Indenture does not
limit monthly distributions of available cash from SPHC to the Company.
In the event SPHC's cash flows are not sufficient to generate
distributable funds to the Company, the Company's ability to pay interest
on the Senior Notes and to service its other indebtedness would be
materially impaired. SPHC paid $58.3 million of dividends to the Company
during the period from March 23, 1993 to December 31, 1993.
On June 23, 1993, the Company entered into a new Revolving
Credit Agreement with a bank which provides for borrowings of up to $30.0
million, of which $15.0 million may be used for standby letters of
credit. As of December 31, 1993, $19.7 million of borrowings was
available under the Revolving Credit Agreement, of which $4.7 million was
available for letters of credit. No borrowings were outstanding as of
December 31, 1993, and letters of credit outstanding amounted to $10.3
million. The Revolving Credit Agreement expires May 31, 1996, is secured
by the Company's trade receivables and inventories and contains covenants
substantially similar to those contained in the indenture governing the
Senior Notes.
The indentures governing the Senior Notes and the Timber Notes
and the Company's Revolving Credit Agreement contain various covenants
which, among other things, limit the payment of dividends and restrict
transactions between the Company and its affiliates. Generally, the
amount of dividends the Company may pay is limited to 50% of the
Company's consolidated net income and depletion and cash dividends
received from SPHC (for periods subsequent to March 1, 1993), exclusive
of the net income and depletion of SPHC so long as any Timber Notes are
outstanding. On February 24, 1994, the Company paid dividends of $5.7
million which represents the entire amount permitted at December 31,
1993.
On August 4, 1993, all of the Company's issued and outstanding
common stock was pledged as collateral for the MGI Secured Notes. MGI
conducts its operations primarily through subsidiary companies. The
Company represents the substantial portion of MGI's assets and
operations. The terms of the indenture governing the MGI Secured Notes
contain provisions that require the Company's board of directors,
pursuant to a good faith determination, to declare and pay dividends on
its common stock to the maximum extent
<PAGE>
permitted by any consensual restriction or encumbrance on the Company's
ability to declare and pay dividends, provided that such declaration and
payment would not be detrimental to the capital or other operating needs
of the Company.
The Company's capital expenditures of approximately $24.9
million for the three years ended December 31, 1993 were made to improve
production efficiency and reduce operating costs. The Company's capital
expenditures were $10.5 million, $8.3 million and $6.1 million for the
years ended December 31, 1993, 1992 and 1991, respectively. Capital
expenditures for 1994 are expected to be $10 million and for the 1995 -
1996 period are estimated to be between $5 million and $10 million per
year. Capital expenditures attributable to the reconstruction of the
commercial facilities destroyed by the April 1992 earthquake were
approximately $1.6 million for 1993 and are expected to be approximately
$2 million to $3 million for 1994 when construction is completed. The
Company anticipates that the funds necessary to finance its capital
expenditures will be obtained through cash flows generated by operations
and other available sources of financing.
In February 1994, the Company received a franchise tax refund
of approximately $7.2 million, including interest, from the State of
California relating to tax years 1972 through 1985. This amount will be
recognized in investment and other income during the first quarter of
1994.
TRENDS
The Company's operations are subject to a variety of California
and, in some cases, federal laws and regulations dealing with timber
harvesting, endangered species, water quality and air and water
pollution. The Company does not expect that compliance with such
existing laws and regulations will have a material adverse effect on its
future operating results. Laws and regulations dealing with the
Company's operations are subject to change and new laws and regulations
are frequently introduced concerning the California timber industry. A
variety of bills are currently pending 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,
endangered species, environmental protection and the restriction,
regulation and administration of timber harvesting practices. For
example, the U.S. Congressman for the congressional district in which the
Company is located has introduced a bill which would, among other things,
incorporate within the boundaries of an existing national forest
approximately 42,000 acres of the Company's timberlands and would
designate approximately 12,000 acres of the Company's timberlands to be
studied for possible inclusion within such national forest. These 54,000
acres constitute approximately 30% of the Company's timberlands. Since
this and the other bills are subject to amendment, it is premature to
assess the ultimate content of these bills, the likelihood of any of the
bills passing or the impact of any of these bills on the consolidated
financial position or results of operations of the Company. Furthermore,
any bills which are passed are subject to executive veto and court
challenge. 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, however, impossible to assess the effect of such matters on the
future operating results or consolidated financial position of the
Company.
Various groups and individuals have filed objections with the
CDF regarding the CDF's actions and rulings with respect to certain of
the Company's THPs, and the Company expects that such groups and
individuals will continue to file objections to the Company's THPs. In
addition, lawsuits are pending which seek to prevent the Company from
implementing certain of its approved THPs. These challenges have
<PAGE>
severely restricted the Company's ability to harvest virgin old growth
redwood timber on its property during the past few years, as well as
substantial amounts of virgin Douglas-fir timber which are located in
virgin old growth redwood stands. No assurance can be given as to the
extent of such litigation in the future. The Company believes that
environmentally focused challenges to its THPs are likely to occur in the
future. Although such challenges have delayed or prevented the Company
from conducting a portion of its operations, to date such challenges have
not had a material adverse effect on the Company's consolidated financial
position or results of operations. It is, however, impossible to predict
the future nature or degree of such challenges or their ultimate impact
on the operating results or consolidated financial position of the
Company.
<PAGE>
THE PACIFIC LUMBER COMPANY
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1993 and 1992, and the related consolidated statements of
operations, cash flows and stockholder's equity for each of the three
years in the period ended December 31, 1993. 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, 1993
and 1992, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles.
As explained in Notes 6 and 7 to the financial statements,
effective January 1, 1993, the Company changed its method of accounting
for income taxes and postretirement benefits other than pensions.
ARTHUR ANDERSEN & CO.
San Francisco, California
January 27, 1994
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
------------------
1993 1992
------- --------
(In thousands of
dollars)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . $ 38,760 $ 43,537
Marketable securities . . . . . . . . . . . 5,635 10,232
Receivables:
Trade . . . . . . . . . . . . . . . . . 14,750 19,724
Other . . . . . . . . . . . . . . . . . 3,801 8,818
Inventories . . . . . . . . . . . . . . . . 66,241 68,000
Prepaid expenses and other current assets . 2,939 3,176
--------- ----------
Total current assets . . . . . . . 132,126 153,487
Timber and timberlands, net of depletion of
$171,007 and $163,628 at December 31, 1993
and 1992, respectively . . . . . . . . . . . 365,511 399,035
Property, plant and equipment, net . . . . . . . 96,541 96,208
Deferred financing costs, net . . . . . . . . . . 26,500 6,202
Deferred income taxes . . . . . . . . . . . . . . 52,066 -
Restricted cash and other assets . . . . . . . . 40,192 7,179
--------- ----------
$712,936 $ 662,111
========= ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . $ 2,360 $ 2,411
Accrued compensation and related benefits . 7,782 7,896
Accrued interest . . . . . . . . . . . . . . 21,627 31,025
Deferred income taxes . . . . . . . . . . . 14,132 -
Other accrued liabilities . . . . . . . . . 1,377 2,298
Long-term debt, current maturities . . . . . 13,191 26,027
--------- ----------
Total current liabilities . . . . 60,469 69,657
Long-term debt, less current maturities . . . . . 598,811 513,352
Other noncurrent liabilities . . . . . . . . . . 27,925 17,832
--------- ----------
Total liabilities . . . . . . . . 687,205 600,841
--------- ----------
Contingencies
Stockholder's equity:
Common stock, $.01 par value, 100 shares
authorized and issued . . . . . . . . . - -
Additional capital . . . . . . . . . . . . . 157,520 157,520
Accumulated deficit . . . . . . . . . . . . (131,789) (96,250)
--------- ----------
Total stockholder's equity . . . . 25,731 61,270
--------- ----------
$712,936 $ 662,111
========= ==========
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1993 1992 1991
------------ ----------- -----------
(In thousands of dollars)
<S> <C> <C> <C>
Net sales:
Lumber and logs . . . . . . . . . . $ 193,227 $ 182,545 $ 172,770
Other . . . . . . . . . . . . . . . 17,407 21,746 19,408
------------ ----------- ------------
210,634 204,291 192,178
------------ ----------- ------------
Operating expenses:
Cost of goods sold (exclusive of
depletion and depreciation) . . 115,175 98,454 93,647
Selling, general and administrative 18,869 15,695 15,335
Depletion and depreciation . . . . . 25,374 30,038 32,067
------------ ----------- ------------
159,418 144,187 141,049
------------ ----------- ------------
Operating income . . . . . . . . . . . . 51,216 60,104 51,129
Other income (expense):
Investment and other income . . . . 3,884 3,404 6,515
Interest expense . . . . . . . . . . (59,145) (65,632) (68,674)
------------ ----------- ------------
Loss before income taxes, extraordinary
item and cumulative effect of changes
in accounting principles . . . . . . (4,045) (2,124) (11,030)
Credit in lieu of income taxes . . . . . 1,683 - -
------------ ----------- ------------
Loss before extraordinary item and
cumulative effect of changes in
accounting principles . . . . . . . (2,362) (2,124) (11,030)
Extraordinary item:
Loss on early extinguishment of debt,
net of related credit in lieu of
income taxes of $5,566 . . . . (10,802) - -
Cumulative effect of changes in accounting
principles:
Postretirement benefits other than
pensions, net of related credit
in lieu of income taxes of
$1,566 . . . . . . . . . . . . (2,348) - -
Accounting for income taxes . . . . 4,973 - -
------------ ----------- ------------
Net loss . . . . . . . . . . . . . . . . $ (10,539) $ (2,124) $ (11,030)
============ =========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31,
----------------------------------------
1993 1992 1991
------------ ----------- -----------
(In thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . $ (10,539) $ (2,124) $ (11,030)
Adjustments to reconcile net loss to
net cash provided by (used for)
operating activities:
Depletion and depreciation . . . . . 25,374 30,038 32,067
Extraordinary loss on early
extinguishment of debt, net . . 10,802 - -
Amortization of deferred
financing costs . . . . . . . . 2,580 1,212 1,670
Net loss (gain) on asset
dispositions . . . . . . . . . . 134 (153) (3,373)
Incurrence of financing costs . . . . (28,235) (505) -
Cumulative effect of changes in
accounting principles, net . . . (2,625) - -
Net gains on marketable
securities . . . . . . . . . . . (1,310) (840) (931)
Decrease (increase) in receivables . 9,991 (15,019) 1,979
Decrease in inventories, net of
depletion . . . . . . . . . . . 987 9,968 5,669
Decrease (increase) in prepaid
expenses and other current
assets . . . . . . . . . . . . . 237 647 (747)
Increase (decrease) in accounts
payable . . . . . . . . . . . . . . . 53 (3,588) 1,851
Decrease in accrued interest . . . . (9,398) - (1,216)
Increase in accrued and deferred
income taxes . . . . . . . . . . (1,697) - -
Increase (decrease) in other
liabilities . . . . . . . . . . (394) 1,408 574
Other . . . . . . . . . . . . . . . . (74) (524) (247)
------------ ----------- -----------
Net cash provided by (used for)
operating activities . . . (4,114) 20,520 26,266
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales (purchases) of marketable
securities . . . . . . . . . . . . . 6,025 (5,419) 2,334
Net proceeds from sale of assets . . . . . 229 573 7,689
Capital expenditures . . . . . . . . . . . (10,472) (8,257) (6,120)
------------ ----------- -----------
Net cash provided by (used for)
investing activities . . . (4,218) (13,103) 3,903
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt . 620,000 - -
Redemptions, repurchase of and principal
payments on long-term debt . . . . . (557,883) (4,654) (19,829)
Restricted cash deposits . . . . . . . . . (33,562) - -
Dividends paid . . . . . . . . . . . . . . (25,000) - -
----------- ----------- -----------
Net cash provided by (used for)
financing activities . . . 3,555 (4,654) (19,829)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . (4,777) 2,763 10,340
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 43,537 40,7
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . $ 38,760 $ 43,537 $ 40,774
=========== =========== ===========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Equipment acquired subject to loans from
seller . . . . . . . . . . . . . . . . . . $ 573
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid, net of capitalized interest $ 65,963 $ 64,4
Income taxes paid . . . . . . . . . . . . 14 927 27
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
Common Additional Accumulated
Stock Capital Deficit Total
($.01 Par) ---------- ----------- ---------
----------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Balance, January 1, 1991 . . $ - $ 157,520 $ (83,096) $ 74,424
Net loss . . . . . . . . - - (11,030) (11,030)
---------- ---------- ----------- ---------
Balance, December 31, 1991 . - 157,520 (94,126) 63,394
Net loss . . . . . . . . - - (2,124) (2,124)
---------- ---------- ----------- ---------
Balance, December 31, 1992 . - 157,520 (96,250) 61,270
Net loss . . . . . . . . - - (10,539) (10,539)
Dividends . . . . . . . - - (25,000) (25,000)
---------- ---------- ----------- ---------
Balance, December 31, 1993 . $ - $ 157,520 $ (131,789) $ 25,731
========== ========== ========== =========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
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 Inc. ("MAXXAM").
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents consist of highly liquid money market
instruments with original maturities of three months or less. The
carrying amount of these instruments approximates fair value.
Marketable Securities
On December 31, 1993, the Company adopted Statement of
Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"). In accordance
with the provisions of SFAS 115, marketable securities are carried at
market value on December 31, 1993. Prior to that date, marketable
securities portfolios were carried at the lower of cost or market at the
balance sheet date. The cost of the securities sold is determined using
the first-in, first-out method. Market values are determined based on
quoted prices. The cost and market values of securities held at December
31, 1992 were $10,232 and $10,243, respectively. Included in investment
and other income for each of the three years ended December 31, 1993
were: 1993 - net realized gains of $1,046 and net unrealized gains of
$264; 1992 - net realized gains of $717 and the recovery of $123 of net
unrealized losses; and 1991 - net realized gains of $1,054 and net
unrealized losses of $123. Net unrealized losses represent the amount
required to reduce the short-term marketable securities portfolios from
cost to market value prior to December 31, 1993.
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
Depletion is computed utilizing the unit-of-production method
based upon estimates of timber values and quantities.
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 term of the related borrowing.
<PAGE>
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Restricted Cash and Concentrations of Credit Risk
Restricted cash represents the amount initially 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") as described in Note 5. The 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 below) 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. The carrying amount of the Liquidity
Account approximates its fair value. Investment and other income
includes approximately $2,101 attributable to an investment rate
agreement (at 7.95% per annum) with the financial institution which holds
the Liquidity Account. At December 31, 1993, the balance of the
Liquidity Account is $33,562.
At December 31, 1993, cash and cash equivalents includes
$20,280 (the "Payment Account") which is reserved for debt service
payments on the Timber Notes (see Note 5). 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.
Reclassifications
Certain reclassifications have been made to prior years'
financial statements to be consistent with the presentation in the
current year.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1993 1992
-------- --------
<S> <C> <C>
Lumber . . . . . $ 50,906 $ 57,153
Logs . . . . . . 15,335 10,847
-------- --------
$ 66,241 $ 68,000
======== ========
</TABLE>
During 1993, 1992 and 1991, inventory quantities were reduced.
These reductions resulted in the liquidation of LIFO inventory quantities
carried at prevailing costs from prior years which were higher than the
current cost of inventory in 1993 and lower than current costs in 1992
and 1991. The effects of these inventory liquidations increased cost of
goods sold by approximately $222 for the year ended December 31, 1993 and
decreased cost of goods sold by approximately $372 and $3,286 for the
years ended December 31, 1992 and 1991, respectively.
<PAGE>
3. TIMBER AND TIMBERLANDS
The following table presents the changes in timber and
timberlands for the three years ended December 31, 1993.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year . . . . . $ 399,035 $ 415,836 $ 432,048
Adoption of new accounting principle
for income taxes (see Note 6) . . (17,419) - -
Additions at cost . . . . . . . . . . . 264 557 319
Depletion . . . . . . . . . . . . . . . (16,369) (17,358) (16,531)
---------- ---------- ----------
Balance at end of year . . . . . . . . $ 365,511 $ 399,035 $ 415,836
========== ========== ==========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
Estimated December 31,
----------------------
Useful Lives 1993 1992
------------ -------- ---------
<S> <C> <C> <C>
Machinery and equipment . . . . . . . 5 - 20 years $ 116,455 $ 108,877
Buildings . . . . . . . . . . . . . . 20 years 21,932 20,529
Logging roads . . . . . . . . . . . . 15 years 6,857 8,438
----------- -----------
145,244 137,844
Less: accumulated depreciation . . . (48,703) (41,636)
----------- -----------
$ 96,541 $ 96,208
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1993,
1992 and 1991 was $8,233, $8,189 and $7,819, respectively.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1993 1992
---------- -----------
<S> <C> <C>
7.95% Timber Collateralized Notes due July 20, 2015 . $ 376,953 $ -
10 1/2% Senior Notes due March 1, 2003 . . . . . . . 235,000 -
12% Series A Senior Notes due July 1, 1996 . . . . . - 163,784
12.2% Series B Senior Notes due July 1, 1996 . . . . - 304,725
12 1/2% Senior Subordinated Debentures due July 1,
1998 . . . . . . . . . . . . . . . . . . . . . . - 41,750
Bank credit agreement . . . . . . . . . . . . . . . . - 28,867
Other . . . . . . . . . . . . . . . . . . . . . . . . 49 253
---------- ------------
612,002 539,379
Less: current maturities . . . . . . . . . . . . . . (13,191) (26,027)
---------- ------------
$ 598,811 $ 513,352
========== ============
</TABLE>
On March 23, 1993, the Company issued $235,000 of 10 1/2%
Senior Notes due 2003 (the "Senior Notes") and its newly-formed wholly
owned subsidiary, Scotia Pacific Holding Company ("SPHC"),
<PAGE>
issued $385,000 of the Timber Notes. The Company and SPHC used the net
proceeds from the sale of the Senior Notes and the Timber Notes, together
with the Company's cash and marketable securities, to (i) retire (a)
$163,784 aggregate principal amount of the Company's 12% Series A Senior
Notes due July 1, 1996 (the "Series A Notes"), (b) $299,725 aggregate
principal amount of the Company's 12.2% Series B Senior Notes due July 1,
1996 (the "Series B Notes") and (c) $41,750 aggregate principal amount of
the Company's 12 1/2% Senior Subordinated Debentures due July 1, 1998
(the "Debentures;" the Series A Notes, the Series B Notes and the
Debentures are referred to collectively as the "Old Pacific Lumber
Securities"); (ii) pay accrued interest on the Old Pacific Lumber
Securities through the date of redemption thereof; (iii) pay the
applicable redemption premiums on the Old Pacific Lumber Securities; (iv)
repay the Company's $28,867 cogeneration facility loan; (v) fund the
initial deposit of $35,000 to the Liquidity Account; and (vi) pay a
$25,000 dividend to a subsidiary of MGI. These transactions resulted in
a pre-tax extraordinary loss of $16,368, consisting primarily of the
payment of premiums and the write-off of unamortized deferred financing
costs on the Old Pacific Lumber Securities.
The indenture governing the Timber Notes (the "Timber Note
Indenture") prohibits SPHC from incurring any additional indebtedness for
borrowed money and limits the business activities of SPHC to the
ownership and operation of its timber and timberlands. The Timber Notes
are senior secured obligations of SPHC and are not obligations of, or
guaranteed by, the Company or any other person. The Timber Notes are
secured by a lien on (i) SPHC's timber and timberlands, (ii)
substantially all of SPHC's property and equipment, (iii) SPHC's contract
rights and certain other assets and (iv) the funds deposited in the
Payment Account and the Liquidity Account.
The Timber Notes are structured to link, to the extent of cash
available, the deemed depletion of SPHC's timber (through the harvest and
sale of logs) to required amortization of the Timber Notes. The actual
required amount of such 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 SPHC must pay (on
a cumulative basis) through any Timber Note payment date in order to
avoid an Event of Default (as defined in the Timber Note Indenture) 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 SPHC will pay the final installment of principal is
July 20, 2015. The amount of principal which SPHC must pay through each
Timber Note payment date in order to avoid payment of 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 SPHC will pay the final
installment of principal is July 20, 2009. Scheduled Amortization on the
Timber Notes is as follows: years ending December 31, 1994 - $13,142;
1995 - $13,578; 1996 - $14,103; 1997 - $16,165; 1998 - $19,335;
thereafter - $300,630.
Principal and interest on the Timber Notes is payable semi-
annually on January 20 and July 20. The Timber Notes are redeemable at
the option of SPHC, 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
<PAGE>
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 Company has a revolving credit agreement with a bank (the
"Revolving Credit Agreement") which expires on May 31, 1996. Borrowings
under the Revolving Credit Agreement are secured by the Company's trade
receivables and inventories, with interest computed at the bank's
reference rate plus 1 1/2% or the bank's offshore rate plus 2 1/2%. The
Revolving Credit Agreement provides for borrowings of up to $30,000, of
which $15,000 may be used for standby letters of credit. As of December
31, 1993, $19,742 of borrowings was available under the Revolving Credit
Agreement, of which $4,742 was available for letters of credit. No
borrowings were outstanding as of December 31, 1993, and letters of
credit outstanding amounted to $10,258.
The indentures governing the Senior Notes and the Timber Notes
and the Company's Revolving Credit Agreement contain various covenants
which, among other things, limit the payment of dividends and restrict
transactions between the Company and its affiliates. As of December 31,
1993, under the most restrictive of these covenants, approximately $5,731
of dividends could be paid by the Company.
During 1991, the Company purchased $15,452 principal amount of
its Series B Notes for $15,029. Cash flow from operations was used to
repurchase the Series B Notes.
Scheduled maturities of long-term debt outstanding at December
31, 1993 are as follows: years ending December 31, 1994 - $13,191; 1995
- $13,578; 1996 - $14,103; 1997 - $16,165; 1998 - $19,335; thereafter -
$535,630.
The estimated fair value of the Company's long-term debt is
determined based on the quoted market prices for the Timber Notes, the
Senior Notes and the Old Pacific Lumber Securities, and on the current
rates offered for borrowings similar to the bank credit agreement and the
other debt. At December 31, 1993 and 1992, the fair value of the
Company's long-term debt is estimated to be $637,700 and $549,900,
respectively.
6. CREDIT IN LIEU OF INCOME TAXES
The Company and its subsidiaries are members of MAXXAM's
consolidated return group for federal income tax purposes. Under a tax
allocation agreement with MAXXAM, prior to the effective date of its
amendment on March 23, 1993, The Pacific Lumber Company, excluding its
wholly owned subsidiaries ("Pacific Lumber"), recorded tax liabilities or
benefits computed as if it filed separate tax returns. The Company's tax
allocation agreement with MAXXAM, as amended (the "Amended Tax Allocation
Agreement"), provides that Pacific Lumber is liable to MAXXAM for the
federal consolidated income tax liability of Pacific Lumber, SPHC and
certain other subsidiaries of Pacific Lumber (but excluding Salmon Creek
Corporation) (collectively, the "PL Subgroup") computed as if the PL
Subgroup was a separate affiliated group of corporations which was never
affiliated with MAXXAM. The Amended Tax Allocation Agreement further
provides that Salmon Creek Corporation is liable to MAXXAM for its
federal income tax liability computed as if Salmon Creek Corporation was
a separate corporation which was never affiliated with MAXXAM.
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes
("SFAS 109"). The adoption of SFAS 109 changes the Company's method
<PAGE>
of accounting for income taxes to an asset and liability approach from
the deferral method prescribed by Accounting Principles Board Opinion No.
11, Accounting for Income Taxes ("APB 11"). The asset and liability
approach 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 cumulative effect of the change in accounting principle, as
of January 1, 1993, increased the Company's results of operations by
$4,973.
The implementation of SFAS 109 required the Company to restate
certain assets and liabilities to their pre-tax amounts from their net-
of-tax amounts originally recorded in connection with the acquisition of
the Company in 1986. The restatement of the assigned values with respect
to assets and liabilities recorded as a result of the acquisition and the
recomputation of deferred income tax assets and liabilities under SFAS
109 resulted in: (i) a decrease of $17,419 in the net carrying value of
timber and timberlands, (ii) a decrease of $1,279 in the net carrying
value of property, plant and equipment and (iii) an increase of $23,671
in net deferred income tax assets. As a result of restating these assets
and liabilities, the loss before income taxes, extraordinary item and
cumulative effect of changes in accounting principles for the year ended
December 31, 1993 was decreased by $875.
Concurrent with the adoption of SFAS 109, the Company
implemented changes in its accounting method for postretirement benefits
pursuant to Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions
("SFAS 106") (see Note 7). The pre-tax cumulative effect of the change
in accounting principle relating to SFAS 106 was a charge of $3,914 and
resulted in the recognition of deferred income tax assets of $1,566.
The credit in lieu of income taxes on the loss before income
taxes, extraordinary item and cumulative effect of changes in accounting
principles for the year ended December 31, 1993 consists of the
following:
<TABLE>
<CAPTION>
<S> <C>
Current:
Federal credit in lieu of income taxes . . . . . $ -
State and local . . . . . . . . . . . . . . . . -
------------
-
------------
Deferred:
Federal credit in lieu of income taxes . . . . . 1,913
State and local . . . . . . . . . . . . . . . . (230)
------------
1,683
------------
$ 1,683
============
</TABLE>
Pursuant to the principles of APB 11, the Company did not
record a credit in lieu of income taxes for 1992 and 1991 due to the
uncertainty of realizing the benefit of the 1992 and 1991 net operating
losses in future periods.
The Omnibus Budget Reconciliation Act of 1993 (the "Act"),
enacted on August 10, 1993, retroactively increased the maximum federal
statutory income tax rate from 34% to 35% for periods beginning on or
after January 1, 1993. The deferred federal credit in lieu of income
taxes of $1,913 includes an $850 benefit for
<PAGE>
increasing net deferred income tax assets (liabilities) as of the date of
enactment of the Act due to the increase in the federal statutory income
tax rate.
A reconciliation between the credit in lieu of income taxes and
the amount computed by applying the federal statutory income tax rate to
the loss before income taxes, extraordinary item and cumulative effect of
changes in accounting principles is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Loss before income taxes, extraordinary
item and cumulative effect of changes
in accounting principles . . . . . . . $ (4,045) $ (2,124) $ (11,030)
========== ========== ==========
Amount of federal income tax based upon
the statutory rate . . . . . . . . . . $ 1,416 $ 722 $ 3,750
Increase in net deferred income tax
assets due to tax rate change . . . . . 850 - -
Revision of prior years' tax estimates
and other changes in valuation
allowances . . . . . . . . . . . . . . (566) - -
State and local taxes, net of federal
tax benefit . . . . . . . . . . . . . . (150) - -
Losses and expenses for which no
federal tax benefit was recognized . . - (722) (3,750)
Other . . . . . . . . . . . . . . . . . 133 - -
---------- ---------- ----------
$ 1,683 $ - $ -
========== ========== ==========
</TABLE>
As shown in the Consolidated Statement of Operations for the
year ended December 31, 1993, the Company reported an extraordinary loss
related to the early extinguishment of debt. The Company reported the
loss net of related deferred income taxes of $5,566 which approximated
the federal statutory income tax rate in effect on the date the
transaction occurred. The related deferred income tax benefit recorded
by the Company in respect of SFAS 106 was recorded at the federal and
state statutory rates in effect on the date the accounting standard was
adopted.
<PAGE>
After giving effect to the adoption of SFAS 109, the components
of the Company's net deferred income tax assets (liabilities) are as
follows:
<TABLE>
<CAPTION>
January 1,
1993
December 31, (date of
1993 adoption)
------------- -------------
<S> <C> <C>
Deferred income tax assets:
Timber and timberlands . . . . . . . . . . . $ 36,443 $ 30,608
Loss and credit carryforwards . . . . . . . 35,013 30,158
Other liabilities . . . . . . . . . . . . . 4,627 2,884
Postretirement benefits other than pensions 1,734 1,695
Other . . . . . . . . . . . . . . . . . . . 3,019 2,552
Valuation allowances . . . . . . . . . . . . (5,613) (4,520)
------------- -------------
Total deferred income tax assets, net . 75,223 63,377
------------- -------------
Deferred income tax liabilities:
Property, plant and equipment . . . . . . . (19,101) (20,524)
Inventories . . . . . . . . . . . . . . . . (17,172) (16,590)
Other . . . . . . . . . . . . . . . . . . . (1,016) (1,130)
------------- -------------
Total deferred income tax liabilities . (37,289) (38,244)
------------- -------------
Net deferred income tax assets . . . . . . . . . $ 37,934 $ 25,133
============= =============
</TABLE>
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 primarily 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
$36,056 at December 31, 1993 and $23,025 at January 1, 1993 which are
recorded pursuant to the tax allocation agreements with MAXXAM.
The following table presents the Company's estimated tax
attributes, for federal income tax purposes, under the terms of the
Amended Tax Allocation Agreement at December 31, 1993.
<PAGE>
<TABLE>
<CAPTION>
Expiring
Through
---------------
<S> <C> <C>
Regular Tax Attribute Carryforwards:
Current year net operating loss . . . . . $ 11,616 2008
Prior year net operating losses . . . . . 67,687 2007
Net capital losses . . . . . . . . . . . . 4,577 1997
Alternative Minimum Tax Attribute Carryforwards:
Current year net operating loss . . . . . $ 10,978 2008
Prior year net operating losses . . . . . 23,837 2007
</TABLE>
7. EMPLOYEE BENEFIT PLANS
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:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1993 1992 1991
----------- --------- ---------
<S> <C> <C> <C>
Service cost - benefits earned during
the year . . . . . . . . . . . . . . . $ 1,600 $ 1,546 $ 1,225
Interest cost on projected benefit
obligation . . . . . . . . . . . . . . 918 749 530
Actual gain on plan assets . . . . . . (2,128) (1,013) (1,164)
Net amortization and deferral . . . . . 1,359 352 775
----------- --------- ---------
Net periodic pension cost . . . . . . . $ 1,749 $ 1,634 $ 1,366
=========== ========= =========
</TABLE>
<PAGE>
The following table sets forth the funded status and amounts
recognized in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
December 31,
---------------------
1993 1992
-------- ---------
<S> <C> <C>
Actuarial present value of accumulated plan
benefits:
Vested benefit obligation . . . . . . . . . . $11,047 $ 8,211
Non-vested benefit obligation . . . . . . . . 1,183 1,114
-------- ---------
Total accumulated benefit obligation . . $12,230 $ 9,325
======== =========
Projected benefit obligation . . . . . . . . . . . $15,303 $ 11,475
Plan assets at fair value, primarily fixed income
securities . . . . . . . . . . . . . . . . . . . . (12,216) (9,108)
-------- ---------
Projected benefit obligation in excess of plan
assets . . . . . . . . . . . . . . . . . . . . . . 3,087 2,367
Unrecognized net transition asset . . . . . . . . . 35 41
Unrecognized net loss . . . . . . . . . . . . . . . (582) (450)
Unrecognized prior service cost . . . . . . . . . . (89) (97)
-------- ---------
Accrued pension liability . . . . . . . . $ 2,451 $ 1,861
======== =========
</TABLE>
The assumptions used in accounting for the defined benefit plan were as
follows:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Rate of increase in compensation levels . . 5.0% 5.0% 5.0%
Discount rate . . . . . . . . . . . . . . . 7.5% 8.0% 8.0%
Expected long-term rate of return on assets 8.0% 9.0% 9.0%
</TABLE>
The Company has an unfunded defined benefit plan for certain
postretirement and other 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 Company adopted SFAS 106 as of January 1, 1993. The costs
of postretirement benefits other than pensions are now accrued over the
period the employees provide services to the date of their full
eligibility for such benefits. Previously, such costs were expensed as
actual claims were incurred. The cumulative effect of the change in
accounting principle for the adoption of SFAS 106 was recorded as a
charge to results of operations of $2,348, net of related income taxes of
$1,566.
A summary of the components of net periodic postretirement
benefit cost for the year ended December 31, 1993 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Service cost - benefits earned during the year . . . . . . . $ 153
Interest cost on accumulated postretirement benefit
obligation . . . . . . . . . . . . . . . . . . . . . . . . . 315
-------
Net periodic postretirement benefit cost . . . . . . . . . . $ 468
=======
</TABLE>
The adoption of SFAS 106 increased the Company's loss before
extraordinary item and cumulative effect of changes in accounting
principles by $212 ($360 before tax) for the year ended December 31,
1993.
<PAGE>
The postretirement benefit liability recognized in the
Company's Consolidated Balance Sheet was:
<TABLE>
<CAPTION>
January 1,
1993
December 31, (date of
1993 adoption)
------------ -----------
<S> <C> <C>
Retirees . . . . . . . . . . . . . . . . . . $ 963 $ 1,009
Actives . . . . . . . . . . . . . . . . . . . 3,245 2,905
------------ -----------
Accumulated postretirement benefit
obligation . . . . . . . . . . . . . . . 4,208 3,914
Unrecognized net gain . . . . . . . . . . . . 71 -
------------ -----------
Postretirement benefit liability . . . . $ 4,279 $ 3,914
============ ===========
</TABLE>
The annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 13% for 1994 and
is assumed to decrease gradually to 5.5% for 2007 and remain at that
level thereafter. Each one percentage point increase in the assumed
health care cost trend rate would increase the accumulated postretirement
benefit obligation as of December 31, 1993 by approximately $582 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost by approximately $76.
The discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at December 31, 1993 and 8.25%
at January 1, 1993.
8. 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 $2,598, $2,735 and $2,652 for the years ended December 31, 1993,
1992 and 1991, respectively.
Net sales for the years ended December 31, 1993, 1992 and 1991
include revenues of $9,198, $6,942 and $5,583, respectively, from Britt
Lumber Co., Inc., an indirect wholly owned subsidiary of MGI. The
Company recognized operating income of $1,972, $1,335 and $2,836 on these
revenues for the years ended December 31, 1993, 1992 and 1991,
respectively. At December 31, 1993 and 1992, receivables include $178
and $1,380, respectively, related to these affiliate sales.
On August 4, 1993, all of the Company's issued and outstanding
common stock was pledged as collateral for MGI's $100.0 million 11 1/4%
Senior Secured Notes due 2003 and $126.7 million 12 1/4% Senior Secured
Discount Notes due 2003 (collectively referred to herein as the "MGI
Notes"). MGI conducts its operations primarily through subsidiary
companies. The Company represents the substantial portion of MGI's
assets and operations. The terms of the indenture governing the MGI
Notes contain provisions that require the Company's board of directors,
pursuant to a good faith determination, to declare and pay dividends on
its common stock to the maximum extent permitted by any consensual
restriction or encumbrance on the Company's ability to declare and pay
dividends, provided that such declaration and payment would not be
detrimental to the capital or other operating needs of the Company.
<PAGE>
In 1993, the Company paid approximately $1,931 in connection
with the offering of the Senior Notes and the Timber Notes to a law firm
in which a director of the Company is also a partner.
In November 1991, MAXXAM purchased $1,222 of MAXXAM's 12 1/2%
Subordinated Debentures (the "MAXXAM Debentures") from the Company for
$1,304. Interest earned on the MAXXAM Debentures amounted to $164 for
the year ended December 31, 1991.
9. CONTINGENCIES
The Company's operations are subject to a variety of California
and, in some cases, federal laws and regulations dealing with timber
harvesting, endangered species, water quality and air and water
pollution. The Company does not expect that compliance with such
existing laws and regulations will have a material adverse effect on the
Company's future operating results. There can be no assurance, however,
that future legislation, governmental regulations or judicial or
administrative decisions would not adversely affect the Company or its
ability to sell lumber, logs or timber.
Various groups and individuals have filed objections with the
California Department of Forestry ("CDF") regarding the CDF's actions and
rulings with respect to certain of the Company's timber harvesting plans
("THPs"), and the Company expects that such groups and individuals will
continue to file objections to the Company's THPs. In addition, lawsuits
are pending which seek to prevent the Company from implementing certain
of its approved THPs. These challenges have severely restricted the
Company's ability to harvest virgin old growth redwood timber on its
property during the past few years, as well as substantial amounts of
virgin Douglas-fir timber which are located in virgin old growth redwood
stands. No assurance can be given as to the extent of such litigation in
the future. The Company believes that environmentally focused challenges
to its THPs are likely to occur in the future. Although such challenges
have delayed or prevented the Company from conducting a portion of its
operations, to date such challenges have not had a material adverse
effect on the Company's consolidated financial position or results of
operations. It is, however, impossible to predict the future nature or
degree of such challenges or their ultimate impact on the operating
results or consolidated financial position of the Company.
The Company, MGI, MAXXAM and certain of their former and
current officers and directors are defendants in various actions related
to MGI's acquisition of the Company. Management is of the opinion that
the outcome of such litigation is unlikely to have a material adverse
effect on the Company's consolidated financial position. Management is
unable to express an opinion as to whether the outcome of such litigation
is unlikely to have a material adverse effect on the Company's results of
operations in respect of any fiscal year.
The Company is also involved in various claims, lawsuits and
proceedings relating to a wide variety of other matters. While there are
uncertainties inherent in the ultimate outcome of such matters and it is
impossible to presently determine the ultimate costs that may be
incurred, management believes the resolution of such uncertainties and
the incurrence of such costs should not have a material adverse effect
upon the Company's consolidated financial position or results of
operations.
<PAGE>
10. SUPPLEMENTARY INFORMATION
The following amounts are included in the Company's Consolidated
Statement of Operations:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1993 1992 1991
---------- --------- ----------
<S> <C> <C> <C>
Maintenance and repairs . . . . . . . . $ 11,609 $ 10,235 $ 9,806
Property taxes . . . . . . . . . . . . 1,520 2,019 2,258
Yield taxes . . . . . . . . . . . . . . 4,372 2,691 1,960
Workers' compensation . . . . . . . . . 3,317 2,944 4,259
</TABLE>
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 $7,008 and $5,400 at December 31, 1993 and 1992,
respectively.
In 1993 and 1992, the Company recorded reductions in cost of
sales of $1,200 and $3,300, respectively, from business interruption
insurance claims for reimbursement of higher operating costs and the
related loss of revenues resulting from the April 1992 earthquake. In
1992, the Company recorded a $1,600 gain in investment and other income
on a casualty insurance claim for the loss of certain commercial property
due to the earthquake. Other receivables at December 31, 1993 and 1992
included $1,235 and $7,723, respectively, related to these and other
earthquake related insurance claims.
In June 1991, the Company completed the sale of its San Mateo
County, California timberlands for $7,492. This sale resulted in a pre-
tax gain of $3,482 which is included in investment and other income for
the year ended December 31, 1991.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summary quarterly financial information for the years ended
December 31, 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------
March 31 June 30 September 30 December 31
---------- --------- ------------ -----------
<S> <C> <C> <C> <C>
1993:
Net sales . . . . . . . . . $ 45,569 $ 51,621 $ 55,819 $ 57,625
Operating income . . . . . . 13,560 13,309 11,427 12,920
Loss before extraordinary
item and cumulative effect of
changes in accounting principles (1,275) (62) (576) (449)
Extraordinary item, net . . (10,802) - - -
Cumulative effect of changes
in accounting principles, net . . 2,625 - - -
Net loss . . . . . . . . . . (9,452) (62) (576) (449)
1992:
Net sales . . . . . . . . . $ 47,195 $ 52,054 $ 53,688 $ 51,354
Operating income . . . . . . 11,925 18,820 17,070 12,289
Net income (loss) . . . . . (4,229) 4,370 1,436 (3,701)
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-
K
<TABLE>
<CAPTION>
PAGE
----
(A) INDEX TO FINANCIAL STATEMENTS:
<S> <C>
1. Financial Statements (included under Item 8):
Report of Independent Public Accountants 24
Consolidated balance sheet at December 31, 1993
and 1992 25
Consolidated statement of operations for the years
ended December 31, 1993, 1992 and 1991 26
Consolidated statement of cash flows for the years
ended December 31, 1993, 1992 and 1991 27
Consolidated statement of stockholder's equity for
the years ended December 31, 1993, 1992 and 1991 28
Notes to consolidated financial statements 29
</TABLE>
2. Financial Statement Schedules:
Schedules are inapplicable or the required
information is included in the consolidated financial statements or the
notes thereto.
(B) REPORTS ON FORM 8-K:
None.
(C) EXHIBITS:
Reference is made to the Index of Exhibits immediately
preceding the exhibits hereto (beginning on page 44), which index is
incorporated herein by reference.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C>
THE PACIFIC LUMBER COMPANY
Date: March 29, 1994 By: JOHN T. LA DUC
John T. La Duc
Vice President - Chief Financial
Officer
(Principal Financial Officer)
Date: March 29, 1994 By: GARY L. CLARK
Gary L. Clark
Vice President - Finance and
Administration
(Principal Accounting Officer)
<CAPTION>
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
<S> <C>
Date: March 29, 1994 By: JOHN A. CAMPBELL
John A. Campbell
President, Chief Executive Officer
and Director
Date: March 29, 1994 By: JOHN T. LA DUC
John T. La Duc
Vice President - Chief Financial
Officer
and Director
Date: March 29, 1994 By: ANTHONY R. PIERNO
Anthony R. Pierno
Vice President, General Counsel
and Director
Date: March 29, 1994 By: PAUL N. SCHWARTZ
Paul N. Schwartz
Vice President and Director
Date: March 29, 1994 By: WILLIAM S. RIEGEL
William S. Riegel
Vice President - Sales and
Director
Date: March 29, 1994 By: EZRA G. LEVIN
Ezra G. Levin
Director
</TABLE>
<PAGE>
THE PACIFIC LUMBER COMPANY
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- ------------------------------------------------------
<S> <C>
3.1 Articles of Incorporation of The Pacific Lumber
Company (the "Company" or "Pacific Lumber")
(incorporated herein by reference to Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992)
3.2 By-laws of the Company, as amended (incorporated
herein by reference to Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992)
*4.1 Indenture between the Company and The First National
Bank of Boston, as Trustee, regarding Pacific Lumber's
10 1/2% Senior Notes due 2003
4.2 Indenture between Scotia Pacific Holding Company
("SPHC") and The First National Bank of Boston, as
Trustee, regarding SPHC's 7.95% Timber Collateralized
Notes due 2015 (incorporated herein by reference to
Exhibit 4.1 to Amendment No. 3 to the Form S-1
Registration Statement of SPHC, Registration No. 33-
55538; the "SPHC Registration Statement")
4.3 Revolving Credit Agreement dated as of June 23, 1993
between the Company and Bank of America National Trust
and Savings Association (incorporated herein by
reference to Exhibit 4.19 to Amendment No. 2 to the
Form S-2 Registration Statement of MAXXAM Group Inc.,
Registration No. 33-56332)
4.4 Letter Amendment, dated October 5, 1993, to the
Revolving Credit Agreement (incorporated herein by
reference to Exhibit 4.1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1993)
Note: Pursuant to Regulation Section 229.601, Item
601(b)(4)(iii) of Regulation S-K, upon request of the
Securities and Exchange Commission, the Company hereby
agrees to furnish a copy of any unfiled instrument
which defines the rights of holders of long-term debt
of the Company and its consolidated subsidiaries (and
for any of its unconsolidated subsidiaries for which
financial statements are required to be filed) wherein
the total amount of securities authorized thereunder
does not exceed 10 percent of the total consolidated
assets of the Company.
10.1 Agreement dated December 20, 1985 between the Company
and General Electric Company (the "1985 GE Agreement")
(incorporated herein by reference to Exhibit 10(m) to
the Registration Statement of Pacific Lumber on Form
S-1, Registration No. 33-5549)
10.2 Amendment No. 1 to Agreement between the Company and
General Electric Company dated July 29, 1986 relating
to the 1985 GE Agreement (incorporated herein by
reference to Exhibit 10.4 to Pacific Lumber's Annual
Report on Form 10-K for the fiscal year ended December
31, 1988)
10.3 Power Purchase Agreement dated January 17, 1986
between the Company and Pacific Gas
<PAGE>
and Electric Company (incorporated herein by reference
to Exhibit 10(n) to the Registration Statement of the
Company on Form S-1, Registration No. 33-5549)
10.4 Tax Allocation Agreement dated as of May 21, 1988
among MAXXAM Inc., MAXXAM Group Inc., the Company and
the corporations signatory thereto (incorporated
herein by reference to Exhibit 10.8 of the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1988)
10.5 Tax Allocation Agreement among the Company, SPHC,
Salmon Creek Corporation and MAXXAM Inc. dated March
23, 1993 (incorporated herein by reference to Exhibit
10.1 to the SPHC Registration Statement)
10.6 Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment among SPHC,
The First National Bank of Boston, as Trustee, and The
First National Bank of Boston, as the Collateral Agent
(incorporated herein by reference to Exhibit 4.2 to
SPHC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993; the "SPHC 1993 Form 10-K")
10.7 Master Purchase Agreement between the Company and SPHC
(incorporated herein by reference to Exhibit 10.1 to
the SPHC 1993 Form 10-K)
10.8 Services Agreement between the Company and SPHC
(incorporated herein by reference to Exhibit 10.2 to
the SPHC 1993 Form 10-K)
10.9 Additional Services Agreement between the Company and
SPHC (incorporated herein by reference to Exhibit 10.3
to the SPHC 1993 Form 10-K)
10.10 Reciprocal Rights Agreement among the Company, SPHC
and Salmon Creek Corporation (incorporated herein by
reference to Exhibit 10.4 to the SPHC 1993 Form 10-K)
10.11 Environmental Indemnification Agreement between the
Company and SPHC (incorporated herein by reference to
Exhibit 10.5 to the SPHC 1993 Form 10-K)
10.12 Transfer Agreement between the Company and SPHC
(incorporated herein by reference to Exhibit 10.6 to
the SPHC 1993 Form 10-K)
10.13 Grant Deed from the Company to SPHC (incorporated
herein by reference to Exhibit 10.7 to the SPHC 1993
Form 10-K)
10.14 Bill of Sale and General Assignment from the Company
to SPHC (incorporated herein by reference to Exhibit
10.8 to the SPHC 1993 Form 10-K)
10.15 Purchase and Services Agreement between the Company
and Britt Lumber Co., Inc. (incorporated herein by
reference to Exhibit 10.17 Exhibit 4.1 to Amendment
No. 2 to the Form S-2 Registration Statement of
Pacific Lumber, Registration Statement No. 33-56332;
the "Pacific Lumber Registration Statement")
<PAGE>
10.16 Investment Management Agreement, dated as of December
1, 1991, by and among the Company, MAXXAM Inc. and
certain related corporations (incorporated herein by
reference to Exhibit 10.23 to Amendment No. 5 to the
Registration Statement on Form S-2 of MAXXAM Group
Inc., Registration No. 33-64042)
<FN>
--------------------
* Included in this filing.
</TABLE>
--------------------
THE PACIFIC LUMBER COMPANY
$235,000,000
10 1/2% Senior Notes due 2003
--------------------
INDENTURE
Dated as of March 23, 1993
--------------------
THE FIRST NATIONAL
BANK OF BOSTON,
Trustee
--------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ARTICLE 1
Definitions and Incorporation by Reference
<S> <C>
SECTION 1.01. Definitions. 1
SECTION 1.02. Other Definitions 21
SECTION 1.03. Incorporation by Reference of Trust
Indenture Acts 22
SECTION 1.04. Rules of Construction 22
<CAPTION>
ARTICLE 2
The Securities
<S> <C>
SECTION 2.01. Form and Dating 23
SECTION 2.02. Execution and Authentication 23
SECTION 2.03. Registrar and Paying Agent 24
SECTION 2.04. Paying Agent to Hold Money in Trust 25
SECTION 2.05. Securityholder Lists 26
SECTION 2.06. Transfer and Exchange 26
SECTION 2.07. Replacement Securities 27
SECTION 2.08. Outstanding Securities 27
SECTION 2.09. Temporary Securities 28
SECTION 2.10. Cancellation 28
SECTION 2.11. Defaulted Interest 28
SECTION 2.12. CUSIP Numbers 29
<CAPTION>
ARTICLE 3
Redemption
<S> <C>
SECTION 3.01. Notices to Trustee 29
SECTION 3.02. Selection of Securities to be
Redeemed 29
SECTION 3.03. Notice of Redemption 30
SECTION 3.04. Effect of Notice of Redemption 31
SECTION 3.05. Deposit of Redemption Price 32
SECTION 3.06. Securities Redeemed in Part 32
<PAGE>
SECTION 3.07. Cancellation of Redeemed Securities 32
SECTION 3.08. No Repurchase Restrictions 32
<CAPTION>
ARTICLE 4
Covenants
<S> <C>
SECTION 4.01. Payment of Securities 33
SECTION 4.02. SEC Reports 33
SECTION 4.03. Limitation on Indebtedness 33
SECTION 4.04. Limitation on Restricted Payments 37
SECTION 4.05. Ownership of Capital Stock of Subsidiaries 40
SECTION 4.06. Limitation on Dividends and Other Payment
Restrictions Affecting Subsidiaries 41
SECTION 4.07. Limitation on Asset Sales 44
SECTION 4.08. Limitation on Transactions with Affiliates 50
SECTION 4.09. Change of Control 51
SECTION 4.10. Limitation on Liens 55
SECTION 4.11. Amendment of Scotia Pacific
Agreements 58
SECTION 4.12. Compliance Certificate 58
<CAPTION>
ARTICLE 5
Successor Company
<S> <C>
SECTION 5.01. When Company May Merge or Transfer
Assets 58
<CAPTION>
ARTICLE 6
Defaults and Remedies
<S> <C>
SECTION 6.01. Events of Default 60
SECTION 6.02. Acceleration 62
SECTION 6.03. Other Remedies 63
SECTION 6.04. Waiver of Past Defaults 63
<PAGE>
SECTION 6.05. Control by Majority 63
SECTION 6.06. Limitation on Suits 64
SECTION 6.07. Rights of Holders to Receive
Payment 64
SECTION 6.08. Collection Suit by Trustee 64
SECTION 6.09. Trustee May File Proofs of Claim 65
SECTION 6.10. Priorities 65
SECTION 6.11. Undertaking for Costs 66
SECTION 6.12. Waiver of Stay or Extension Laws 66
SECTION 6.13. Restoration of Rights and Remedies 66
<CAPTION>
ARTICLE 7
Trustee
<S> <C>
SECTION 7.01. Duties of Trustee 66
SECTION 7.02. Rights of Trustee 68
SECTION 7.03. Individual Rights of Trustee 68
SECTION 7.04. Trustee's Disclaimer 69
SECTION 7.05. Notice of Defaults 69
SECTION 7.06. Reports by Trustee to Holders 69
SECTION 7.07. Compensation and Indemnity 69
SECTION 7.08. Replacement of Trustee 70
SECTION 7.09. Successor Trustee by Merger 71
SECTION 7.10. Eligibility; Disqualification 72
SECTION 7.11. Preferential Collection of Claims Against Company 72
<CAPTION>
ARTICLE 8
Discharge of Indenture
<S> <C>
SECTION 8.01. Discharge of Liability on Securities; Defeasance 72
SECTION 8.02. Conditions to Defeasance 73
SECTION 8.03. Application of Trust Money 75
SECTION 8.04. Repayment to Company 75
SECTION 8.05. Indemnity for Government
Obligations 75
SECTION 8.06. Reinstatement 750
<PAGE>
<CAPTION>
ARTICLE 9
Amendments
<S> <C>
SECTION 9.01. Without Consent of Holders 76
SECTION 9.02. With Consent of Holders 77
SECTION 9.03. Compliance with Trust Indenture Act 78
SECTION 9.04. Revocation and Effect of Consents and Waivers 78
SECTION 9.05. Notation on or Exchange of
Securities 78
SECTION 9.06. Trustee to Sign Amendments 79
<CAPTION>
ARTICLE 10
Miscellaneous
<S> <C>
SECTION 10.01. Trust Indenture Act Controls 79
SECTION 10.02. Notices 79
SECTION 10.03. Communication by Holders with Other
Holders 80
SECTION 10.04. Certificate and Opinion as to Conditions Precedent 80
SECTION 10.05. Statements Required in Certificate or Opinion 81
SECTION 10.06. When Treasury Securities
Disregarded 81
SECTION 10.07. Rules by Trustee, Paying Agent
and Registrar 82
SECTION 10.08. Legal Holidays 82
SECTION 10.09. Governing Law 82
SECTION 10.10. No Recourse Against Others 82
SECTION 10.11. Successors 82
SECTION 10.12. Severability 82
SECTION 10.13. Multiple Originals 83
SECTION 10.14. Table of Contents; Headings 83
SECTION 10.15. Benefits of Indenture 83
SECTION 10.16. No Challenge 83
Exhibit A - Form of Security
Exhibit B - Salmon Creek Property Legal Description
<PAGE>
CROSS-REFERENCE TABLE
</TABLE>
<TABLE>
<CAPTION>
TIA Indenture
Section Section _______
_
<S> <C>
310(a)(1) 7.10
(a)(2) 7.10
(a)(3) N.A.
(a)(4) N.A.
(a)(5) 7.10
(b) 7.08;
7.10
(c) N.A.
311(a) 7.11
(b) 7.11
(c) N.A.
312(a) 2.05
(b) 10.03
(c) 10.03
313(a) 7.06
(b)(1) 7.06
(b)(2) 7.06
(c) 7.06;
10.02
(d) 7.06
314(a) 4.02;
10.02
(b) N.A.
(c)(1) 10.04
(c)(2) 10.04
(c)(3) N.A.
(d) N.A.
(e) 10.05
(f) N.A.
315(a) 7.01
(b) 7.05;
10.02
(c) 7.01
(d) 7.01
(e) 6.11
316(a) (last sentence) 10.06
(a)(1)(A) 6.05
(a)(1)(B) 6.04
(a)(2) N.A.
(b) 6.07
(c) 9.04
317(a)(1) 6.08
(a)(2) 6.09
<PAGE>
<CAPTION>
TIA Indenture
Section Section
_______
<S> <C>
(b) 2.04
318(a) 10.01
N.A. means Not Applicable.
<FN>
______________
Note: This Cross-Reference Table shall not, for any purpose, be
deemed part of the Indenture.
</TABLE>
<PAGE>
INDENTURE dated as of March 23, 1993, between The Pacific
Lumber Company, a Delaware corporation (the "Company"), and The First
National Bank of Boston, a national banking association, as trustee
(the "Trustee").
Each party agrees as follows for the benefit of the other
party and for the equal and ratable benefit of the Holders of the
Company's 10 1/2% Senior Notes due 2003 (the "Securities"):
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. DEFINITIONS.
"ADJUSTED CONSOLIDATED NET INCOME" means, for any period,
the aggregate of the Consolidated Net Income of the Company for such
period taken as a single accounting period, plus any expenses for
depletion of the Company and its Subsidiaries determined on a con-
solidated basis in accordance with GAAP, for such period without
giving effect to any such expenses for depletion attributable to (A)
any Unrestricted Subsidiary for such period or (B) any Restricted
Subsidiary if the declaration or payment of dividends or similar
distributions by such Subsidiary is not at the time permitted (as set
forth in clause (v) of the definition of Consolidated Net Income in
this Indenture) or (C) Scotia Pacific so long as any Timber Notes are
outstanding.
"AFFILIATE" of any person means (i) any person who, directly
or indirectly, is in control of, is controlled by or is under common
control with such person and (ii) any person who is a director or
officer (A) of such person, (B) of any subsidiary of such person or
(C) of any person described in clause (i) above and shall be deemed to
include any joint venture, partnership or other person (other than a
Subsidiary of the Company) in which the Company and/or its Subsidiar-
ies have an equity ownership interest equal to or greater than 5% and
in which one or more Affiliates of the Company has a direct or an
indirect equity ownership interest in excess of 5% therein other than
by virtue of the direct or indirect equity ownership in such joint
venture, partnership or other person held (in the aggregate) by the
Company and/or one
<PAGE>
or more of its Subsidiaries; provided, however, that the term
"Affiliate" shall not include (i) the Company or (ii) any Subsidiary
of the Company. For purposes of this definition, control of a person
means the power, direct or indirect, to direct or cause the direction
of the management and policies of such person whether by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing. The fact that an Affiliate of a person
is a partner of a law firm that renders services to such person or its
Affiliates does not mean that the law firm is an Affiliate of such
person.
"ASSET SALE" means any sale, transfer or other disposition
(including, without limitation, dispositions pursuant to any Taking,
merger, consolidation or sale and leaseback transactions), after the
date of the initial issuance of the Securities, by the Company or any
of its Restricted Subsidiaries (other than Scotia Pacific so long as
there are any Timber Notes outstanding) to any person other than to
the Company or any of its Restricted Subsidiaries of (a) any Capital
Stock or other ownership interest of any of the Company's Restricted
Subsidiaries (including sales, transfers or other dispositions by such
Restricted Subsidiary of its Capital Stock or other ownership
interest) or (b) any other assets (other than any Capital Stock or
ownership interests in any Unrestricted Subsidiary) of the Company or
any of its Restricted Subsidiaries, other than sales, transfers or
other dispositions of assets in the ordinary course of business of the
Company and its Restricted Subsidiaries, taken as a whole; provided,
however, that the term Asset Sale shall not include (A) the sale,
transfer or other disposition in any single transaction or series of
related transactions of any assets or Capital Stock or other ownership
interest by the Company or its Restricted Subsidiaries if the gross
proceeds thereof (exclusive of indemnities) do not exceed $10,000,000
(such proceeds, to the extent non-cash, to be determined in good faith
by the Board of Directors of the Company) in any 12-month period, (B)
the creation, incurrence, assumption or existence of any Lien to the
extent not prohibited by Section 4.10, (C) any of the transactions
governed by Section 5.01, (D) an exchange of assets, provided the
assets received are to be used in the lines of business of the Company
or any of its Restricted Subsidiaries on the date of the Indenture or
reasonably related extensions of such lines and only to the extent
such exchange qualifies for non-recognition
<PAGE>
treatment under the Code, and (E) any transaction to the extent
permitted pursuant to Section 4.04 or Section 4.05.
"AVERAGE LIFE" means, as of the date of determination, with
respect to any Indebtedness, the quotient obtained by dividing (i) the
sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal
payment of such Indebtedness multiplied by the amount of such prin-
cipal payment by (ii) the sum of all such principal payments.
"BANK DEBT" means any and all amounts payable under or in
respect of the Credit Agreement, including principal, premium (if
any), interest, fees, charges, expenses, reimbursement obligations,
guarantees, indemnities and all other amounts payable thereunder or in
respect thereof.
"BERING AGREEMENT" means the investment management agree-
ment, effective as of December 1, 1991, between Bering Holdings Inc.
and MAXXAM Properties Inc., as amended, supplemented or otherwise
modified from time to time.
"BOARD OF DIRECTORS" means the Board of Directors of the
Company or any committee thereof duly authorized to act on behalf of
such Board.
"BRITT LUMBER AGREEMENT" means the Agreement dated as of the
date hereof, among the Company and Britt Lumber Co., Inc., as amended,
supplemented or otherwise modified from time to time.
"BUSINESS DAY" means each day that is not a Legal Holiday.
"CAPITAL LEASE OBLIGATIONS" of any person means, as of any
date of determination, any obligation that is required to be
classified and accounted for as a capital lease on the face of a
balance sheet of such person prepared in accordance with GAAP as of
such determination date (it being understood that the Capital Lease
Obligations of the Company shall not include any such obligations
attributable to any Unrestricted Subsidiary as of any determination
date); the amount of such obligation shall be the capitalized amount
thereof, determined
<PAGE>
in accordance with GAAP; and the stated maturity thereof shall be the
date of the last payment of rent or any other amount due under such
lease prior to the first date upon which such lease may be terminated
by the lessee without payment of a penalty.
"CAPITAL STOCK" of any person means any and all shares,
interests, rights to purchase, warrants, options, participations or
other equivalents of or interests in (however designated) corporate
stock of such person, including any Preferred Stock of such person but
excluding any Redeemable Stock of such person.
"CASH EQUIVALENTS" means at any time (i) any evidence of any
obligation issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof
(provided, that the full faith and credit of the United States of
America is pledged in support thereof); (ii) demand or time deposits
with, and certificates of deposit or acceptances issued by, any bank
or trust company organized under the laws of the United States of
America or any State thereof (including the Trustee) whose unsecured,
unguaranteed long-term debt obligations are rated "A" by Standard &
Poor's Corporation ("S&P") and "A2" by Moody's Investors Service, Inc.
("Moody's") or higher, or whose unsecured, unguaranteed commercial
paper obligations are rated "A-2" by S&P and "P-2" by Moody's or
higher; (iii) repurchase agreements entered into with entities whose
unsecured, unguaranteed long-term debt obligations are rated "A" by
S&P and "A2" by Moody's or higher, or whose unsecured, unguaranteed
commercial paper obligations are rated "A-2" by S&P and "P-2" by
Moody's or higher, pursuant to a written agreement with respect to any
obligation described in clauses (i), (ii) or (iv) of this definition;
(iv) commercial paper (including both noninterest-bearing discount
obligations and interest-bearing obligations payable on demand or on a
specified date not later than 180 days from the date of acquisition
thereof) and having a rating of "A-2" by S&P and "P-2" by Moody's or
higher; (v) direct obligations of any money market fund or other
similar investment company all of whose investments consist primarily
of obligations described in the foregoing clauses of this definition
and that is rated "AAm" by S&P and "Aam" by Moody's or higher; (vi)
taxable auction rate securities commonly known as "money market notes"
that at the time of purchase have been rated and the ratings for which
(A) for direct issues, must not be less than "P2"
<PAGE>
if rated by Moody's and not less than "A2" if rated by S&P, or (B) 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 (vii) any investments hereafter developed which are
substantially comparable to those described above.
"CHANGE OF CONTROL" means the occurrence of any of the
following events: (i) MAXXAM, directly or indirectly, not having
(other than by reason of the existence of a Lien but including by
reason of the foreclosure of or other realization upon a Lien) direct
or indirect sole beneficial ownership (as defined under Regulation -
13d-3 of the Exchange Act as in effect on the date of this Indenture)
of at least 40% of the total common equity, on a fully diluted basis,
of the Company; provided, however, that such ownership by MAXXAM,
directly or indirectly, of 30% or greater, but less than 40% of the
total common equity, on a fully diluted basis, of the Company shall
not be a Change of Control if MAXXAM, through direct representation or
through persons nominated by it, controls a majority of the Board of
Directors necessary to effectuate any actions by the Board of
Directors; and provided, further, that the foregoing minimum
percentages shall be deemed not satisfied if any person or group
shall, directly or indirectly, own more of the total voting power
entitled to vote generally in the election of directors of the Company
than MAXXAM; or (ii) Charles Hurwitz, members of his immediate family
and trusts for the benefit thereof (each such person, including Mr.
Hurwitz and any trustee of such trusts being herein called a
"Beneficiary") not having (other than by reason of resolution of any
litigation outstanding as of the date of the Indenture or any similar
litigation or the existence of a Lien but including by reason of the
foreclosure of or other realization upon a Lien) direct or indirect
sole beneficial ownership (as defined under Regulation 13d-3 of the
Exchange Act as in effect on the date of this Indenture) of at least
the Minimum Percentage of the total equity of MAXXAM other than as a
result of new issuances of equity securities by MAXXAM to third
parties (other than to a third party who is not a Beneficiary and who
controls MAXXAM). Minimum Percentage means that percentage obtained
by multiplying (x) the percentage of the total equity of MAXXAM
directly or indirectly
<PAGE>
beneficially owned by the Beneficiaries as of the date of this
Indenture and (y) 80%.
"CODE" means the Internal Revenue Code of 1986, as amended
(or any successor statute thereto), and the regulations promulgated
thereunder, all as in effect from time to time.
"COGENERATION FACILITY" means the Credit Agreement dated as
of July 26, 1990 between the Company and Bank of America, National
Trust and Savings Association, together with all related notes,
letters of credit, collateral documents and guarantees and any other
related agreements and instruments executed and delivered in
connection therewith, in each case, as amended, supplemented, re-
stated, restructured, renewed, extended, refinanced or otherwise
modified, in whole or in part, from time to time through the date of
this Indenture.
"COMMON STOCK" means the common stock, par value $.01 per
share, of the Company.
"COMPANY" means The Pacific Lumber Company, a Delaware
corporation, and subject to the provisions of Article 5 herein, shall
mean its successors and assigns; provided, however, that, for purposes
of any provision contained herein which is required by the TIA,
"Company" shall also mean each other obligor (if any) on the indenture
securities.
"CONSOLIDATED CASH FLOW COVERAGE RATIO" of the Company
means, as of the date of the transaction giving rise to the need to
calculate the Consolidated Cash Flow Coverage Ratio (the "Transaction
Date"), the ratio of (i) the aggregate amount of EBITDA for the four
fiscal quarters for which financial information in respect thereof is
available immediately prior to the Transaction Date to (ii) the
aggregate Consolidated Interest Expense for the fiscal quarter in
which the Transaction Date occurs and to be accrued during the three
fiscal quarters immediately subsequent thereto (based upon the pro
forma amount of Indebtedness of the Company and its Restricted
Subsidiaries expected by the Company to be outstanding on the
Transaction Date and thereafter other than the Timber Notes), assuming
for the purposes of this measurement the continuation of market
interest rates prevailing on the Transaction Date and base interest
rates in respect of floating interest rate obligations equal to the
base
<PAGE>
interest rates on such obligations in effect as of the Transaction
Date; provided that if the Company or any of its Restricted
Subsidiaries is a party to any Interest Rate Protection Agreements
which would have the effect of changing the interest rate on any
Indebtedness of the Company or any of its Restricted Subsidiaries for
such four quarter period (or a portion thereof), the resulting rate
shall be used for such four quarter period or portion thereof; and
provided further that any Consolidated Interest Expense with respect
to Indebtedness Incurred or retired by the Company or any of its
Restricted Subsidiaries during the fiscal quarter in which the
Transaction Date occurs shall be calculated as if such Indebtedness
was so Incurred or retired on the first day of the fiscal quarter in
which the Transaction Date occurs; and provided further that if,
during the four fiscal quarters referred to in clause (i) of this
definition, (x) the Company or any of its Restricted Subsidiaries
shall have engaged in any Asset Sale, EBITDA for such period shall be
reduced by an amount equal to the EBITDA (if positive), or increased
by an amount equal to the EBITDA (if negative), directly attributable
to the assets which are the subject of such Asset Sale for such period
calculated on a pro forma basis as if such Asset Sale and any related
retirement of Indebtedness had occurred on the first day of such
period or (y) the Company or any of its Restricted Subsidiaries shall
have acquired any material assets out of the ordinary course of
business, EBITDA shall be calculated on a pro forma basis as if such
asset acquisition and any related financing had occurred on the first
day of such period.
"CONSOLIDATED INCOME TAX EXPENSE" of the Company means
(without duplication), for any period the aggregate of the income tax
expense (net of applicable credits) of the Company and its
Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP other than income taxes (including credits) with
respect to items of net income excluded from the definition of
Consolidated Net Income and without giving effect to any income tax
expense or benefit attributable to any Unrestricted Subsidiary, or to
Scotia Pacific so long as any Timber Notes are outstanding, during
such period.
"CONSOLIDATED INTEREST EXPENSE" of the Company means, for
any period (without duplication), (A) the sum of (i) the interest
expense of the Company and its Subsidiaries for such period,
determined on a consolidated
<PAGE>
basis in accordance with GAAP, (ii) all fees, commissions, discounts
and other charges of the Company and its Subsidiaries with respect to
letters of credit and bankers' acceptances and the costs (net of
benefits) associated with Interest Rate Protection Agreements for such
period, determined on a consolidated basis in accordance with GAAP,
and (iii) dividends declared on Redeemable Stock of the Company or any
Restricted Subsidiary held by persons other than the Company or a
Wholly Owned Restricted Subsidiary (other than dividends payable in
Capital Stock of the Company or pro rata dividends payable in Capital
Stock of any such Restricted Subsidiary), less (B) the sum of (i), to
the extent included in clause (A) of this definition, any charge in
connection with the repurchase or redemption of the Old Securities
with respect to premiums paid in excess of the principal amount of the
Old Securities so repurchased or redeemed, (ii) the amortization or
write-off of deferred financing costs by the Company and its
Subsidiaries during such period, determined on a consolidated basis in
accordance with GAAP (including, without limitation, the amortization
of any unamortized deferred financing costs in connection with any
refinancing of the Credit Agreement and/or the Cogeneration Facility
and/or the repurchase or redemption of the Old Securities), and (iii)
the amortization of any debt discount associated with the Securities
determined on a consolidated basis in accordance with GAAP; in the
case of clauses (A) and (B) of this definition, without giving effect
to any such items and amounts attributable to any Unrestricted
Subsidiary, or to Scotia Pacific so long as any Timber Notes are out-
standing, during such period.
"CONSOLIDATED NET INCOME" of the Company means, for any
period, the aggregate net income (or net loss, as the case may be) of
the Company and its Subsidiaries for such period on a consolidated
basis, determined in accordance with GAAP ("GAAP Net Income");
provided that (without duplication) there shall be excluded from GAAP
Net Income (to the extent otherwise included therein) (i) gains and
losses (net of applicable taxes) from Asset Sales or reserves relating
thereto (except any gain or loss on the sale of an Unrestricted
Subsidiary); (ii) items classified as extraordinary (other than the
tax benefit of the utilization of net operating loss carryforwards)
and gains and losses from discontinued operations; (iii) the net
income (or loss) of any Unrestricted Subsidiary, and of Scotia Pacific
so long as there are
<PAGE>
Timber Notes outstanding, during such period; (iv) except to the
extent includable pursuant to clause (iii) of this definition, the net
income (or loss) of any other person accrued or attributable to any
period prior to the date it becomes a Subsidiary of the Company or is
merged into or consolidated with the Company or any of its Subsidiar-
ies or such other person's property (or a portion thereof) is acquired
by the Company or any of its Subsidiaries; and (v) the net income of
any Subsidiary during such period to the extent that the declaration
or payment of dividends or similar distributions by such Subsidiary of
such net income is not at the time permitted by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or government regulation applicable to such Subsidiary;
and provided further, that there shall be added to GAAP Net Income the
entire amount of dividends or other distributions actually paid in
cash or Cash Equivalents during such period to the Company or any of
its Restricted Subsidiaries by any Unrestricted Subsidiary or Scotia
Pacific out of funds legally available therefor and which the Company
elects to include in the computation of Consolidated Net Income at the
time of the computation thereof (such election having been deemed to
have occurred with respect to Scotia Pacific so long as any Timber
Notes are outstanding), except all dividends and other distributions
which are permitted to be distributed to stockholders of the Company
in accordance with Section 4.04(c)(v).
"CREDIT AGREEMENT" means the letter agreement dated May 29,
1992, from Bank of America, National Trust and Savings Association to
the Company, together with all related notes, letters of credit,
collateral documents and guarantees and any other related agreements
and instruments executed and delivered in connection therewith, in
each case, as amended, supplemented, restated, restructured, renewed,
extended, refinanced or otherwise modified, in whole or in part, from
time to time.
"DEED OF TRUST" means the Deed of Trust dated prior to the
date hereof, among Scotia Pacific, the Collateral Agent named therein,
as beneficiary, and the Deed of Trust Trustee named therein, as
amended, supplemented or otherwise modified from time to time.
"DEFAULT" means any event which is, or after notice or
passage of time or both would be, an Event of Default as specified in
Section 6.01.
<PAGE>
"EBITDA" of the Company means, for any period, the sum for
such period of Consolidated Net Income plus, to the extent reflected
in the income statement for such period from which Consolidated Net
Income is determined, without duplication, (i) Consolidated Interest
Expense, (ii) Consolidated Income Tax Expense, (iii) depreciation and
depletion expense, (iv) amortization expense (including amortization
of deferred financing costs), and (v) any charge related to any
premium or penalty paid in connection with redeeming or retiring any
Indebtedness prior to its stated maturity, in the case of clauses
(iii), (iv) and (v) of this definition, of the Company and its Sub-
sidiaries determined on a consolidated basis in accordance with GAAP
for such period, but without giving effect to any such items and
amounts attributable to any Unrestricted Subsidiary during such period
or to Scotia Pacific so long as any Timber Notes are outstanding.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended (or any successor statute thereto), and the rules and
regulations promulgated thereunder.
"GAAP" means, at any date, generally accepted accounting
principles as in effect on December 31, 1992, and used in the
preparation of the Company's consolidated balance sheet at such date
and the Company's statements of consolidated income and cash flows for
the year then ended, but in any event giving effect to, but excluding
the effect of any one-time charges related to the implementation of,
Statement of Financial Accounting Standards No. 106 (Employers'
Accounting for Postretirement Benefits Other than Pensions) and
Statement of Financial Accounting Standards No. 109 (Accounting for
Income Taxes).
"HOLDER" or "SECURITYHOLDER" means the person in whose name
a Security is registered on the Registrar's books.
"INDEBTEDNESS" of any person means, at any date, any of the
following (without duplication): (a) the principal amount of all
obligations (unconditional or contingent) of such person for borrowed
money (whether or not recourse is to the whole of the assets of such
person or only to a portion thereof) and the principal amount of all
obligations (unconditional or contin-
<PAGE>
gent) of such person evidenced by debentures, notes or other similar
instruments (including, without limitation, reimbursement obligations
with respect to letters of credit (except to the extent collateralized
by cash or Cash Equivalents), performance bonds (except to the extent
collateralized by cash or Cash Equivalents) and bankers' acceptances
(except to the extent collateralized by cash or Cash Equivalents));
(b) all obligations of such person to pay the deferred purchase price
of property or services, except (x) accounts payable and other current
liabilities arising in the ordinary course of business and (y)
compensation, pension obligations and other obligations arising from
employee benefits and employee arrangements; (c) Capital Lease
Obligations of such person; (d) all Indebtedness of others secured by
a Lien on any asset of such person whether or not such Indebtedness is
assumed or guaranteed by such person; (e) all Indebtedness of others
guaranteed by such person; and (f) all Redeemable Stock, valued at the
greater of its voluntary or involuntary maximum fixed repurchase price
exclusive of accrued and unpaid dividends; and the amounts thereof
shall be the outstanding balance of any such unconditional obligations
as described in clauses (a) through (e) (other than clause (d)), and
the maximum liability of any such contingent obligations at such date
(other than with respect to clause (d)) and, in the case of clause
(d), the lesser of the fair value (as determined by the Board of
Directors) at such date of any asset subject to any Lien securing the
Indebtedness of others and the principal amount of the Indebtedness
secured; provided that the Indebtedness of any person shall not
include (i) obligations of such person arising from the honoring by a
bank or other financial institution of a check, draft or similar
instrument inadvertently drawn against insufficient funds in the
ordinary course of business provided that such obligations are
extinguished within two Business Days after their Incurrence and (ii)
obligations of such person resulting from the endorsement of
negotiable instruments in the ordinary course of business. For
purposes hereof, the "maximum fixed repurchase price" of any
Redeemable Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Stock as if
such Redeemable Stock were purchased on any date on which Indebtedness
is required to be determined pursuant to this Indenture, and if such
price is based upon, or measured by, the fair market value of such
Redeemable Stock, such fair market value shall be determined in good
faith by
<PAGE>
the board of directors of the issuer of such Redeemable Stock.
"INDENTURE" means this Indenture as amended, supplemented or
otherwise modified from time to time in accordance with the terms
hereof.
"INTEREST RATE PROTECTION AGREEMENT" means any interest rate
swap agreement, interest rate cap agreement, currency swap agreement
or other financial agreement or arrangement designed to protect the
Company or any Subsidiary of the Company against fluctuations in
interest rates or currency exchange rates, as in effect from time to
time.
"INVESTMENT" means with respect to any person (such person
being referred to in this definition as the "Investor") (without
duplication), (i) any amount paid or any property transferred, in each
case, directly or indirectly, by the Investor for Capital Stock or
Redeemable Stock, partnership interests or other securities of, or as
a contribution to the capital of any other person, (ii) any direct or
indirect loan or advance by the Investor to any other person other
than accounts receivable of the Investor relating to the purchase and
sale of property or services arising in the ordinary course of busi-
ness, and (iii) any direct or indirect guarantee by the Investor of
any Indebtedness of any other person.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which
banking institutions are not required by applicable law to be open in
the Commonwealth of Massachusetts and in the States of New York,
California and Texas.
"LIEN" means, with respect to any asset, any lien, mortgage,
pledge, security interest, charge or encumbrance of any kind
(including any conditional sale or other title retention agreement and
any lease in the nature thereof) in respect of such asset.
"MAINTENANCE AGREEMENT" means the Maintenance Agreement,
dated as of July 1, 1986, between the Company and MGI.
"MAXXAM" means MAXXAM Inc., a Delaware corporation, and any
successor corporation.
<PAGE>
"MGI" means MAXXAM Group Inc., a Delaware corporation, and
any successor corporation.
"NET CASH PROCEEDS" means cash payments received (but if
received in a currency other than United States dollars, such payments
shall not be deemed received until the earliest time at which such
currency is, or could freely be, converted into United States dollars)
by or on behalf of the Company and/or any of its Restricted Sub-
sidiaries (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or
otherwise, or the cash realization of any non-cash proceeds of any
Asset Sale, but, in each case, only as and when, and to the extent,
received by the Company or any of its Restricted Subsidiaries) from an
Asset Sale, in each case and without duplication, net of (i) fees,
expenses and other expenditures in connection with such Asset Sale
(whether or not such fees, expenses or expenditures are then due and
payable or made, as the case may be), (ii) the amounts paid to
repurchase or repay any Indebtedness, or the amount of any
Indebtedness assumed, in each case which Indebtedness is either (A)
secured, directly or indirectly, by Liens on the assets which are the
subject of such Asset Sale or (B) associated with such assets and due
in connection with such Asset Sale, and other fees, expenses and other
expenditures, in each case, incurred in connection with such Asset
Sale or the repurchase, repayment or assumption of such Indebtedness
(whether or not such fees, expenses or expenditures are then due and
payable), (iii) all amounts deemed appropriate by the Company (as evi-
denced by a signed certificate of the Treasurer of the Company
delivered to the Trustee) to be provided as a reserve, in accordance
with GAAP, against any liabilities associated with such assets which
are the subject of such Asset Sale, (iv) all foreign, federal, state
and local taxes payable (including taxes reasonably estimated to be
payable) in connection with or as a result of such Asset Sale, and (v)
with respect to Asset Sales by Restricted Subsidiaries of the Company,
the portion of such cash payments required to be paid to persons
holding a minority interest in such Restricted Subsidiary, provided,
in each such case, such fees, expenses, expenditures and other amounts
are not payable to an Affiliate of the Company.
<PAGE>
"OFFICER" means the Chairman of the Board, the President,
any Vice President, the Chief Financial Officer, the Treasurer, an
Assistant Treasurer, the Secretary, or an Assistant Secretary of the
Company.
"OFFICERS' CERTIFICATE" means a certificate signed by two
Officers.
"OLD SECURITIES" means, collectively, (i) the Company's 12%
Series A Senior Notes due July 1, 1996, (ii) the Company's 12.2%
Series B Senior Notes due July 1, 1996, and (iii) the Company's 12.5%
Senior Subordinated Debentures due July 1, 1998.
"OPINION OF COUNSEL" means a written opinion from legal
counsel who is reasonably acceptable to the Trustee. The counsel may
be an employee of or counsel to the Company or the Trustee, as the
case may be.
"PERSON" means any individual, corporation, partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision
thereof or any other entity.
"PREFERRED STOCK" as applied to the Capital Stock or
Redeemable Stock of any corporation, means Capital Stock or Redeemable
Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock or Redeemable Stock, as the
case may be, of any other class of such corporation.
"PRINCIPAL" of a Security means the principal of the
Security plus the premium, if any, payable on the Security.
"REDEEMABLE STOCK" of any person means any equity security
of such person that by its terms is required to be redeemed prior to
the final Stated Maturity of all principal of the Securities, or is
redeemable at the option of the holder thereof at any time prior to
the final Stated Maturity of all principal of the Securities.
"RESTRICTED INVESTMENT" means any Investment in an Affiliate
of the Company.
<PAGE>
"RESTRICTED SUBSIDIARY" means, as of any determination date,
each of the Subsidiaries of the Company which is not as of such
determination date an Unrestricted Subsidiary of the Company.
"SALMON CREEK" means Salmon Creek Corporation, a Delaware
corporation, or any successor corporation, by way of merger,
consolidation, purchase of all or substantially all of its assets, or
otherwise, which holds the Salmon Creek Property on the date of this
Indenture but which may not acquire any other assets (other than
assets incidental to the operation, disposition, management and
maintenance of the Salmon Creek Property or assets received in
connection with a transaction described in Section 4.04(c)(v) or any
clause thereof), except in exchange for or out of the proceeds of the
sale or disposition of Salmon Creek Property.
"SALMON CREEK PROPERTY" means any of the property described
on Exhibit B to this Indenture or any assets or Stock, in each case,
held by Salmon Creek.
"SCOTIA PACIFIC" means Scotia Pacific Holding Company, a
Delaware corporation, and any successor corporation, by way of merger,
consolidation, purchase of all or substantially all of its assets, or
otherwise.
"SCOTIA PACIFIC AGREEMENTS" means any agreements between
Scotia Pacific and the Company or any Subsidiary of the Company as the
same may be amended after the date hereof in accordance with the terms
thereof, including without limitation, the Master Purchase Agreement,
Services Agreement, Additional Services Agreement, Environmental
Indemnification Agreement and Reciprocal Rights Agreement, each
effective prior to or as of the date hereof.
"SEC" means the Securities and Exchange Commission or any
successor regulatory agency thereto.
"SECURITIES" means the Securities issued, authenticated and
delivered under this Indenture, as amended, restated, restructured,
renewed, extended, refinanced or otherwise modified, in whole or in
part, from time to time.
<PAGE>
"SECURITIES ACT" means the Securities Act of 1933, as
amended (or any successor statute thereto), and the rules and
regulations promulgated thereunder.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary of
the Company which at the time of determination had, or any group of
Restricted Subsidiaries which, if merged into each other at the time
of determination, would at the time of determination have had, (A)
assets which, as of the date of the Company's most recent quarterly
consolidated balance sheet, constituted at least 10% of the Company's
total assets on a consolidated basis as of such date, (B) revenues for
the 12-month period ending on the date of the Company's most recent
quarterly consolidated statement of income which constituted at least
10% of the Company's total revenues on a consolidated basis for such
period or (C) EBITDA for the 12-month period ending on the date of the
Company's most recent quarterly consolidated statement of income which
constituted at least 10% of the Company's total EBITDA on a
consolidated basis for such period (it being understood that for the
purposes of clause (C) of this definition, EBITDA of any Restricted
Subsidiary or group of Restricted Subsidiaries of the Company for any
period shall be that portion of the Company's total EBITDA
attributable to such Restricted Subsidiary or group of Restricted
Subsidiaries during such period).
"STATED MATURITY", when used with respect to the payment of
any principal of, or accrued interest on, any Security, means the date
specified in such Security as the fixed date on which such principal
of or accrued interest on such Security is due and payable, as the
case may be.
"STOCK" of any person means, collectively, the Capital Stock
and the Redeemable Stock of such person.
"SUBSIDIARY" means, with respect to any person, (i) any
corporation of which more than 50% of the outstanding Capital Stock
and Redeemable Stock having ordinary voting power to elect a majority
of the board of directors of the corporation (irrespective of whether
at the time Capital Stock or Redeemable Stock of any other class or
classes of such corporation shall or might have voting power upon the
occurrence of any contingency) is at the time owned, directly or
indirectly, by such per-
<PAGE>
son, or by one or more other Subsidiaries of such person, or by such
person and one or more other Subsidiaries of such person, or (ii) any
other entity of which more than 50% of the outstanding equity
ownership interests are at the time owned, directly or indirectly, by
such person, or by one or more other Subsidiaries of such person, or
by such person and one or more other Subsidiaries of such person.
"TAKING" means any sale, transfer or other disposition of
all or any part of the assets of the Company that occurs by reason of
condemnation or eminent domain or other similar proceedings exercised
by the United States of America or any State, municipality, agency or
other governmental authority thereof.
"TAX SHARING AGREEMENT" means the Tax Allocation Agreement,
dated May 21, 1988, by and among MAXXAM, the Company and certain other
subsidiaries of MAXXAM, as amended by the Tax Allocation Agreement,
dated as of the date hereof, by and among MAXXAM, the Company, Scotia
Pacific and Salmon Creek, as amended, supplemented or otherwise
modified from time to time.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C.
77aaa-77bbbb) as in effect on the date of this Indenture, except as
otherwise expressly provided herein.
"TIMBER NOTE INDENTURE" means the Indenture, dated as of the
date hereof between Scotia Pacific and The First National Bank of
Boston, as trustee, pursuant to which the Timber Notes are being
issued, as amended, supplemented or otherwise modified from time to
time.
"TIMBER NOTES" means the 7.95% Timber Collateralized Notes
due 2015, issued by Scotia Pacific, as amended, supplemented or
otherwise modified, in whole or in part from time to time in
accordance with the terms of the Timber Note Indenture.
"TRUST OFFICER" means any officer of the Trustee assigned by
the Trustee to administer its corporate trust matters.
<PAGE>
"TRUSTEE" means the party named as such in this Indenture
until a successor replaces it in accordance with the terms of this
Indenture and, thereafter, means the successor.
"UNIFORM COMMERCIAL CODE" means the New York Uniform
Commercial Code as in effect in the State of New York from time to
time.
"UNRESTRICTED INVESTMENTS OUTSTANDING" means, at any time of
determination, in respect of any Unrestricted Subsidiary, the
difference between (x) the sum of all Unrestricted Investments
theretofore made by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary after the date of this Indenture, minus (y)
the amount of all dividends and distributions paid (to the extent that
the Company does not elect to include the amount of such dividends and
distributions in the computation of Consolidated Net Income pursuant
to the last proviso of the definition thereof at the time of determi-
nation), all repayments of the principal amount of loans or advances
by such Unrestricted Subsidiary to the Company or any of its
Restricted Subsidiaries during the period that such person was an
Unrestricted Subsidiary and any other reduction of Unrestricted
Investments in such Unrestricted Subsidiary during the period that
such person was an Unrestricted Subsidiary (the amount of any
Unrestricted Investment returned or reduced, if other than in cash or
a sum certain guaranteed, to be the fair market value as determined in
good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a resolution of the Board of Directors
filed with the Trustee); provided that the amount of Unrestricted In-
vestments Outstanding in respect of any Unrestricted Subsidiary shall
at no time be a negative amount.
"UNRESTRICTED SUBSIDIARY" means (a) each of the Subsidiaries
of the Company so designated by a resolution adopted by the Company's
Board of Directors and whose creditors have no direct or indirect
recourse (including, but not limited to, recourse with respect to the
payment of principal or interest on Indebtedness of such Subsidiary)
to the Company or a Restricted Subsidiary (except to the extent such
recourse arises (i) solely by operation of law and not pursuant to a
contractual or other consensual arrangement or (ii) pursuant to an
Investment or a Restricted Investment permitted by this Indenture),
<PAGE>
(b) any Subsidiary of an Unrestricted Subsidiary, (c) any joint
venture, partnership or other person (other than a Subsidiary of the
Company) in which the Company and/or its Subsidiaries have an equity
ownership interest equal to or greater than 5% and in which no
Affiliate of the Company has a direct or an indirect equity ownership
interest in excess of 5% therein other than by virtue of the direct or
indirect equity ownership interest in such joint venture, partnership
or other person held (in the aggregate) by the Company and/or one or
more of its Subsidiaries, and (d) Salmon Creek. The Board of Direc-
tors may designate an Unrestricted Subsidiary to be a Restricted
Subsidiary, provided that any such redesignation shall be deemed to be
an Incurrence by the Company and its Restricted Subsidiaries of the
Indebtedness (if any) of such redesignated Restricted Subsidiary for
purposes of Section 4.03 as of the date of such redesignation to the
extent that such Indebtedness does not already constitute Indebtedness
of the Company or one or more of its Restricted Subsidiaries. Subject
to the foregoing, the Board of Directors of the Company also may
designate any Restricted Subsidiary (other than Scotia Pacific so long
as there are any Timber Notes outstanding) to be an Unrestricted
Subsidiary, provided that (i) the amount of any outstanding
Investments by the Company and its Restricted Subsidiaries in such
Restricted Subsidiary shall be deemed to be Unrestricted Investments
Outstanding at the time of such designation and (ii) immediately after
giving effect to such designation and to the characterization of the
Investments by the Company and its Restricted Subsidiaries in such
newly designated Unrestricted Subsidiary, the Company and its
remaining Restricted Subsidiaries could make at least $1.00 of
additional Restricted Payments or Unrestricted Investments pursuant to
Section 4.04.
"U.S. GOVERNMENTAL OBLIGATIONS" means any evidence of
obligations issued directly or fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof for
the payment of which the full faith and credit of the United States of
America is pledged and which are not callable at the issuer's option.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means any Restricted
Subsidiary (i) which is a corporation of which all of the outstanding
shares of Capital Stock and Redeemable Stock having ordinary voting
power to elect a
<PAGE>
majority of the board of directors of such corporation (irrespective
of whether at the time Capital Stock or Redeemable Stock of any other
class or classes of such corporation shall or might have voting power
upon the occurrence of any contingency) are owned at the time,
directly or indirectly (through one or more Wholly Owned Restricted
Subsidiaries), by the Company (except for director's qualifying
shares), or (ii) which is any other entity of which all of the
outstanding equity ownership interests are owned at the time, directly
or indirectly (through one or more Wholly Owned Restricted Subsidiar-
ies), by the Company.
<PAGE>
SECTION 1.02. OTHER DEFINITIONS.
<TABLE>
<CAPTION>
Defined in
Term Section
____ _________
<S> <C>
"Asset Sale Offer" 4.07(c)
"Asset Sale Offer Notice" 4.07(d)
"Asset Sale Purchase Notice" 4.07(e)
"Asset Sale Purchase Price" 4.07(c)
"Bankruptcy Law" 6.01
"Change of Control Offer Notice" 4.09(b)
"Change of Control Offer Period" 4.09
"Change of Control Purchase Date" 4.09(a)
"Change of Control Purchase Price" 4.09(a)
"covenant defeasance option" 8.01
"Custodian" 6.01
"Event of Default" 6.01
"GAAP Net Income" 1.01 (within
the defini-
tion of "Con-
solidated Net
Income")
"Incur" (and the terms "Incurred" and
"Incurrence" have correlative meanings) 4.03
"legal defeasance option" 8.01
"maximum fixed repurchase price" 1.01 (within)
the defini-
tion of "In-
debtedness")
"Moody's" 1.01 (within
the defini-
tion of "Cash
Equivalents")
"Offer Amount" 4.07
"Offer Period" 4.07
"Paying Agent" 2.03
"Redemption" 4.04(a)
"refinance" (and the terms "refinancing" and
"refinanced" have correlative meanings) 4.03(c)
"Refinancing Indebtedness" 4.03(c)
"Registrar" 2.03
"Restricted Payment" 4.04(a)
"S&P" 1.01 (within
the defini-
tion of "Cash
Equivalents")
"Unrestricted Investment" 4.04(a)
<PAGE>
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE
ACT. Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this
Indenture. The following TIA terms used in this Indenture have the
following meanings:
"Commission" means the SEC.
"indenture securities" means the Securities.
"indenture security holder" means a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the
Trustee.
"obligor" on the indenture securities means the Company and
any other obligor on the indenture securities.
Except as expressly provided herein, all other terms used in
this Indenture that are defined by the TIA, or that are, by reference
in the TIA, defined in the Securities Act, shall have the meaning
assigned to such terms in the TIA and in the Securities Act, as the
case may be, as they were in effect as of the date of this Indenture.
SECTION 1.04. RULES OF CONSTRUCTION. For purposes of the
Securities and this Indenture (except as otherwise expressly provided
herein or unless the context otherwise requires):
a term has the meaning assigned to it;
(1) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP;
(2) "or" is not exclusive;
(3) "including" means including, without limitation;
<PAGE>
(4) words in the singular include the plural and words
in the plural include the singular;
(5) unsecured indebtedness shall not be deemed to rank
subordinate or junior in right or priority of payment to secured
indebtedness merely because it is unsecured indebtedness; and
(6) the principal amount of any noninterest bearing
security at any date shall be the principal amount thereof that would
be shown on a balance sheet of the issuer dated such date prepared in
accordance with GAAP and accretion of principal on such security shall
not be deemed to be the Incurrence of Indebtedness.
ARTICLE 2
THE SECURITIES
SECTION 2.01. FORM AND DATING. The Securities and the
Trustee's certificate of authentication shall be substantially in the
respective forms set forth in Exhibit A hereto. The Securities may
have notations, legends or endorsements lithographed or engraved
thereon as the Company may deem appropriate and as not inconsistent
with the provisions of this Indenture, or as may be required by law,
stock exchange rule or regulation, or usage or agreements to which the
Company is a party which are not inconsistent therewith (provided that
any such notation, legend or endorsement is in a form reasonably
acceptable to the Trustee and the Company). Each Security shall be
dated the date of its authentication. The terms and provisions
contained in the form of Security, annexed hereto as Exhibit A, shall
constitute, and are hereby expressly made, a part of this Indenture.
SECTION 2.02. EXECUTION AND AUTHENTICATION. Two Officers
shall sign the Securities on behalf of the Company under its corporate
seal. The Company's seal shall be impressed, affixed, imprinted or
otherwise reproduced on the Securities and may be in facsimile form.
The signature of any such officer or officers upon the Securities may
be the manual or facsimile signature of the present or any future
officer or officers and facsim-
<PAGE>
ile signatures may be imprinted or otherwise reproduced on the
Securities.
If an Officer whose signature is on a Security no longer
holds that office at the time the Trustee authenticates the Security,
the Security shall be valid nevertheless.
A Security shall not be valid until a duly authorized
officer of the Trustee manually signs the certificate of
authentication on the Security. The signature shall be conclusive
evidence that the Security has been authenticated under this
Indenture.
The Trustee shall authenticate and deliver Securities for
original issue in an aggregate principal amount of up to $235,000,000
upon a written order of the Company, signed by two Officers of the
Company. Such order shall specify the amount of the Securities to be
authenticated and the date on which the original issue of Securities
is to be authenticated. The aggregate principal amount of Securities
outstanding at any time shall not exceed that amount except as
provided in Section 2.07.
The Trustee may appoint an authenticating agent acceptable
to the Company to authenticate the Securities. Unless limited by the
terms of such appointment, an authenticating agent may authenticate
Securities whenever the Trustee may do so. Each reference in this
Indenture to authentication by the Trustee includes authentication by
such agent. An authenticating agent has the same rights as any
Registrar, Paying Agent or agent for service of notices and demands.
The Securities shall be issued only in registered form,
without coupons, and only in denominations of $1,000 and any integral
multiple thereof.
SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company
shall maintain an office or agency where Securities may be presented
for registration of transfer or for exchange ("Registrar") and an
office or agency where Securities may be presented for payment
("Paying Agent"). The Registrar shall keep a register of the
Securities and of their transfer and exchange. The Company may have
one or more co-registrars and one or more additional paying agents.
The term "Registrar" includes any co-registrar
<PAGE>
and the term "Paying Agent" includes any additional paying agent.
The Company may designate or appoint a Registrar or Paying
Agent not a party to this Indenture. If the Company shall so
designate or appoint such agent, the Company shall enter into an
appropriate agency agreement with such Registrar or Paying Agent. The
agreement shall implement the provisions of this Indenture that relate
to such agent. The Company shall notify the Trustee of the name and
address of any such agent. If the Company fails to maintain a
Registrar or Paying Agent, the Trustee shall act as such and shall be
entitled to appropriate compensation therefor pursuant to Section
7.07. The Company or any Subsidiary or Affiliate of the Company may
act as Paying Agent, Registrar or transfer agent.
The Company initially appoints the Trustee as Registrar and
Paying Agent in connection with the Securities.
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. On or
prior to 11:00 A.M., New York City time, on each due date of the
principal of or interest on any Security, the Company shall deposit
with the Paying Agent immediately available funds sufficient to pay
such principal or interest then so becoming due. The Company shall
require each Paying Agent (other than the Trustee) to agree in writing
that the Paying Agent shall hold in trust for the benefit of
Securityholders or the Trustee all money held by the Paying Agent for
the payment of principal of or interest on the Securities and shall
notify the Trustee of any default by the Company in making any such
payment; provided, however, that any money earned on funds invested by
the Trustee or any Paying Agent shall be remitted to the Company. If
the Company or a Subsidiary acts as Paying Agent, it shall segregate
the money held by it as Paying Agent and hold it as a separate trust
fund. The Company at any time may require a Paying Agent to pay all
money held by it to the Trustee and to account for any funds disbursed
by it. Upon doing so, the Paying Agent (other than the Company) shall
have no further liability for the money so paid over to the Trustee.
SECTION 2.05. SECURITYHOLDER LISTS. The Trustee shall pre-
serve in as current a form as is reasonably practicable the most
recent list available to it of
<PAGE>
the names and addresses of Securityholders. If the Trustee is not the
Registrar, the Company shall furnish to the Trustee, in writing at
least seven Business Days before each interest payment date as set
forth in the Securities and at such other times as the Trustee may
request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of
Securityholders.
SECTION 2.06. TRANSFER AND EXCHANGE. The Securities shall
be issued in registered form and shall be transferable only upon the
surrender of such Security for registration of transfer at the office
or agency to be maintained by the Company. When a Security is
presented to the Registrar with a written request to register a trans-
fer, the Registrar shall register the transfer as requested, and
deliver a duly executed and authenticated Security or Securities in
the name of the transferee, if its requirements are met. When
Securities are presented to the Registrar with a request to exchange
them for an equal principal amount of Securities in other authorized
denominations, the Registrar shall make the exchange as requested, and
deliver the duly executed and authenticated Security or Securities
which the Holder making the exchange shall be entitled to receive, if
the same requirements are met. To permit registration of transfers
and exchanges, the Company shall execute and the Trustee shall
authenticate Securities at the Registrar's request. No service charge
shall be made to a Holder for any registration of transfer or
exchange, but the Company may require payment of a sum sufficient to
pay all taxes, assessments or other governmental charges that may be
imposed in relation thereto. The Company shall not be required to
make and the Registrar need not register transfers or exchanges of
Securities selected for redemption in whole or in part (except, in the
case of Securities to be redeemed in part, the portion thereof not to
be redeemed) or during the 15 day period prior to the date of the
mailing of a notice of redemption of Securities selected for redemp-
tion or 15 days before an interest payment date as set forth in the
Securities.
Prior to the due presentation for registration of transfer
or exchange of any Security, the Company, the Paying Agent or the
Registrar may deem and treat the person in whose name a Security is
registered as the absolute owner of such Security for the purpose of
receiving payment of principal of and interest on such
<PAGE>
Security and for all other purposes whatsoever, and none of the
Company, the Trustee, the Paying Agent or the Registrar shall be
affected by notice to the contrary.
SECTION 2.07. REPLACEMENT SECURITIES. If a mutilated Secu-
rity (temporary or definitive) is surrendered to the Registrar or if
the Holder of a Security claims that the Security has been lost,
destroyed or wrongfully taken, the Company shall issue and the Trustee
shall authenticate a replacement Security if the Trustee's
requirements are met. If required by the Trustee or the Company, such
Holder shall furnish to the Trustee and the Company an indemnity bond
sufficient in the judgment of the Company and the Trustee to protect
the Company, the Trustee, the Paying Agent and the Registrar from any
loss which any of them may suffer if a Security is replaced. The
Company and the Trustee may charge the Holder for their respective
expenses in replacing a Security.
Every replacement Security is an additional obligation of
the Company and shall be subject to all the terms and provisions of
this Indenture.
SECTION 2.08. OUTSTANDING SECURITIES. Securities outstand-
ing at any time are all Securities that have been issued, authenti-
cated and delivered by the Trustee except for those cancelled by it,
those delivered to it for cancellation and those described in this
Section as not outstanding. A Security does not cease to be out-
standing because the Company, one of its Subsidiaries or an Affiliate
of the Company holds the Security.
If a Security is replaced pursuant to Section 2.07, it
ceases to be outstanding unless the Trustee and the Company receive
proof satisfactory to them that the replaced Security is held by a
bona fide purchaser.
To the extent that the Trustee or the Paying Agent segre-
gates and holds in trust, in accordance with this Indenture, on a
redemption date or maturity date money sufficient to pay the
Securities (or portions thereof) payable on that date and the Paying
Agent is not prohibited from paying such money to the Holders on that
date pursuant to the terms of this Indenture, then on and after that
date such Securities (or portions thereof) cease to be outstanding and
interest on them ceases to accrue.
<PAGE>
SECTION 2.09. TEMPORARY SECURITIES. Until definitive Secu-
rities are ready for delivery, the Company may execute and the Trustee
shall authenticate and deliver temporary Securities (printed,
lithographed or typewritten) of any authorized denomination, upon
written order of the Company signed by two Officers. Temporary
Securities shall be substantially in the form of definitive
Securities, but with such omissions, insertions and variations that
the Company considers appropriate for temporary Securities. Without
unreasonable delay, the Company shall execute and deliver definitive
Securities to the Trustee and the Trustee shall authenticate defini-
tive Securities and deliver them in exchange for temporary Securities.
Until so exchanged, the temporary Securities shall in all respects be
entitled to the same benefits under this Indenture and shall be
subject to the same provisions hereof as definitive Securities
authenticated and delivered hereunder.
SECTION 2.10. CANCELLATION. The Company at any time may
deliver Securities to the Trustee for cancellation. The Registrar and
the Paying Agent shall forward to the Trustee any Securities
surrendered to them for transfer, exchange or payment. The Trustee
and no one else shall cancel and destroy all Securities surrendered
for transfer, exchange, payment or cancellation and deliver a
certificate of such destruction to the Company unless the Company
directs the Trustee to deliver canceled Securities to the Company.
The Company may not issue new Securities to replace Securities it has
redeemed, paid or delivered to the Trustee for cancellation.
SECTION 2.11. DEFAULTED INTEREST. If the Company defaults
in a payment of interest on the Securities, it shall pay the defaulted
interest (plus interest on such defaulted interest to the extent
permitted by applicable law calculated at the same rate as the rate at
which the interest that is in default was calculated). The Company
may pay the defaulted interest to the persons who are Securityholders
on a subsequent special record date, which date shall be at least five
Business Days prior to the payment date. The Company shall fix or
cause to be fixed any such special record date and payment date, and,
at least 15 days before the special record date, the Company shall
mail to each Securityholder a notice that states the special record
date, the payment date and the amount of defaulted interest to be
paid.
<PAGE>
The Company may pay defaulted interest in any other lawful manner.
SECTION 2.12. CUSIP NUMBERS. The Company in issuing the
Securities may use "CUSIP" numbers (if then generally in use), and the
Trustee shall use CUSIP numbers in notices of redemption or exchange
as a convenience to Holders upon written order of the Company signed
by two Officers; provided that any such notice shall state that
neither the Trustee nor the Company makes any representation as to the
correctness of such numbers either as printed on the Securities or as
contained in any notice of redemption or exchange and that reliance
may be placed only on the other identification numbers printed on the
Securities, and any such redemption or exchange shall not be affected
by any defect in or omission of such numbers.
ARTICLE 3
REDEMPTION
SECTION 3.01. NOTICES TO TRUSTEE. If the Company elects to
redeem Securities pursuant to paragraph 5 of the Securities, it shall
notify the Trustee in writing of the redemption date and the principal
amount of Securities to be redeemed. The Company shall give each
notice to the Trustee provided for in this Section at least 45 days
before the redemption date (unless a shorter notice period shall be
satisfactory to the Trustee). If less than all the Securities are to
be redeemed, the record date relating to such redemption shall be
selected by the Company and given to the Trustee.
SECTION 3.02. SELECTION OF SECURITIES TO BE REDEEMED. If
fewer than all the Securities are to be redeemed, the Trustee shall
allocate the Securities to be redeemed pro rata or by lot or by any
other method the Trustee considers fair and appropriate and in
accordance with methods generally used at the time of selection by
fiduciaries in similar circumstances. The Trustee shall make the
selection from outstanding Securities not previously called for
redemption. The Trustee may select for redemption portions of the
principal (excluding premiums, if any) of Securities that have
denominations larger than $1,000. Securities and portions of them the
Trustee selects for redemption shall be in amounts of $1,000 or
<PAGE>
an integral multiple of $1,000. Provisions of this Indenture that
apply to Securities called for redemption also apply to portions of
Securities called for redemption. If the Trustee uses the pro rata
method of redemption, in order to as nearly as practicable exhaust
funds provided by the Company for redemption, the Trustee in redeeming
Securities may use any method it considers fair and equitable to round
up or down so that the amount of any Securities redeemed shall be in
principal amounts (excluding premiums, if any) of $1,000 or integral
multiples thereof. If at the time of any such selection, the Trustee
is not then the Registrar, the Trustee may direct the Registrar to
make the selection in accordance with this Section 3.02. The Trustee
shall notify the Company promptly of the Securities or portions of
Securities to be redeemed.
SECTION 3.03. NOTICE OF REDEMPTION. At least 15 days (or
30 days if legally required by The Depositary Trust Company) but not
more than 60 days before a date fixed for redemption of Securities,
the Company shall mail a notice of redemption by first-class mail to
each Holder of Securities to be redeemed at each Holder's last address
as it shall appear upon the register of the Securities maintained by
the Company, but any defect therein or failure of the addressee to
receive such notice shall not affect the validity of the proceedings
for the redemption of any of the Securities. Any failure to give such
notice to the Holder of any Securities shall not affect the validity
of the proceedings for the redemption of any other Security.
The notice shall identify the Securities to be redeemed
(including CUSIP numbers if used) and shall state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be sur-
rendered to the Paying Agent to collect the redemption
price;
<PAGE>
(5) if fewer than all the outstanding Securities are
to be redeemed, the identification and principal amounts of the
particular Securities to be redeemed;
(6) that, unless the Company defaults in making such
redemption payment, interest on Securities called for redemption
ceases to accrue on and after the redemption date and the only remain-
ing right of the Holders is to receive payment of the redemption price
and accrued and unpaid interest to (but not including) the redemption
date, if applicable, upon surrender to the Paying Agent of such
Securities; and
(7) the paragraph of the Securities and the section of
this Indenture pursuant to which the Securities are to be redeemed.
At the Company's request, the Trustee shall give the notice
of redemption in the Company's name and at the Company's expense. In
such event, the Company shall provide the Trustee with the information
required by clauses (1) through (3) at least 60 days prior to any such
redemption date (unless a shorter notice period shall be satisfactory
to the Trustee).
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice
of redemption is mailed, Securities called for redemption become due
and payable on the redemption date and at the redemption price stated
in the notice. Upon surrender to the Paying Agent, such Securities
shall be paid at the redemption price stated in the notice, plus
accrued and unpaid interest thereon, if any, to (but not including)
the redemption date. Unless the Company defaults in making the
redemption payment, interest on the Securities called for redemption
ceases to accrue on and after the redemption date (regardless of
whether the Securities have been timely surrendered). If the date
fixed for redemption is an interest payment date, the redemption
payment shall not include accrued interest which shall be paid in the
usual manner otherwise provided for herein.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. On or prior to
11:00 A.M., New York City time, on the redemption date, the Company
shall deposit with the Paying
<PAGE>
Agent (or if the Company or a Subsidiary is the Paying Agent, shall
segregate and hold in trust as provided in Section 2.04) money suffi-
cient to pay the redemption price of, and accrued interest on, all
Securities to be redeemed on that date other than Securities or
portions thereof called for redemption on that date which have been
delivered by the Company to the Trustee for cancellation. All money
earned on funds held in trust by the Trustee or any Paying Agent shall
be remitted to the Company.
SECTION 3.06. SECURITIES REDEEMED IN PART. Upon surrender
of a Security that is redeemed in part, the Company shall execute and
the Trustee shall authenticate and deliver to the Holder thereof (at
the Company's expense) a new Security equal in principal amount in
authorized denominations to the unredeemed portion of the Security
surrendered.
SECTION 3.07. CANCELLATION OF REDEEMED SECURITIES. All
Securities surrendered to the Trustee, upon redemption pursuant to the
provisions of this Article 3, shall be forthwith cancelled by it.
SECTION 3.08. NO REPURCHASE RESTRICTIONS. Nothing con-
tained in this Indenture or in the Securities shall be deemed to
prohibit or in any way restrict the Company, any Subsidiary or any
Affiliate from purchasing or otherwise acquiring any Security or
interest therein at any price or for any consideration whether higher
or lower than the redemption price, in a transaction not effected
pursuant to this Article 3.
ARTICLE 4
COVENANTS
SECTION 4.01. PAYMENT OF SECURITIES. The Company shall
promptly pay the principal of and accrued interest on the Securities
on the dates and in the manner provided in the Securities and in this
Indenture. Principal and accrued interest shall be considered paid on
the date due to the extent that on such date the Trustee or the Paying
Agent holds in accordance with this Indenture money sufficient to pay
the principal and accrued interest then due and the Trustee or the
Paying Agent, as the case may be, is not prohibited from paying such
money
<PAGE>
to the Securityholders on that date pursuant to the terms of this
Indenture.
The Company shall pay interest on overdue principal at the
rate specified therefor in the Securities, and it shall pay interest
on overdue installments of interest to the extent permitted by
applicable law calculated at the same rate as the rate at which the
interest that is in default was calculated.
SECTION 4.02. SEC REPORTS. The Company shall file with the
Trustee and provide Securityholders, within 15 days after it files
them with the SEC, copies of its annual report and of the final
information, documents and other reports (or copies of such portions
of any of the foregoing as the SEC may by rules and regulations pre-
scribe) which the Company or any Subsidiary is required to file with
the SEC pursuant to Section 13 or 15(d) of the Exchange Act. Notwith-
standing that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall continue to file with the SEC and provide the Trustee and
Securityholders with such annual reports and such information,
documents and other reports (or copies of such portions of any of the
foregoing as the SEC may by rules and regulations prescribe) which are
specified in Sections 13 and 15(d) of the Exchange Act. The Company
also shall comply with the provisions of TIA 314(a).
SECTION 4.03. LIMITATION ON INDEBTEDNESS. (a) The Company
shall not, and shall not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or
become liable with respect to, contingently or otherwise
(collectively, "INCUR"), any Indebtedness (including, without duplica-
tion, guarantees of Indebtedness by the Company and/or its Restricted
Subsidiaries), except that the Company and/or its Restricted
Subsidiaries (other than Scotia Pacific so long as there are any
Timber Notes outstanding) may Incur Indebtedness (including, without
duplication, guarantees of Indebtedness by the Company and/or its
Restricted Subsidiaries) if, immediately after giving effect thereto
and the receipt and application of the proceeds thereof, the
Consolidated Cash Flow Coverage Ratio of the Company would exceed 1.75
to 1 if such determination is made prior to March 31, 1994 and 2.0 to
1 if such determination is made thereafter.
<PAGE>
(b) Notwithstanding the provisions of Section 4.03(a),
the Company and/or its Restricted Subsidiaries (other than, except in
the case of clauses (xi) and (xii) of Section 4.03(b), Scotia Pacific
so long as there are any Timber Notes outstanding) may Incur (without
duplication) the following:
(i) Indebtedness in respect of the Secu-
rities;
(ii) aggregate Indebtedness under the Credit
Agreement in an amount not to exceed at any time outstanding
$40,000,000;
(iii) Indebtedness outstanding on the date
hereof (other than the Timber Notes which are governed by clause (xi)
of this Section 4.03(b));
(iv) Indebtedness in connection with one or
more letters of credit issued pursuant to (a) self-insurance obliga-
tions (other than workmen's compensation obligations), the aggregate
face or stated amount of which, together with the aggregate amount of
any related reimbursement obligations (without duplication) does not
exceed $1,000,000 at any time outstanding, and (b) workmens'
compensation obligations;
(v) Indebtedness owed by the Company to a
Restricted Subsidiary or owed by a Restricted Subsidiary to the
Company or to any other Restricted Subsidiary of the Company;
(vi) Capital Lease Obligations (other than
Capital Lease Obligations permitted by clause (xii) of this Section
4.03(b)) not exceeding $10,000,000 at any time outstanding;
(vii) Indebtedness under any Interest Rate
Protection Agreement to the extent that such Interest Rate Protection
Agreement is related to payment obliga
<PAGE>
tions on Indebtedness otherwise permitted under Section 4.03;
(viii) Indebtedness Incurred in connection
with Indebtedness the interest on which is exempt from Federal income
tax under the Code in an amount not exceeding $10,000,000 at any time
outstanding;
(ix) Indebtedness owed to or guaranteed by
any governmental agency, instrumentality or other authority Incurred
to provide relief from natural disasters or other similar assistance;
(x) Indebtedness Incurred after the date
hereof (in addition to (and without duplication of) Indebtedness
otherwise permitted by Section 4.03), in an aggregate principal amount
not exceeding $25,000,000 at any time outstanding;
(xi) Indebtedness of Scotia Pacific under
the Timber Notes or the Timber Note Indenture or in respect of the
Scotia Pacific Agreements or any other agreement entered into in
connection with the Timber Notes, as the same may be amended from time
to time in accordance with Section 4.11; and
(xii) Capital Lease Obligations of Scotia
Pacific.
(c) Notwithstanding anything to the contrary in
Section 4.03(a) or (b), the Company and its Restricted Subsidiaries
(other than Scotia Pacific so long as there are any Timber Notes
outstanding) may Incur Indebtedness all of the net proceeds of which
(after premiums, reasonable fees, expenses and costs related to the
Incurrence of such Indebtedness) are applied to renew, extend,
restructure, restate, refund or otherwise refinance, in whole or in
part (collectively, "REFINANCE"), the Indebtedness permitted by
paragraphs (a) or (b)(i) and (iii) of this Section 4.03 or any one or
more successive refinancings thereof (collectively, "REFINANCING
INDEBTEDNESS"); provided that (i) such Refinancing
<PAGE>
Indebtedness is in an aggregate amount not exceeding the aggregate
amount outstanding of the Indebtedness being so refinanced plus an
amount equal to the premiums, reasonable fees and expenses incurred in
connection with such refinancing; (ii) with respect to Refinancing
Indebtedness which refinances Indebtedness of the Company which ranks
(pursuant to its terms) subordinate in right and priority of payment
to the Securities, (x) the final stated maturity date of such
Refinancing Indebtedness shall not be earlier than the final stated
maturity date of the Indebtedness being so refinanced, (y) in the case
of such Refinancing Indebtedness Incurred by the Company, such Refi-
nancing Indebtedness is ranked (pursuant to its terms) subordinate in
right and priority of payment to the Securities to the same extent as
the Indebtedness being so refinanced, and (z) such Refinancing
Indebtedness has an Average Life at the time it is Incurred which is
not less than the remaining Average Life of the Indebtedness being so
refinanced; and (iii) no Restricted Subsidiary may Incur Refinancing
Indebtedness to refinance Indebtedness of the Company pursuant to this
clause (c) of Section 4.03 except to the extent that such Refinancing
Indebtedness constitutes a guarantee by such Restricted Subsidiary of
Indebtedness of the Company (it being understood that such Restricted
Subsidiary may incur Indebtedness to refinance Indebtedness of the
Company to the extent that the Incurrence of such Indebtedness is
otherwise permitted by clauses (a) or (b) of this Section 4.03).
(d) Any revocation of the designation of an Unre-
stricted Subsidiary shall be deemed for purposes of this Section 4.03
to be an Incurrence of Indebtedness by the Company and its Restricted
Subsidiaries of the Indebtedness of such Unrestricted Subsidiary as of
the time of such revocation to the extent such Indebtedness does not
already constitute Indebtedness of the Company or one of its
Restricted Subsidiaries.
SECTION 4.04. LIMITATION ON RESTRICTED PAYMENTS. (a) The
Company shall not, and in the cases of clauses (i)(y), (ii) and (iv)
of this Section 4.04(a), shall not permit any Restricted or
Unrestricted Subsidiary to, and in the case of clause (iii) of this
Section 4.04(a), shall not permit any Restricted Subsidiary to
directly or indirectly:
<PAGE>
(i)(x) declare or pay any dividend or make
any distribution on the Company's Capital Stock (other than dividends
or distributions payable in Capital Stock of the Company) or (y)
purchase, redeem or otherwise acquire or retire for value any Capital
Stock or Redeemable Stock of the Company (each of the foregoing in
clauses (x) and (y), a "RESTRICTED PAYMENT"),
(ii) make any Restricted Investment,
(iii) make any Investment in an Unrestricted
Subsidiary (an "UNRESTRICTED INVESTMENT"), or
(iv) redeem, repurchase, defease or
otherwise acquire or retire for value (a "REDEMPTION"), prior to any
scheduled maturity, scheduled repayment or scheduled sinking fund
payment, Indebtedness of the Company which ranks (pursuant to its
terms) subordinate in right and priority of payment to the Securities
and which was scheduled to mature on or after the final Stated
Maturity of all principal of the Securities (other than acquisitions
of such Indebtedness in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due
within one year of the date of such acquisition),
if, at the time of such Restricted Payment, Restricted Investment,
Unrestricted Investment or Redemption:
(A) a Default shall have occurred and be continuing; or
(B) after giving effect to such Restricted Payment by the
Company (or, in the case of a Restricted Payment covered by clause (y)
of the definition thereof, by the Company or any Restricted Subsidiary
or Unrestricted Subsidiary), Restricted Investment by the Company or
any Restricted Subsidiary or Unrestricted Subsidiary, Unrestricted
Investment by the Company
<PAGE>
or any Restricted Subsidiary, or Redemption by the Company or any
Restricted Subsidiary or Unrestricted Subsidiary, the aggregate amount
(i) expended for all such Restricted Payments and Redemptions
subsequent to March 1, 1993, (ii) of all Restricted Investments then
outstanding (the amount expended for such Restricted Payments,
Redemptions and Restricted Investments subsequent to March 1, 1993,
the amount of any Restricted Investments outstanding at any time, and
the amount of any Restricted Investments returned or reduced, in each
case, if other than in cash or a sum certain guaranteed, to be the
fair market value as determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a
resolution of the Board of Directors filed with the Trustee), and
(iii) of the excess, if any, of the aggregate amount of Unrestricted
Investments Outstanding in respect of all Unrestricted Subsidiaries
over $25,000,000 shall exceed the sum of:
(1) 50% of the aggregate Adjusted Consolidated Net Income of
the Company accrued on a cumulative basis subsequent to March 1, 1993
(or, in case such aggregate cumulative Adjusted Consolidated Net
Income shall be a loss, minus 100% of such loss), and
(2) the aggregate net cash proceeds, received by the Company
as capital contributions to the Company after March 1, 1993, or from
the issue or sale (other than to a Subsidiary of the Company) after
March 1, 1993, of Capital Stock (including Capital Stock issued upon
the conversion of, or in exchange for, indebtedness or Redeemable
Stock and including upon exercise of warrants or options or other
rights to purchase such Capital Stock, issued after March 1, 1993), or
from the issue or sale, after March 1, 1993 of any indebtedness or
other security of the Company convertible or exercisable into such
Capital Stock that has been so converted or exercised.
<PAGE>
(b) Transactions and payments which are permitted by
Section 4.08 hereof, shall not be considered Restricted Payments or
Restricted Investments.
(c) The foregoing provisions of Section 4.04(a) shall
not be violated by reason of: (i) the payment of any dividend or
distribution or the redemption of any securities within 60 days after
the date of declaration of such dividend or distribution or the giving
of the formal notice of such redemption, if at said date of
declaration of such dividend or distribution or the giving of the
formal notice of such redemption, such dividend, distribution or
redemption would have complied with Section 4.04(a) and so long as no
Event of Default exists as of the payment date; (ii) redemptions,
repurchases, defeasances, acquisitions or retirements for value, of
indebtedness of the Company which ranks (pursuant to its terms)
subordinate in right and priority of payment to the Securities from
proceeds of Refinancing Indebtedness permitted by Section 4.03(c);
(iii) the acquisition, redemption or retirement of any shares of the
Company's Capital Stock or Redeemable Stock or any Indebtedness of the
Company in exchange for, or in connection with a substantially
concurrent issuance of, Capital Stock of the Company (provided such
Capital Stock is not exchangeable for or convertible into Redeemable
Stock or Indebtedness of the Company or any of its Subsidiaries); (iv)
the repurchase of the Company's Capital Stock or Redeemable Stock with
the proceeds of the issuance of Capital Stock by the Company; and (v)
the direct or indirect dividend or distribution to the stockholders of
the Company of any consideration received by the Company or any of its
Subsidiaries from any person or entity (A) in respect of all or any
part of the Stock of Salmon Creek, or (B) in respect of all or any
part of the real property constituting the Salmon Creek Property, or
(C) otherwise in connection with Salmon Creek or the Salmon Creek
Property, except in connection with the harvesting of timber located
on the Salmon Creek Property (it being understood that any Subsidiary
of the Company can distribute any such consideration to the Company or
to any other Subsidiary of the Company and that the Company can
distribute any such consideration to its stockholders pursuant to this
clause (v)). No payments and other transfers made under clauses (ii)-
(v) of this Section 4.04(c) shall reduce the amount available for
Restricted Payments, Restricted Investments, Unrestricted Investments
or Redemptions under Section 4.04(a) and the application of
<PAGE>
proceeds from the issuance of Capital Stock applied pursuant to clause
(iii) of this Section 4.04(c) shall not reduce the amount available
for Restricted Payments under Section 4.04(a); provided, however, that
the proceeds from the issuance of Capital Stock pursuant to clauses
(iii) and (iv) of this Section 4.04(c) shall not increase the amount
available for Restricted Payments, Restricted Investments and Redemp-
tions under Section 4.04(a). In addition, the payment of the
$25,000,000 dividend by the Company to its stockholders on or about
the date hereof shall be expressly excluded for all purposes under
this Indenture, including this Section 4.04.
SECTION 4.05. OWNERSHIP OF CAPITAL STOCK OF SUBSIDIARIES.
The Company will not, and will not permit any Restricted Subsidiary
to, issue, sell, assign, transfer or otherwise dispose of, directly or
indirectly, (i) any Capital Stock or Redeemable Stock of Scotia
Pacific or its successor or successors (other than to the Company or
to one or more Wholly Owned Restricted Subsidiaries), (ii) any assets
of Scotia Pacific for consideration consisting in whole or in part of
Capital Stock or Redeemable Stock of another person which is not a
Wholly Owned Restricted Subsidiary, (iii) any Capital Stock or
Redeemable Stock of any other Restricted Subsidiary (except to the
Company or to one or more Restricted Subsidiaries) or any assets of
any Restricted Subsidiary for consideration consisting in whole or in
part of Capital Stock or Redeemable Stock of another person which is
not a Wholly Owned Restricted Subsidiary unless, in the case of this
clause (iii), immediately after giving effect thereto and the receipt
and application of the proceeds therefrom, the Consolidated Cash Flow
Coverage Ratio of the Company would be greater than 2.0 to 1;
provided, however, that this Section 4.05 shall permit the disposition
in a single transaction or in a series of related transactions of all
of the Capital Stock of any Restricted Subsidiary then owned by the
Company or its Restricted Subsidiaries for a consideration consisting
of cash or other property (other than Capital Stock or Redeemable
Stock of another person) which is at least equal to the fair value (as
determined by the Board of Directors of the Company) of such Capital
Stock; and provided further that any entity resulting from any
transaction or disposition permitted by this Section 4.05 shall become
a Restricted Subsidiary.
<PAGE>
SECTION 4.06. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RE-
STRICTIONS AFFECTING SUBSIDIARIES. (a) The Company shall not, and
shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become
effective any consensual restriction or encumbrance on the ability of
any such Restricted Subsidiary to (i) pay dividends or make any other
distributions on its Capital Stock or Redeemable Stock or any other
interest or participation in, or measured by, its profits, in each
case, owned by the Company, or pay any Indebtedness owed to the
Company or any Restricted Subsidiary of the Company, (ii) make loans
or advances to the Company or any Restricted Subsidiary of the
Company, or (iii) make any transfer of any of its assets to the
Company or a Restricted Subsidiary.
(b) The foregoing shall not prohibit encumbrances or
restrictions existing under or by reason of
(i) this Indenture;
(ii) the Credit Agreement;
(iii) (A) customary provisions restricting
subletting or assignment of any lease of the Company or any Restricted
Subsidiary of the Company, or (B) customary restrictions imposed on
the transfer of copyrighted or patented materials or provisions in
agreements that restrict the assignment of such agreement or any
rights thereunder;
(iv) any instrument governing Indebtedness
or other obligations of a person acquired (whether pursuant to a pur-
chase of stock or assets) by the Company or any Restricted Subsidiary
or applicable to any assets so acquired at the time such person became
a Subsidiary of the Company or such assets were acquired by the
Company or a Restricted Subsidiary (excluding instruments entered into
by such person in connection with, or in contemplation of, its
becoming a Subsidiary of the Company or its assets being
<PAGE>
acquired by the Company or any Restricted Subsidiary, as the case may
be), which encumbrance or restriction is not applicable to any person,
or the properties or assets of any person, other than the person or
the property or assets of the person so acquired (including the
Capital Stock or Redeemable Stock thereof) or any entity formed to
effect such acquisition, and, in each case, the monetary proceeds
thereof;
(v) Indebtedness or other obligations
existing on the date hereof;
(vi) any encumbrances and restrictions with
respect to a Restricted Subsidiary of the Company imposed in connec-
tion with an agreement which has been entered into for the sale or
disposition of such Restricted Subsidiary or its assets, provided that
such sale or disposition otherwise complies with this Indenture;
(vii) the subordination (pursuant to its
terms) in right and priority of payment to Indebtedness of the Company
or any of its Restricted Subsidiaries of any Indebtedness owed by the
Company or any Restricted Subsidiary of the Company to the Company or
any of its other Restricted Subsidiaries provided (A) the Indebtedness
is permitted under the Indenture and (B) the Board of Directors has
determined in good faith at the time of the creation of such
encumbrance or restriction that such encumbrance or restriction would
not singly or in the aggregate have a material adverse effect on the
holders of the Securities;
(viii) restrictions imposed by covenants
contained in any refinancing of Indebtedness or other obligations de-
scribed in clauses (i), (ii), (iv), (v) and (x) of this Section
4.06(b), provided that such restrictions are, in the good
<PAGE>
faith determination of the Board of Directors, on the whole, not
materially more restrictive than such restrictions contained in such
refinanced Indebtedness;
(ix) restrictions imposed by applicable laws
or regulations or pursuant to condemnation or eminent domain proceed-
ings;
(x) restrictions on Scotia Pacific and/or
any of its Subsidiaries imposed by the Scotia Pacific Agreements, the
Deed of Trust, the Timber Note Indenture or any other agreements
entered into in connection with the Timber Notes, as the same may be
amended in accordance with Section 4.11 of this Indenture;
(xi) an agreement which has been entered
into for the sale or disposition of all or substantially all of the
Stock or assets of a Subsidiary of the Company provided, however, that
such encumbrances or restrictions are limited to the Stock or assets
being sold or disposed of; or
(xii) applicable law and agreements with
foreign governments with respect to assets located in their jurisdic-
tions.
(c) The provisions of Section 4.06(a) shall not
prohibit (i) Liens not prohibited by Section 4.10 or (ii) restrictions
on the sale or other disposition of any property securing Indebted-
ness, provided that such Indebtedness is otherwise permitted by the
Indenture.
SECTION 4.07. LIMITATION ON ASSET SALES. (a) The Company
shall not, and shall not permit any Restricted Subsidiary to, con-
summate any Asset Sale unless (except in the case of an Asset Sale
which is a Taking) (i) the Company or such Restricted Subsidiary
receives consideration at the time of such Asset Sale at least equal
to the fair value of the assets subject to such Asset Sale (as deter-
mined by the Board of Directors
<PAGE>
(including the value of all non-cash consideration) and (ii) at least
75% of the aggregate consideration (excluding indemnities) received
therefor by the Company or such Restricted Subsidiary is in the form
of cash or Cash Equivalents. The amount of any liabilities of the
Company or any Restricted Subsidiary of the Company that is actually
assumed by the transferee in such Asset Sale shall be deemed to be
cash for purposes of determining the percentage of cash and Cash
Equivalent consideration received by the Company and its Restricted
Subsidiaries.
(b) For the purposes of this Section 4.07, "Asset Sale
Offer Amount" means the sum of (i) the amount of Net Cash Proceeds
from each Asset Sale by the Company and its Restricted Subsidiaries
which, on the 360th day following the consummation of such Asset Sale,
the Company or such Restricted Subsidiary has not (A) reinvested, or
entered into binding obligations (subject to customary closing and
termination provisions) to reinvest in additional assets to be used in
one or more lines of business (including capital expenditures) in
which the Company or its Restricted Subsidiaries are engaged as of the
date of this Indenture or reasonably related extensions of such lines
or (B) applied to make repayments or purchases of the Securities or of
Indebtedness of the Company which ranks (pursuant to its terms) pari
passu in right and priority of payment with the Securities, less (ii)
the amount of Net Cash Proceeds from such Asset Sale which has been
subjected to a prior Asset Sale Offer.
(c) Each Holder shall have the right, at the Holder's
option, to require the Company to apply the Asset Sale Offer Amount to
purchase Securities tendered pursuant to an offer by the Company to
purchase Securities at a purchase price (the "ASSET SALE PURCHASE
PRICE") equal to 100% of the principal amount of the Securities
purchased plus accrued and unpaid interest, if any, to (but not
including) the scheduled date of purchase (the "ASSET SALE PURCHASE
DATE") in accordance with the procedures (including proration in the
event of an over subscription) set forth in this Section 4.07 (an
"ASSET SALE OFFER"); provided, that the Company shall not be required
to make an Asset Sale Offer unless the Asset Sale Offer Amount exceeds
$25,000,000. No Asset Sale Offer Amount shall be required to be
applied to purchase Securities pursuant to more than one Asset Sale
Offer. Pending application of any Net Cash Proceeds in accordance
with this Section 4.07, the Company or a Restricted
<PAGE>
Subsidiary, as the case may be, may invest such Net Cash Proceeds in
Cash Equivalents.
(d) Within 30 days following each date on which the
Asset Sale Offer Amount exceeds $25,000,000, the Company shall mail a
written notice of an Asset Sale Offer to the Trustee, the Paying Agent
and each Holder (and to beneficial owners as required by applicable
law, including without limitation, Rule 13e-4 of the Exchange Act)
(the "ASSET SALE OFFER NOTICE"). The Asset Sale Offer Notice shall
include a form of Asset Sale Purchase Notice (as described below) to
be completed by the Holder and shall contain or state:
(1) the Asset Sale Offer Amount, a brief description of
the Asset Sale(s) which have generated Net Cash Proceeds and the
calculation of the Asset Sale Offer Amount;
(2) the date by which the Asset Sale Purchase Notice
pursuant to this Section 4.07 must be delivered to the Paying Agent;
(3) the Asset Sale Purchase Date (which shall be no
earlier than 30 days and not later than 60 days following the date on
which such Asset Sale Offer Notice is mailed, subject to compliance
with applicable law);
(4) the Asset Sale Purchase Price;
(5) the name and address of the Trustee and the Paying
Agent;
(6) that the Securities must be surrendered to the
Paying Agent;
(7) that the Asset Sale Purchase Price for any Security
as to which an Asset Sale Purchase Notice has been duly given and not
withdrawn will be paid promptly (subject to proration as described in
clause (d)(8) of this Section 4.07) following the later of the Asset
Sale Purchase Date and the time of surrender of such Security as
described in clause (d)(6) of this Section 4.07;
<PAGE>
(8) that if Asset Sale Purchase Notices are given with
respect to Securities in an aggregate principal amount in excess of
the Asset Sale Offer Amount pursuant to the Asset Sale Offer, the
Company shall purchase Securities on a pro rata basis (with such ad-
justments as may be deemed appropriate by the Company so that only
Securities in denominations of $1,000 or integral multiples thereof
shall be acquired);
(9) the procedures that the Holder must follow to exer-
cise rights under this Section 4.07 and a brief description
of those rights; and
(10) the procedures for withdrawing an Asset Sale Pur-
chase Notice.
The Trustee and the Paying Agent shall be under no obligation to
ascertain the occurrence of an Asset Sale. The Trustee and the Paying
Agent may conclusively assume, absent contrary notice from the
Company, that no Asset Sale has occurred.
(e) To accept the offer to purchase Securities de-
scribed in Section 4.07(c), a Holder must deliver a written notice of
purchase (an "ASSET SALE PURCHASE NOTICE") to the Paying Agent at any
time prior to the close of business on the third Business Day imme-
diately preceding the Asset Sale Purchase Date, stating:
(1) the name of the Holder, the principal amount and
the certificate number or numbers of the Security or Securities which
the Holder will deliver to be purchased, and a statement that the
offer to purchase is being accepted with respect to such Securities;
(2) the portion, if any, of the principal amount of any
Security which the Holder will deliver to be purchased, which portion
must be $1,000 or an integral multiple thereof; and
(3) that such Security or Securities shall be purchased
on the Asset Sale Purchase Date pursuant to the terms and conditions
specified in the Securities and this Indenture.
<PAGE>
The delivery of a Security, by hand or by registered mail
prior to, on or after the Asset Sale Purchase Date (together with all
necessary endorsements), to the Paying Agent shall be a condition to
the receipt by the Holder of the Asset Sale Purchase Price therefor;
provided, however, that such Asset Sale Purchase Price shall be so
paid pursuant to this Section 4.07 only if the Security or Securities
so delivered to the Paying Agent shall conform in all respects to the
description thereof set forth in the related Asset Sale Purchase
Notice; and provided, further that the Company shall have no obliga-
tion to purchase any Securities with respect to which an Asset Sale
Purchase Notice has not been received by the Paying Agent prior to the
close of business on the third Business Day immediately preceding the
Asset Sale Purchase Date.
In the event that the offer to purchase described in Section
4.07(c) shall be exercised in accordance with the terms hereof with
respect to any portion of a Security, the Company shall purchase from
the Holder thereof (subject to proration pursuant to Section 4.07(f)),
pursuant to this Section 4.07, such portion of such Security if the
principal amount of such portion is $1,000 or an integral multiple of
$1,000. In connection with a Security purchased in part, the Company
shall execute and the Trustee shall authenticate for delivery to the
Holder thereof, a new Security equal in principal amount to the
unpurchased portion of the Security surrendered.
(f) Upon receipt by the Paying Agent of the Asset Sale
Purchase Notice as specified in Section 4.07(e), the Holder of the
Security (or portion thereof) in respect of which such Asset Sale
Purchase Notice was given shall (subject to proration pursuant to this
Section 4.07(f) and unless such Asset Sale Purchase Notice is
withdrawn as specified in the following paragraph) thereafter be
entitled to receive the Asset Sale Purchase Price with respect to such
Security (or portion thereof). Such Asset Sale Purchase Price shall
be due and payable as of the Asset Sale Purchase Date and shall be
paid to such Holder promptly following the later of (i) the Asset Sale
Purchase Date (provided the conditions in Section 4.07(e), as
applicable, have been satisfied) and (ii) the date of delivery of such
Security to the Paying Agent by the Holder thereof in the manner
required by Section 4.07(e).
<PAGE>
An Asset Sale Purchase Notice may be withdrawn by means of a
written notice of withdrawal delivered to the Paying Agent at any time
on or prior to the close of business on the Business Day next
preceding the Asset Sale Purchase Date, specifying:
(1) the certificate number or numbers of the Security
or Securities in respect of which such notice of withdrawal is being
submitted;
(2) the principal amount of the Security or Securities
with respect to which such notice of withdrawal is being submitted;
and
(3) the principal amount, if any, of such Security or
Securities which remains subject to the original Asset Sale Purchase
Notice, and which has been or will be delivered for purchase by the
Company.
If at the close of business on the Business Day next
preceding the Asset Sale Purchase Date, the Asset Sale Purchase Price
of all Securities for which Asset Sale Purchase Notices have been
given and not withdrawn exceeds the Asset Sale Offer Amount, the
Company shall select the Securities to be purchased on a pro rata
basis (with such adjustments as may be deemed appropriate by the
Company so that only Securities in denominations of $1,000 or integral
multiples thereof shall be purchased). The Paying Agent shall
promptly return to the Holder thereof any Securities surrendered which
the Company shall not be required to purchase pursuant to this Section
4.07.
(g) On or prior to the Asset Sale Purchase Date, the
Company shall deposit with the Paying Agent (or, if the Company or a
Subsidiary or an Affiliate of either of them is acting as Paying Agent
shall segregate and hold in trust) an amount of cash (not exceeding
the Asset Sale Offer Amount) in immediately available funds sufficient
to pay the aggregate Asset Sale Purchase Price of the Securities (or
portions thereof) which are to be purchased on the Asset Sale Purchase
Date. If cash sufficient to pay the Asset Sale Purchase Price of all
Securities (or portions thereof) to be purchased on the Asset Sale
Purchase Date is deposited with the Paying Agent as of the Asset Sale
Purchase Date, interest shall cease to accrue (whether or not any such
Security is
<PAGE>
delivered to the Paying Agent) on such Securities (or portions there-
of) on and after the Asset Sale Purchase Date, and the Holders thereof
shall have no other rights as such, other than the right to receive
the Asset Sale Purchase Price (and, in the case of a Security
purchased in part, a new Security equal in principal amount to the
unpurchased portion of the Security surrendered) upon surrender of
such Securities.
(h) In connection with any offer to purchase, or any
purchase of, Securities under this Section 4.07, the Company shall (i)
comply with Rule 13e-4 under the Exchange Act (or any successor
provision thereof), if applicable, (ii) file the related Schedule 13E-
4 (or any successor schedule, form or report) under the Exchange Act,
if applicable, and (iii) otherwise comply with all Federal and state
securities laws regulating the purchase of the Securities.
(i) The Paying Agent shall return to the Company any
cash, together with interest or dividends, if any, thereon held by it
for the payment of the Asset Sale Purchase Price of the Securities
that remain unclaimed as provided in Section 8.04 hereof; provided,
however, that to the extent that the aggregate amount of cash
deposited by the Company pursuant to Section 4.07(g) exceeds the
aggregate Asset Sale Purchase Price of the Securities or portions
thereof to be purchased on the Asset Sale Purchase Date, then promptly
after the Asset Sale Purchase Date, the Paying Agent shall return any
such excess to the Company together with interest or dividends, if
any, thereon.
(j) Notwithstanding anything to the contrary contained
in this Section 4.07, this Section 4.07 shall not prohibit or
otherwise apply to (i) a consolidation or merger of the Company or a
transfer, conveyance, sale or lease of all or substantially all of the
Company's assets provided that any such transaction complies with the
provisions and the terms set forth in Section 5.01 or (ii) any
transaction permitted by Section 4.04.
SECTION 4.08. LIMITATION ON TRANSACTIONS WITH AFFILIATES.
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, enter into any transaction or transactions with any
Affiliate of the Company unless: (i) the terms thereof are not less
favorable to the Company or such Restricted Subsidiary than
<PAGE>
those that could reasonably be obtained in a comparable transaction at
such time with a person who is not an Affiliate of the Company; (ii)
such transaction shall have been approved as meeting such standard, in
good faith, by a majority of the members of the Board of Directors;
and (iii) with respect to any transaction or series of related
transactions involving payments and consideration in excess of
$10,000,000, the Company shall have obtained and made available to the
Trustee an opinion of a nationally recognized investment banking firm
stating that the terms of such transaction or series of transactions
are fair from a financial point of view to the Company or its
Restricted Subsidiary, as the case may be. The Company shall deliver
to the Trustee, within 60 days after the end of each fiscal quarter of
the Company, an Officers' Certificate which shall briefly describe and
specify the aggregate dollar amount of transactions (other than the
transactions set forth in Section 4.08(b)) with Affiliates of the
Company occurring during such fiscal quarter.
(b) The provisions contained in Section 4.08(a) shall
not apply to: (i) any transaction permitted by Section 4.04(a) or
Section 4.04(c)(i) and (v) of this Indenture, (ii) the execution and
delivery of, the performance of, and the making of any payments
required by, the Tax Sharing Agreement, (iii) the execution and deliv-
ery of, the performance of, and the making of any payments required
by, the Britt Lumber Agreement, (iv) termination of the Maintenance
Agreement, (v) the execution and delivery of, the performance of, and
the making of any payments required by, the Bering Agreement, (vi) the
making of payments to MGI or MAXXAM for reimbursement for actual
services provided thereby to the Company and its Subsidiaries based on
actual costs and an allocable share of overhead expenses consistent
with prior practices and (vii) compensation, indemnification and other
benefits paid or made available to officers, directors and employees
of the Company or a Restricted Subsidiary for services rendered in
such person's capacity as an officer, director, or employee (including
reimbursement or advancement of reasonable out-of-pocket expenses and
directors' and officers' liability insurance).
SECTION 4.09. CHANGE OF CONTROL. (a) Upon the first
Change of Control to occur after the date of this Indenture (but not
upon any subsequent Change of Control), each Holder shall have the
right, at the Holders' option, to require that the Company purchase
any or all of such Holder's Securities at a purchase price (the
"CHANGE OF CONTROL PURCHASE PRICE") in cash equal to 100% of the
principal amount of the Securities to be purchased plus accrued and
unpaid interest, if any, to (but not including) the scheduled date of
purchase (the "CHANGE OF CONTROL PURCHASE DATE"), in accordance with
the procedures set forth in this Section 4.09.
(b) Within 30 days following the first occurrence of
a Change of Control following the date of this Indenture, the Company
shall mail a written notice of Change of Control to the Trustee, the
Paying Agent and each Holder (and to beneficial owners as required by
applicable law, including without limitation, Rule 13e-4 of the
Exchange Act) (the "CHANGE OF CONTROL OFFER NOTICE"). The Change of
Control Offer Notice shall include a form of Change of Control
Purchase Notice (as described below) to be completed by the Holder and
shall contain or state:
(1) a brief description of the Change of Control and
the date of such Change of Control;
(2) the date by which the Change of Control Purchase
Notice pursuant to this Section 4.09 must be delivered to the Paying
Agent;
(3) the Change of Control Purchase Date (which shall be
no earlier than 30 days and not later than 60 days following the date
on which such Change of Control Offer Notice is mailed, subject to
compliance with applicable law);
(4) the Change of Control Purchase Price;
(5) the name and address of the Trustee and the Paying
Agent;
(6) that the Securities must be surrendered to the
Paying Agent;
(7) that the Change of Control Purchase Price for any
Security as to which a Change of Control Purchase Notice has been duly
given and not withdrawn will be paid promptly following the later of
the Change of Control Purchase Date and the time of surrender of such
Security
<PAGE>
as described in clause (b)(6) of this Section 4.09;
(8) the procedures that the Holder must follow to exer-
cise rights under this Section 4.09 and a brief description
of those rights; and
(9) the procedures for withdrawing a Change of Control
Purchase Notice.
The Trustee and the Paying Agent shall be under no
obligation to ascertain the occurrence of a Change of Control. The
Trustee and the Paying Agent may conclusively assume, absent contrary
notice from the Company, that no Change of Control has occurred.
(c) To accept the offer to purchase Securities de-
scribed in Section 4.09(a), a Holder must deliver a written notice of
purchase (a "Change of Control Purchase Notice") to the Paying Agent
at any time prior to the close of business on the third Business Day
immediately preceding the Change of Control Purchase Date, stating:
(1) the name of the Holder, the principal amount and
the certificate number or numbers of the Security or Securities which
the Holder will deliver to be purchased, and a statement that the
offer to purchase is being accepted with respect to such Securities;
(2) the portion, if any, of the principal amount of any
Security which the Holder will deliver to be purchased, which portion
must be $1,000 or an integral multiple thereof; and
(3) that such Security or Securities shall be purchased
on the Change of Control Purchase Date pursuant to the terms and
conditions specified in the Securities and this Indenture.
The delivery of a Security, by hand or by registered
mail prior to, on or after the Change of Control Purchase Date
(together with all necessary endorsements), to the Paying Agent shall
be a condition to the receipt by the Holder of the Change of Control
Purchase
<PAGE>
Price therefor; provided, however, that such Change of Control
Purchase Price shall be so paid pursuant to this Section 4.09 only if
the Security or Securities so delivered to the Paying Agent shall
conform in all respects to the description thereof set forth in the
related Change of Control Purchase Notice; and provided, further that
the Company shall have no obligation to purchase any Securities with
respect to which a Change of Control Purchase Notice has not been
received by the Paying Agent prior to the close of business on the
third Business Day immediately preceding the Change of Control
Purchase Date.
In the event that the offer to purchase described in
Section 4.09(a) shall be exercised in accordance with the terms hereof
with respect to any portion of a Security, the Company shall purchase
from the Holder thereof, pursuant to this Section 4.09, such portion
of such Security if the principal amount of such portion is $1,000 or
an integral multiple of $1,000. In connection with a Security
purchased in part, the Company shall execute and the Trustee shall
authenticate for delivery to the Holder thereof, a new Security equal
in principal amount to the unpurchased portion of the Security surren-
dered.
(d) Upon receipt by the Paying Agent of the Change of
Control Purchase Notice as specified in Section 4.09(c), the Holder of
the Security (or portion thereof) in respect of which such Change of
Control Purchase Notice was given shall (unless such Change of Control
Purchase Notice is withdrawn as specified in the following paragraph)
thereafter be entitled to receive the Change of Control Purchase Price
with respect to such Security (or portion thereof). Such Change of
Control Purchase Price shall be due and payable as of the Change of
Control Purchase Date and shall be paid to such Holder promptly
following the later of (i) the Change of Control Purchase Date
(provided the conditions in Section 4.09(c), as applicable, have been
satisfied) and (ii) the date of delivery of such Security to the
Paying Agent by the Holder thereof in the manner required by Section
4.09(c).
A Change of Control Purchase Notice may be withdrawn by
means of a written notice of withdrawal delivered to the Paying Agent
at any time on or prior to
<PAGE>
the close of business on the Business Day next preceding the Change of
Control Purchase Date, specifying:
(1) the certificate number or numbers of the Security
or Securities in respect of which such notice of withdrawal is being
submitted;
(2) the principal amount of the Security or Securities
with respect to which such notice of withdrawal is being submitted;
and
(3) the principal amount, if any, of such Security or
Securities which remains subject to the original Change of Control
Purchase Notice, and which has been or will be delivered for purchase
by the Company.
(e) On or prior to the Change of Control Purchase
Date, the Company shall deposit with the Paying Agent (or, if the
Company or a Subsidiary or an Affiliate of either of them is acting as
Paying Agent shall segregate and hold in trust) an amount of cash in
immediately available funds sufficient to pay the aggregate Change of
Control Purchase Price of all the Securities (or portions thereof)
which are to be purchased on the Change of Control Purchase Date. If
cash sufficient to pay the Change of Control Purchase Price of all
Securities (or portions thereof) to be purchased on the Change of Con-
trol Purchase Date is deposited with the Paying Agent as of the Change
of Control Purchase Date, interest shall cease to accrue (whether or
not such Security is delivered to the Paying Agent) on such securities
(or portions thereof) on and after the Change of Control Purchase
Date, and the Holders thereof shall have no other rights as such,
other than the right to receive the Change of Control Purchase Price
(and, in the case of a Security purchased in part, a new Security
equal in principal amount to the unpurchased portion of the Security
surrendered) upon surrender of such Securities.
(f) In connection with any offer to purchase, or any
purchase of, Securities pursuant to this Section 4.09, the Company
shall (i) comply with Rule 13e-4 under the Exchange Act (or any
successor provision thereof), if applicable, (ii) file the related
Schedule 13E-4 (or any successor schedule, form or report) under the
Exchange Act, if applicable, and (iii) otherwise
<PAGE>
comply with all Federal and state securities laws regulating the
purchase of the Securities.
(g) The Paying Agent shall return to the Company any
cash, together with interest or dividends, if any, thereon held by it
for the payment of the Change of Control Purchase Price of the
Securities that remain unclaimed as provided in Section 8.04 hereof;
provided, however, that to the extent that the aggregate amount of
cash deposited by the Company pursuant to Section 4.09(e) exceeds the
aggregate Change of Control Purchase Price of the Securities (or
portions thereof) to be purchased on the Change of Control Purchase
Date, then promptly after the Change of Control Purchase Date, the
Paying Agent shall return any such excess to the Company together with
interest or dividends, if any, thereon.
SECTION 4.10. LIMITATION ON LIENS. The Company shall not,
and shall not permit any of its Restricted Subsidiaries to, incur,
assume, suffer to exist, create or otherwise cause to be effective
Liens upon any of their respective assets to secure Indebtedness
except for:
(i) Liens in existence on the date hereof;
(ii) Liens securing all or any Indebtedness
outstanding under the Credit Agreement;
(iii) Liens incurred or pledges and deposits
in connection with worker's compensation, unemployment insurance and
other social security benefits, leases, appeal bonds and other
obligations of like nature, incurred by the Company or any Restricted
Subsidiary in the ordinary course of business;
(iv) Liens imposed by law, including,
without limitation, mechanics', carriers', warehousemen's,
materialmen's, suppliers' and vendors' Liens, incurred by the Company
or any Restricted Subsidiary in the ordinary course of business;
(v) zoning restrictions, ease-
<PAGE>
ments, licenses, covenants, reservations, restrictions on the use of
real property or minor irregularities of title incident thereto, which
do not in the aggregate have a material adverse effect on the
operation of the business of the Company or its Restricted
Subsidiaries taken as a whole;
(vi) Liens for ad valorem, income or
property taxes or assessments and similar charges either (x) not
delinquent or (y) contested in good faith by appropriate proceedings
and as to which the Company has set aside on its books reserves to the
extent required by GAAP;
(vii) Liens in respect of purchase money
Indebtedness incurred to acquire assets or Stock provided that such
Liens (and the proceeds of such assets or Stock) are limited to the
assets or Stock acquired with the proceeds of such Indebtedness;
(viii) Liens securing Indebtedness permitted
by Section 4.03(c) which refinances secured Indebtedness, so long as
such Liens are limited to the collateral which secures the
Indebtedness being refinanced and the proceeds of such collateral;
(ix) Liens on any assets or the Stock of any
Subsidiary of the Company which assets or Stock are acquired by the
Company or a Restricted Subsidiary subsequent to the date of this
Indenture and which Liens were in existence on or prior to the
acquisition of such assets or the Stock of such Subsidiary (to the
extent that such Liens were not created in contemplation of such
acquisition); provided that such Liens are limited to the assets so
acquired or the Stock of such acquired Subsidiary (or the entity orga-
nized to effect such acquisition) and the proceeds thereof;
<PAGE>
(x) Liens securing Indebtedness permitted by
clauses (vi), (viii), (ix) or (xii) of Section 4.03(b) provided, in
each such case, that such Liens are limited to the assets financed
with the proceeds of the Indebtedness incurred pursuant to such
provisions (and the proceeds of such assets);
(xi) Liens securing Indebtedness under any
Interest Rate Protection Agreement permitted by Section 4.03(b)(vii),
provided that such Liens are limited to the collateral which secures
the Indebtedness to which such Interest Rate Protection Agreement
relates;
(xii) Liens imposed pursuant to condemnation
or eminent domain or substantially similar proceedings or in connec-
tion with compliance with environmental laws or regulations;
(xiii) Liens granted pursuant to the Timber
Notes, the Timber Note Indenture, the Deed of Trust, in connection
with the Timber Notes or in connection with any of the Scotia Pacific
Agreements, or in connection with any other agreement entered into in
connection with the Timber Notes; and
(xiv) other Liens securing Indebtedness not
exceeding $25,000,000 in aggregate principal amount.
SECTION 4.11. AMENDMENT OF SCOTIA PACIFIC AGREEMENTS. The
Company shall not permit Scotia Pacific to agree to amend the Timber
Note Indenture, the Deed of Trust, or any of the Scotia Pacific
Agreements unless such amendment (i) is to cure any ambiguity,
omission, defect or inconsistency, or to add to the covenants of
Scotia Pacific for the benefit of the Company or the Holders or to
surrender any right or power conferred in the Master Purchase
Agreement on Scotia Pacific, or (ii) does not materially adversely
affect the ability of the Company to pay principal or interest on the
Securities when due.
<PAGE>
SECTION 4.12. COMPLIANCE CERTIFICATE. The Company shall
deliver to the Trustee within 120 days after the end of each fiscal
year of the Company an Officers' Certificate stating whether or not
the signers know of any Default that occurred during such period. If
they do, the Officers' Certificate shall describe the Default and its
status. Such Officers' Certificates shall comply with the TIA to the
extent applicable.
ARTICLE 5
SUCCESSOR COMPANY
SECTION 5.01. WHEN COMPANY MAY MERGE OR TRANSFER ASSETS.
The Company shall not consolidate with or merge with or into, or
convey, transfer or lease all or substantially all its assets to, any
person or group of related persons in a single transaction or series
of related transactions or permit any of its Restricted Subsidiaries
to enter into any such transaction or transactions if such transaction
or transactions in the aggregate would result in a transfer of all or
substantially all of the assets of the Company and its Restricted
Subsidiaries on a consolidated basis, unless:
(i) the resulting, surviving or transferee
person (if not the Company) shall be organized and existing under the
laws of the United States of America or any State thereof or the
District of Columbia and such entity shall expressly assume, by
supplemental indenture hereto, executed and delivered to the Trustee,
in form satisfactory to the Trustee, all the obligations of the
Company under the Securities and this Indenture;
(ii) immediately after giving effect to such
transaction, no Default shall have happened and be continuing;
(iii) except in the case of a merger of a
Restricted Subsidiary into the Company or into another
Restricted Subsidiary, immediately after giving effect to such
transaction, the Consolidated Cash Flow Coverage Ratio of the Company
or the surviving entity shall exceed 1.75 to 1 if such determination
is made prior
<PAGE>
to March 31, 1994 and 2.0 to 1 if such determination is made
thereafter; and
(iv) the Company shall have delivered to the
Trustee an Officers' Certificate to the foregoing effect and an
Opinion of Counsel, stating that such consolidation, merger or
transfer conveyance or lease (other than the calculation of the
Consolidated Cash Flow Coverage Ratio as to which counsel need not
opine) and such supplemental indenture comply with this Indenture.
The resulting, surviving or transferee person (if other than
the Company which executed this Indenture) shall succeed to, and may
exercise every right and power of, the Company under this Indenture
with the same effect as if such successor Company had been named as
the Company herein and the Company (except in the event of a lease of
all or substantially all of the Company's assets) shall be relieved of
its obligations under this Indenture and the Securities.
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.01. EVENTS OF DEFAULT. An "Event of Default"
occurs if:
(1) the Company defaults in any payment of interest on
any Security when the same becomes due and payable and such default
continues for a period of 30 days;
(2) the Company defaults in the payment of the
principal of any Security when the same becomes due and payable at its
Stated Maturity, upon optional or special redemption, upon declaration
or otherwise, including any failure by the Company to redeem or
repurchase any of the Securities when required pursuant to Sections
4.07 and 4.09 of this Indenture or paragraph 5 or 7 of the Securities;
(3) the Company defaults in the performance of, or
breaches, any covenant or agreement on the part of the Company
contained in this Indenture (other than a covenant or agreement on the
part of
<PAGE>
the Company a default in whose performance or breach is specifically
addressed elsewhere in this Section 6.01), and continuance of such
default or breach for a period of 60 days after written notice
thereof, which must specify the default or breach, demand it be
remedied and state that the notice is a "Notice of Default," has been
given to the Company by the Trustee or to the Company and the Trustee
by the holders of at least 25% in aggregate principal amount of the
Securities then outstanding;
(4) there is a default under any bond, debenture, note
or other evidence of Indebtedness of the Company or any Restricted
Subsidiary, or under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or any Restricted Subsidiary, whether such
Indebtedness now exists or is hereafter created, which default
involves the failure to pay principal on Indebtedness at the final
maturity thereof or which has resulted in such Indebtedness becoming
or being declared due and payable prior to its scheduled maturity in
an aggregate amount in excess of $10,000,000;
(5) the Company or any Significant Subsidiary pursuant
to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for
relief against it in an involuntary case,
(C) consents to the appointment of a
Custodian of it or for all or substantially all of its property, or
(D) makes a general assignment for the
benefit of its creditors;
(6) a court of competent jurisdiction enters an order
or decree under any Bankruptcy Law that:
(A) is for relief against the Company or any
Significant Subsidiary in an involuntary case,
<PAGE>
(B) appoints a Custodian of the Company or
any Significant Subsidiary or for all or substantially all of its
property, or
(C) orders the winding up or liquidation of
the Company or any Significant Subsidiary,
and in each case the order or decree remains unstayed and in
effect for a period of 60 consecutive days; or
(7) the entry by a court having jurisdiction in the
premises of one or more judgments or orders against the Company or any
Restricted Subsidiary for the payment of money in an aggregate amount
in excess of $10,000,000 (to the extent not covered by insurance)
which remain undischarged or unsatisfied for a period of 60 consecu-
tive days after the judgments or orders become final and the right to
appeal them has expired.
The term "Bankruptcy Law" means Title 11 of the United
States Code, or any similar Federal or state law for the relief of
debtors. The term "Custodian" means any receiver, trustee, assignee,
liquidator, custodian or similar official under any Bankruptcy Law.
The Company shall deliver to the Trustee, within 30 days
after the occurrence thereof, written notice, in the form of an
Officers' Certificate, of any event which with the giving of notice
and the lapse of time would become an Event of Default under clauses
(4) or (7). Such notice shall specify the status of such event and
what action the Company is taking or proposes to take with respect
thereto.
SECTION 6.02. ACCELERATION. If an Event of Default (other
than an Event of Default specified in Section 6.01(5) or (6)) occurs
and is continuing, either the Trustee by written notice to the
Company, or the Holders of at least 25% in aggregate principal amount
of the Securities then outstanding by written notice to the Company
and the Trustee, may declare the principal of and accrued interest on
all the Securities to be due and payable. If an Event of Default
specified in Section 6.01(5) or (6) with respect to the Company occurs
and is continuing, the principal of and interest on all the Securities
then outstanding shall ipso facto become and
<PAGE>
be immediately due and payable without any declaration or other act on
the part of the Trustee or any Securityholder. The Holders of a
majority in aggregate principal amount of the Securities then
outstanding by notice to the Trustee may rescind an acceleration and
its consequences if the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction and if all
existing Events of Default have been cured or waived except nonpayment
of principal or interest that has become due solely because of
acceleration. No such rescission shall affect any subsequent Default
or impair any right consequent thereto.
SECTION 6.03. OTHER REMEDIES. If an Event of Default
occurs and is continuing, the Trustee may pursue any available remedy
to collect the payment of principal of or interest on the Securities
or to enforce the performance of any provision of the Securities or
this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Securities or does not produce any of them in the
proceeding. A delay or omission by the Trustee or any Securityholder
in exercising any right or remedy accruing upon an Event of Default
shall not impair the right or remedy or constitute a waiver of or
acquiescence in the Event of Default. No remedy is exclusive of any
other remedy. All available remedies are cumulative.
SECTION 6.04. WAIVER OF PAST DEFAULTS. Subject to Sections
6.07 and 9.02, the Holders of a majority in aggregate principal amount
of outstanding Securities by notice to the Trustee may waive an
existing Default and its consequences except (1) a Default or Event of
Default in the payment of the principal of or interest on a Security
as specified in clauses (1) and (2) of Section 6.01 or (2) a Default
in respect of a provision that under Section 9.02 cannot be amended
without the consent of each Securityholder affected. When a Default
or Event of Default is waived, it is deemed cured and ceases, but no
such waiver shall extend to any subsequent or other Default or Event
of Default or impair any right consequent thereon.
SECTION 6.05. CONTROL BY MAJORITY. The Holders of a major-
ity in aggregate principal amount of outstanding Securities may direct
the time, method and place
<PAGE>
of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee. However,
the Trustee may refuse to follow any direction that conflicts with law
or this Indenture or, subject to Section 7.01, that the Trustee
determines is unduly prejudicial to the rights of other
Securityholders or would involve the Trustee in personal liability;
provided, however, that the Trustee may take any other action deemed
proper by the Trustee that is not inconsistent with such direction.
Prior to taking any action hereunder, the Trustee shall be entitled to
indemnification reasonably satisfactory to it against all losses and
expenses caused by taking or not taking such action.
SECTION 6.06. LIMITATION ON SUITS. A Securityholder may
not pursue any remedy with respect to this Indenture or the Securities
unless:
(1) the Holders of at least 25% in aggregate principal
amount of Securities then outstanding give to the Trustee written
notice stating that an Event of Default is continuing;
(2) the Holders of at least 25% in aggregate principal
amount of the Securities then outstanding make a written request to
the Trustee to pursue the remedy;
(3) such Holders offer to the Trustee reasonable
security or indemnity against any loss, liability or expense
to be incurred in complying with such request;
(4) the Trustee does not comply with the request within
60 days after receipt of the notice, request and offer of security or
indemnity and such Event of Default has not been cured or waived; and
(5) the Holders of a majority in aggregate principal
amount of the Securities then outstanding do not give the Trustee a
direction inconsistent with the request during such 60-day period.
A Securityholder may not use this Indenture to prejudice the
rights of another Securityholder or to obtain a preference or priority
over another Securityholder.
<PAGE>
SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Not-
withstanding any other provision of this Indenture, the right of any
Holder to receive payment of principal of and interest on the
Securities held by such Holder, on or after the respective due dates
expressed in the Securities, or to bring suit for the enforcement of
any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such Holder.
SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of
Default in payment of interest or principal specified in Section
6.01(1) or (2) occurs and is continuing, the Trustee may recover
judgment in its own name and as trustee of an express trust against
the Company for the whole amount of principal and interest remaining
unpaid (together with interest on such unpaid interest to the extent
lawful) and the amounts provided for in Section 7.07.
SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trust-
ee may file such proofs of claim and other papers or documents as may
be necessary or advisable in order to have the claims of the Trustee
and the Securityholders allowed in any judicial proceedings relative
to the Company, its creditors or its property and, unless prohibited
by law or applicable regulations, may vote on behalf of the Holders in
any election of a trustee in bankruptcy or other person performing
similar functions, and be entitled and empowered to collect and
receive any monies or other property payable or deliverable on any
such claims and to distribute the same, and any Custodian in any such
judicial proceeding is hereby authorized by each Holder to make
payments to the Trustee and, in the event that the Trustee shall
consent to the making of such payments directly to the Holders, to pay
to the Trustee any amount due it for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and
its counsel, and any other amounts due the Trustee under Section 7.07.
Nothing herein contained shall be deemed to authorize or consent to or
accept or adopt on behalf of any Securityholder any plan of reorga-
nization, arrangement, adjustment or composition affecting the Secu-
rities or the rights of any Holder thereof, or to authorize the
Trustee to vote in respect of the claim of any Securityholder in any
such proceeding.
<PAGE>
SECTION 6.10. PRIORITIES. If the Trustee collects any
money pursuant to this Article 6, it shall pay out the money in the
following order:
FIRST: to the Trustee for amounts due under Section
7.07;
SECOND: to Securityholders for amounts due and unpaid
on the Securities for principal and interest, ratably, without
preference or priority of any kind, according to the amounts due and
payable on the Securities for principal and interest, respectively;
and
THIRD: to the Company its successors and assigns.
The Trustee may fix a record date and payment date for any
payment to Securityholders pursuant to this Section 6.10. At least 15
days before such record date, the Trustee shall mail to each
Securityholder and the Company a notice that states the record date,
the payment date and the amount to be paid.
SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the
enforcement of any right or remedy under this Indenture or in any suit
against the Trustee for any action taken or omitted by it as Trustee,
a court in its discretion may require the filing by any party litigant
in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reason-
able attorneys' fees, against any party litigant in the suit, having
due regard to the merits and good faith of the claims or defenses made
by the party litigant. This Section 6.11 does not apply to a suit by
the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by
Holders of more than 10% in aggregate principal amount of the
outstanding Securities.
SECTION 6.12. WAIVER OF STAY OR EXTENSION LAWS. The Compa-
ny (to the extent it may lawfully do so) shall not at any time insist
upon, or plead, or in any manner whatsoever claim or take the benefit
or advantage of, any stay or extension law wherever enacted, now or at
any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Company (to the extent that it
may lawfully do so) hereby expressly waives all benefit or advantage
of any such
<PAGE>
law, and shall not hinder, delay or impede the execution of any power
herein granted to the Trustee, but shall suffer and permit the
execution of every such power as though no such law had been enacted.
SECTION 6.13. RESTORATION OF RIGHTS AND REMEDIES. If the
Trustee or any Holder has instituted any proceeding to enforce any
right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined
adversely to the Trustee or to such Holder, then and in every such
case, subject to any determination in such proceeding, the Company,
the Trustee and the Holders shall be restored severally and re-
spectively to their former positions hereunder and thereafter all
rights and remedies of the Company, the Trustee and the Holders shall
continue as though no such proceeding had been instituted.
ARTICLE 7
TRUSTEE
SECTION 7.01. DUTIES OF TRUSTEE. (a) The Trustee, prior
to the occurrence of an Event of Default and after the curing or
waiving of all Events of Default which may have occurred, undertakes
to perform such duties and only such duties as are specifically set
forth in this Indenture. If an Event of Default has occurred and is
continuing, the Trustee shall exercise the rights and powers vested in
it by this Indenture, 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.
(b) Except during the continuance of an Event of De-
fault:
(1) the Trustee need perform only those duties that
are specifically set forth in this Indenture and no covenants or
obligations shall be implied in this Indenture which are adverse to
the Trustee; and
(2) in the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the statements and
the correctness of the opinions expressed therein, upon certificates
or opinions furnished to the Trustee and conforming to the
requirements of this Indenture; provided, however,
<PAGE>
that the Trustee shall examine the certificates and opinions to deter-
mine whether or not they conform to the requirements of this
Indenture.
(c) The Trustee may not be relieved from liability for
its own negligent action, its own negligent failure to act or its own
wilful misconduct, except that:
(1) this paragraph does not limit the effect of para-
graph (b) of this Section 7.01;
(2) the Trustee shall not be liable for any error of
judgment made in good faith by a Trust Officer, unless it is proved
that the Trustee was negligent in ascertaining the pertinent facts;
and
(3) the Trustee shall not be liable with respect to
any action it takes or omits to take in good faith in accordance with
a direction received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any way
relates to the Trustee is subject to paragraphs (a), (b) and (c) of
this Section.
(e) The Trustee shall agree in writing with the Compa-
ny to invest moneys deposited hereunder and the Company shall be
entitled to the income thereon.
(f) Money held in trust by the Trustee need not be
segregated from other funds except to the extent required by law.
(g) No provision of this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur financial
liability in the performance of any of its duties hereunder, or in the
exercise of any of its rights or powers, if it shall have reasonable
grounds to believe that repayment of such funds or adequate indemnity
against such risk or liability is not reasonably assured to it.
SECTION 7.02. RIGHTS OF TRUSTEE. Subject to Section 7.01:
(a) The Trustee may rely on any document believed by
it to be genuine and to have been signed or
<PAGE>
presented by the proper person. The Trustee need not investigate any
fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting,
it may require an Officers' Certificate or an Opinion of Counsel.
(c) The Trustee may act through agents and shall not
be responsible for the misconduct or negligence of any agent appointed
with due care.
(d) The Trustee shall not be liable for any action it
takes or omits to take in good faith which it believes to be
authorized or within its rights or powers conferred upon it by this
Indenture; provided, however, that the Trustee's conduct does not
constitute wilful misconduct, negligence or bad faith.
(e) The Trustee may consult with counsel, and the
advice or Opinion of Counsel with respect to matters of law relating
to this Indenture and the Securities shall be full and complete
authorization and protection from liability in respect to any action
taken, omitted or suffered by it hereunder in good faith and in
accordance with the advice or Opinion of Counsel.
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee,
in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with the Company or its
Affiliates with the same rights it would have if it were not Trustee.
Any Paying Agent or Registrar may do the same with like rights.
Notwithstanding the foregoing, the Trustee must comply with Sections
7.10 and 7.11.
SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee shall not
be responsible for and makes no representation as to the validity or
adequacy of this Indenture or the Securities, it shall not be ac-
countable for the Company's use of the proceeds from the Securities,
and it shall not be responsible for any statement in this Indenture or
the Securities other than its certificate of authentication.
SECTION 7.05. NOTICE OF DEFAULTS. If a Default occurs and
is continuing and if it is known to the Trustee, the Trustee shall
mail to each Securityholder, in the manner and to the extent provided
in TIA
<PAGE>
313(b), notice of the Default within 90 days after it occurs.
Except in the case of a Default in payment of principal of or interest
on any Security, the Trustee may withhold the notice if and so long as
a committee of its Trust Officers in good faith determines that
withholding the notice is in the interest of Securityholders.
SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS. As promptly
as practicable after each May 15, beginning with the May 15 following
the date of this Indenture, and in any event prior to July 15 in each
year, the Trustee shall mail to each Securityholder a brief report
dated as of May 15 of such year that compiles with TIA 313(a). The
Trustee also shall comply with TIA 313(b)(1) and (2).
A copy of each report at the time of its mailing to
Securityholders shall be filed with the SEC and each stock exchange,
if any, on which the Securities are listed. The Company agrees to
notify the Trustee whenever the Securities become listed on any stock
exchange and of any delisting thereof.
SECTION 7.07. COMPENSATION AND INDEMNITY. The Company
shall pay to the Trustee from time to time reasonable compensation for
its services. The Trustee's compensation shall not be limited by any
law on compensation relating to the trustee of an express trust. The
Company shall reimburse the Trustee upon request for all reasonable
out-of-pocket expenses incurred by it, except any such expense as may
arise from the Trustee's negligence, bad faith or wilful misconduct.
Such expenses shall include the reasonable compensation and expenses
of the Trustee's agents and counsel. The Company shall indemnify the
Trustee against any loss, liability or expense (including reasonable
attorneys' fees) incurred by it without negligence or bad faith on its
part in connection with the administration of this trust and the
performance of its duties hereunder. The Trustee shall notify the
Company promptly of any claim for which it may seek indemnity. The
Company shall defend the claim and the Trustee shall cooperate in the
defense. The failure of the Trustee to so notify the Company shall
not relieve the Company of its obligations hereunder, except to the
extent the Company is prejudiced thereby. The Company need not pay
for any settlement made without its written consent. The Company need
not reimburse any expense or indemnify against any loss or liability
incurred by the
<PAGE>
Trustee through wilful misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section
7.07, the Trustee shall have a lien prior to the Securities on all
money or property held or collected by the Trustee in its capacity as
Trustee, except that held in trust to pay principal of or interest on
particular Securities.
The Company's payment obligations pursuant to this Section
shall survive the discharge of this Indenture. When the Trustee
incurs expenses after the occurrence of an Event of Default specified
in Section 6.01(5) or (6) with respect to the Company, the expenses
are intended to constitute expenses of administration under the
Bankruptcy Law.
SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or
removal of the Trustee and the appointment of a successor Trustee
shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section 7.08. The Trustee may resign
at any time by so notifying the Company and the Holders in writing.
The Holders of a majority in aggregate principal amount of the
Securities outstanding may remove the Trustee by so notifying the
Trustee and the Company in writing and may appoint a successor Trustee
with the Company's consent. The Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or insolvent or
an order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(3) a Custodian, receiver or other public officer
takes charge of the Trustee or its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists
in the office of Trustee for any reason, the Company shall promptly
appoint a successor Trustee.
<PAGE>
A successor Trustee shall deliver a written acceptance of
its appointment to the retiring Trustee and to the Company. Thereupon
the resignation or removal of the retiring Trustee shall become
effective, and the successor Trustee shall have all the rights, powers
and duties of the Trustee under this Indenture. The successor Trustee
shall mail a notice of its succession to Securityholders. The
retiring Trustee shall promptly transfer all property held by it as
Trustee to the successor Trustee, subject to the lien provided for in
Section 7.07.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring
Trustee, the Company or the Holders of a majority in aggregate
principal amount of the Securities may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any
Securityholder may petition any court of competent jurisdiction for
the removal of the Trustee and the appointment of a successor Trustee.
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER. If the Trustee
consolidates or, merges with or converts into, or transfers all or
substantially all its corporate trust business or assets to, another
corporation or banking association, the resulting, surviving or trans-
feree corporation without any further act shall be the successor
Trustee; provided that in the case of a transfer of all or sub-
stantially all of its corporate trust business to another corporation,
the transferee corporation expressly assumes all the Trustee's
liabilities under the Indenture and the Securities.
In case at the time such successor or successors by merger,
conversion or consolidation to the Trustee shall succeed to the trusts
created by this Indenture any of the Securities shall have been
authenticated but not delivered, any such successor to the Trustee may
adopt the certificate of authentication of any predecessor trustee,
and deliver such Securities so authenticated; and in case at that time
any of the Securities shall not have been authenticated, any successor
to the Trustee may authenticate such Securities either in the name of
any predecessor hereunder or in the name of the successor to the
Trustee; and in all such cases such certificates
<PAGE>
shall have the full force which it is anywhere in the Securities or in
this Indenture provided that the certificate of the Trustee shall
have; provided, however, that the right to adopt the certificate of
authentication of any predecessor trustee or authenticate Securities
in the name of any predecessor trustee shall only apply to its
successors by merger, conversion or consolidation.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. The Trustee
shall at all times satisfy the requirements of TIA 310(a)(1) and
(2). In addition, without limiting the foregoing, the Trustee shall
at all times be authorized to conduct a corporate trust business in
good standing, and be either (a) a bank or trust company having, or
(b) a wholly-owned subsidiary of a bank or trust company having, a
combined capital and surplus of at least $500,000,000 as set forth in
its most recent published annual report of condition. The Trustee
shall comply with TIA 310(b), including the optional provision
permitted by the second sentence of TIA 310(b)(9).
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST
COMPANY. The Trustee shall comply with TIA 311(a), excluding any
creditor relationship listed in TIA 311(b). A Trustee who has
resigned or been removed shall be subject to TIA 311(a) to the
extent indicated therein.
ARTICLE 8
DISCHARGE OF INDENTURE
SECTION 8.01. DISCHARGE OF LIABILITY ON SECURITIES;
DEFEASANCE. (a) When (i) the Company delivers to the Trustee all
outstanding Securities (other than Securities replaced pursuant to
Section 2.07) for cancellation or (ii) all outstanding Securities not
delivered to the Trustee for cancellation have become due and payable,
will become due and payable at their stated maturity within one year
or are to be called for redemption on a redemption date that is within
one year under arrangements satisfactory to the Trustee for giving the
notice of redemption and the Company irrevocably (i.e., without
condition or right of withdrawal) deposits with the Trustee funds
sufficient to pay at maturity all outstanding Securities, including
interest thereon (other than Securities replaced pursuant to Section
2.07), and if in either case the Company pays all other sums payable
hereunder by the Company, then this Indenture shall, subject to
Sections 8.01(c) and 8.06, cease to be of further effect. Upon
satisfaction of the conditions set forth in this Section 8.01(a) and
upon request of the Company, accompanied by an Officers' Certificate
and an Opinion of Counsel, and at the expense of the Company, the
Trustee shall acknowledge in writing the discharge of the Company's
obligations under the Securities and this Indenture except for those
surviving obligations specified herein.
(b) Subject to Sections 8.01(c), 8.02 and 8.06, the
Company at any time may terminate (i) all its obligations under the
Securities and this Indenture ("legal defeasance option") or (ii) its
obligations under Sections 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08,
4.09, 4.10, 4.11, 4.12, 5.01(ii) other than with respect to an Event
of Default specified in Sections 6.01(1) or 6.01(2) and 5.01 (iii) and
the operation of Sections 6.01(3), 6.01(4) and 6.01(7) ("covenant
defeasance option"). The Company may exercise its legal defeasance
option notwithstanding its prior exercise of its covenant defeasance
option.
If the Company exercises its legal defeasance option,
payment of the Securities may not be accelerated because of an Event
of Default. If the Company exercises its covenant defeasance option,
payment of the Securities may not be accelerated because of an Event
of Default specified in Sections 6.01(3), 6.01(4) and 6.01(7).
Upon satisfaction of the conditions set forth herein
and upon request of the Company, the Trustee shall acknowledge in
writing the discharge of those obligations that the Company
terminates.
(c) Notwithstanding clauses (a) and (b) above, the
Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 7.07,
7.08, 8.04, 8.05 and 8.06 shall survive until the Securities have been
paid in full. Thereafter, the Company's obligations in Sections 7.07,
8.04 and 8.05 shall survive.
SECTION 8.02. CONDITIONS TO DEFEASANCE. The Company may
exercise its legal defeasance option or its covenant defeasance option
only if:
<PAGE>
(i) the Company irrevocably deposits in
trust with the Trustee money or U.S. Government Obligations sufficient
for the payment of principal and interest on the Securities to
maturity or redemption, as the case may be;
(ii) the Company delivers to the Trustee an
Officers' Certificate to the effect that the payments of principal and
interest when due and without reinvestment on the deposited U.S.
Government Obligations plus any deposited money without investment
will provide cash at such times and in such amounts (but, in the case
of the legal defeasance option only, not more than such amounts) as
will be sufficient to pay principal and interest when due on all the
Securities to maturity or redemption, as the case may be;
(iii) 90 days pass after the deposit is made
and during the 90-day period no Default specified in Section 6.01(5)
or (6) with respect to the Company occurs which is continuing at the
end of the period;
(iv) the deposit does not constitute a
default under any other agreement binding on the Company other than a
default (a) with respect to Indebtedness of the Company which is
defeased, redeemed or otherwise satisfied prior to or contem-
poraneously with such deposit, or (b) which is consented to or waived
by the relevant other party or parties to the agreement;
(v) the Company delivers to the Trustee an
Opinion of Counsel or a ruling received from the Internal Revenue Ser-
vice to the effect that holders will not recognize income, gain or
loss for Federal income tax purposes as a result of the exercise of
such rights and will be subject to Federal income tax in the same
amount and in the same manner and at the same time as would have been
the case otherwise; provided, that the Company is not required to
deliver to the Trustee such Opinion of Counsel upon the exercise of
the Company's legal defeasance option or covenant defeasance option
within one year
<PAGE>
of Stated Maturity or a date fixed for redemption pursuant to Article
3; and
(vi) the Company delivers to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent to the defeasance and discharge of the Securities
as contemplated by this Article 8 have been complied with.
Before or after a deposit, the Company may make arrangements
satisfactory to the Trustee for the redemption of Securities at a
future date in accordance with Article 3.
SECTION 8.03. APPLICATION OF TRUST MONEY. The Trustee
shall hold in trust money or U.S. Government Obligations deposited
with it pursuant to this Article 8. It shall apply the deposited
money and the money from U.S. Government Obligations through the
Paying Agent and in accordance with this Indenture to the payment of
principal of and interest on the Securities.
SECTION 8.04. REPAYMENT TO COMPANY. Subject to Section
8.01, the Trustee and the Paying Agent shall promptly turn over to the
Company any excess money or securities held by them at any time, upon
the written request of the Company and upon the receipt by the Trustee
of an Officers' Certificate in form reasonably satisfactory to the
Trustee, addressing the status of such money or securities.
Subject to any applicable abandoned property law, the
Trustee and the Paying Agent shall promptly pay to the Company any
money held by them for the payment of principal or interest that
remains unclaimed for two years, and, thereafter, Securityholders
entitled to the money must look to the Company for payment as general
creditors, unless applicable law designates another person.
SECTION 8.05. INDEMNITY FOR GOVERNMENT OBLIGATIONS. The
Company shall pay and shall indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against deposited U.S.
Government Obligations or the principal and interest received on such
U.S. Government Obligations.
<PAGE>
SECTION 8.06. REINSTATEMENT. If the Trustee or Paying
Agent is unable to apply any money or U.S. Government Obligations in
accordance with this Article 8 by reason of any legal proceeding or by
reason of any order or judgment of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application, the
Company's obligations under this Indenture and the Securities shall be
revived and reinstated as though no deposit had occurred pursuant to
this Article 8 until such time as the Trustee or Paying Agent is
permitted to apply all such money or U.S. Government Obligations in
accordance with this Article 8; provided, however, that if the Company
has made any payment of interest on or principal of any Securities
because of the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of such Securities to receive
such payment from the money or U.S. Government Obligations held by the
Trustee or Paying Agent.
ARTICLE 9
AMENDMENTS
SECTION 9.01. WITHOUT CONSENT OF HOLDERS. The Company and
the Trustee may amend, supplement or otherwise modify this Indenture
or the Securities without notice to or consent of any Securityholder:
(1) to cure any ambiguity, omission defect or
inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Securities in
addition to or in place of certificated Securities; provided, however,
that the uncertificated Securities are issued in registered form for
purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Securities are described in Section 163(f)(2)(B) of the
Code;
(4) to make any change that does not adversely affect
the rights of any Securityholder;
(5) to add to the covenants of the Company for the
benefit of the Securityholders or to surrender any right or power
herein conferred upon the Company; or
<PAGE>
(6) to comply with the TIA.
After an amendment, supplement or other modification
under this Section becomes effective, the Company shall mail to
Securityholders a notice briefly describing such amendment, supplement
or other modification. The failure to give such notice to all
Securityholders, or any defect therein, shall not impair or affect the
validity of an amendment, supplement or other modification under this
Section 9.01.
SECTION 9.02. WITH CONSENT OF HOLDERS. (a) Subject to
Section 6.07, the Company and the Trustee may amend, supplement or
otherwise modify this Indenture or the Securities without notice to
any Securityholder but with the written consent of the Holders of at
least a majority in aggregate principal amount of the Securities then
outstanding. Subject to Sections 6.04 and 6.07, the Holders of a
majority in aggregate principal amount of the Securities then out-
standing may waive compliance by the Company with any provision of
this Indenture or the Securities without notice to any Securityholder.
(b) Notwithstanding anything to the contrary contained
in Sections 9.01 or 9.02(a), without the consent of each
Securityholder affected, an amendment, supplement, other modification
or waiver may not:
(1) reduce the amount of Securities whose Holders must
consent to an amendment, supplement, other modification or waiver;
(2) reduce the rate of or extend the stated maturity
of any payment of interest on any Security;
(3) reduce the principal of or extend the Stated
Maturity of any payment of principal of any Security;
(4) reduce the premium payable upon the redemption of
any Security;
(5) make any Security payable in money other than that
stated in the Security; or
(6) make any change in Section 6.04 or 6.07 of this
Indenture.
<PAGE>
(c) It shall not be necessary for the consent of the
Holders under this Section 9.02 to approve the particular form of any
proposed amendment, but it shall be sufficient if such consent
approves the substance thereof.
(d) After an amendment, supplement, waiver or other
modification under this Section becomes effective, the Company shall
mail to Securityholders a notice briefly describing such amendment,
supplement, waiver or other modification. The failure to give such
notice to all Securityholders, or any defect therein, shall not impair
or affect the validity of an amendment, supplement, waiver or other
modification under this Section. An amendment, supplement, waiver or
other modification shall be binding upon all subsequent transferees of
Securities.
(e) Notwithstanding the foregoing, the provisions of
Section 10.16 hereof and this subsection (e) may not be amended
without the consent of the parties to the Credit Agreement.
SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every
amendment, supplement or other modification to this Indenture or the
Securities shall comply with the TIA as then in effect.
SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS AND WAIV-
ERS. A consent to an amendment, supplement or other modification or a
waiver under or in connection with this Indenture or the Securities by
a Holder of a Security shall bind the Holder and every subsequent
Holder of that Security or portion of the Security that evidences the
same debt as the consenting Holder's Security, even if notation of the
consent or waiver is not made on the Security. However, if such
consent or waiver may be revoked, any such Holder or subsequent Holder
may revoke the consent or waiver as to such Holder's Security or
portion of the Security if the Trustee receives the notice of
revocation before the date the amendment, supplement, waiver or other
modification becomes effective. After an amendment, supplement,
waiver or other modification becomes effective, it shall bind every
Securityholder, unless it makes a change described in any of clauses
(1) through (6) of Section 9.02(b). In that case, the amendment,
supplement, waiver or other modification shall bind each Holder of a
Security who has con-
<PAGE>
sented to it and every subsequent Holder of a Security or a portion of
a Security that evidences the same debt as the consenting Holder's
Security.
The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Securityholders entitled to
give their consent or take any other action described above. If a
record date is fixed, then notwithstanding the immediately preceding
paragraph, those persons who were Securityholders at such record date
(or their duly designated proxies), and only those persons, shall be
entitled to give such consent or to revoke any consent previously
given or to take any such action, whether or not such persons continue
to be Holders after such record date.
SECTION 9.05. NOTATION ON OR EXCHANGE OF SECURITIES. If an
amendment, supplement, waiver or other modification changes the terms
of a Security, the Trustee may require the Holder of the Security to
deliver it to the Trustee. The Trustee may place an appropriate nota-
tion on the Security regarding the changed terms and return it to the
Holder. Alternatively, if the Company or the Trustee so determines,
the Company in exchange for the Security shall issue and the Trustee
shall authenticate a new Security that reflects the changed terms.
Failure to make the appropriate notation or to issue a new Security
shall not affect the validity of such amendment, supplement, waiver or
other modification.
SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS. The Trustee
shall sign any amendment, supplement, waiver or other modification
authorized pursuant to this Article 9 if the amendment, supplement,
waiver or other modification does not adversely affect the rights,
duties, liabilities or immunities of the Trustee. If it does, the
Trustee may, but need not sign it. In signing such amendment, supple-
ment, waiver or other modification the Trustee shall be entitled to
receive, and (subject to Section 7.01) shall be fully protected in
relying upon, an Officers' Certificate and an Opinion of Counsel stat-
ing that such amendment, supplement, waiver or other modification is
authorized or permitted by this Indenture.
<PAGE>
ARTICLE 10
MISCELLANEOUS
SECTION 10.01. TRUST INDENTURE ACT CONTROLS. If any provi-
sion of this Indenture limits, qualifies or conflicts with another
provision which is required to be included in this Indenture by the
TIA, the required provision shall control.
SECTION 10.02. NOTICES. Any notice or communication shall
be in writing and delivered in person, transmitted by facsimile (con-
firmed in writing by mail) or mailed by first-class mail addressed as
follows:
If to the Company:
The Pacific Lumber Company
P.O. Box 37
125 Main Street
Scotia, California 95565
Attention: Vice President -
Finance and Administration
Telecopy Number: (707) 764-4269
with copies to:
The Pacific Lumber Company
5847 San Felipe, Suite 2600
Houston, Texas 77057
Attention: A. R. Pierno
Telecopy Number: (713) 267-3702
and
if to the Trustee:
The First National
Bank of Boston
Blue Hills Office Park
150 Royall Street
Canton, MA 02021
Attention: Corporate Trust Division
Mail Stop 45-02-15
(The Pacific Lumber Company
1992 Indenture)
Telecopy Number: (617) 575-2078
<PAGE>
The Company or the Trustee by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
Any notice or communication mailed to a Securityholder shall
be mailed to the Securityholder at the Securityholder's address as it
appears on the registration books of the Registrar and shall be
sufficiently given if so mailed within the time prescribed.
Failure to mail a notice or communication to a
Securityholder or any defect in it shall not affect its sufficiency
with respect to other Securityholders. If a notice or communication
is mailed in the manner provided above, it is duly given, whether or
not the addressee receives it. Notwithstanding anything to the
contrary in this Section 10.02, notices to the Company or the Trustee
shall only be deemed given when received by the Company or the
Trustee, as the case may be.
SECTION 10.03. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS.
Securityholders may communicate pursuant to TIA 312(b) with other
Securityholders with respect to their rights under this Indenture or
the Securities and the Trustee shall comply with TIA 312(b). The
Company, the Trustee, the Registrar and anyone else shall have the
protection of TIA 312(c).
SECTION 10.04. CERTIFICATE AND OPINION AS TO CONDITIONS
PRECEDENT. Upon any request or application by the Company to the
Trustee to take any action under this Indenture, the Company shall
furnish to the Trustee upon the Trustee's request:
(i) an Officers' Certificate stating that,
in the opinion of the signers, all conditions precedent, if any,
provided for in this Indenture relating to the proposed action have
been complied with (or will have been complied with upon the execution
and delivery of designated instruments); and
(ii) an Opinion of Counsel stating that, in
the opinion of such counsel, as to legal matters, all such conditions
precedent have been complied with (or will have been complied with
upon the execution and delivery of designated instruments);
<PAGE>
except that in the case of any application or request as to which the
furnishing of such documents is specifically required by any
provisions of this Indenture relating to such particular application
or request, no additional certificate or opinion need be furnished.
SECTION 10.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPIN-
ION. Each certificate or opinion with respect to compliance with a
covenant or condition provided for in this Indenture shall include:
(1) a statement that the person making such certificate
or rendering such opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of
the examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such person,
he or she has made such examination or investigation as is necessary
to enable him or her to express an informed opinion as to whether or
not such covenant or condition has been complied with; and
(4) a statement as to whether or not, in the opinion
of such person, such covenant or condition has been complied with.
SECTION 10.06. WHEN TREASURY SECURITIES DISREGARDED. In
determining whether the Holders of the required principal amount of
Securities have concurred in any direction, waiver or consent,
Securities owned by the Company or by any person directly or
indirectly controlling or controlled by or under direct or indirect
common control with the Company shall be disregarded and deemed not to
be outstanding, except that, for the purpose of determining whether
the Trustee shall be protected in relying on any such direction,
waiver or consent, only Securities which the Trustee knows are so
owned shall be so disregarded. Also, subject to the foregoing, only
Securities outstanding at the time shall be considered in any such
determination.
<PAGE>
SECTION 10.07. RULES BY TRUSTEE, PAYING AGENT AND REGIS-
TRAR. The Trustee may make reasonable rules for action by or at a
meeting of Securityholders. The Registrar and the Paying Agent may
make reasonable rules for their functions.
SECTION 10.08. LEGAL HOLIDAYS. If a payment date is a
Legal Holiday, payment shall be made on the next succeeding day that
is not a Legal Holiday, and no interest shall accrue for the
intervening period. If a regular record date is a Legal Holiday, the
record date shall not be affected.
SECTION 10.09. GOVERNING LAW. THE LAWS OF THE STATE OF NEW
YORK SHALL GOVERN THIS INDENTURE AND THE SECURITIES, 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
THEREBY.
SECTION 10.10. NO RECOURSE AGAINST OTHERS. A director,
officer, employee or stockholder, as such, of the Company or the
Trustee shall not have any liability for any obligations of the
Company or the Trustee under the Securities or this Indenture or for
any claim based on, in respect of or by reason of such obligations or
their creation. By accepting a Security, each Securityholder shall
waive and release all such liability. The waiver and release shall be
part of the consideration for the issue of the Securities.
SECTION 10.11. SUCCESSORS. All agreements of the Company
in this Indenture and the Securities shall bind its successors. All
agreements of the Trustee in this Indenture shall bind its successors.
SECTION 10.12. SEVERABILITY. In case any provision in this
Indenture or in the Securities shall be invalid, illegal or unenforce-
able, the validity, legality and enforceability of the remaining
provisions thereof shall not in any way be affected or impaired
thereby.
SECTION 10.13. MULTIPLE ORIGINALS. The parties may sign
any number of copies of this Indenture. Each signed copy shall be an
original, but all of them together represent the same agreement. One
signed copy is enough to prove this Indenture. This Indenture may be
executed in two or more counterparts, each of which shall
<PAGE>
be an original, but all of them together constitute the same
agreement.
SECTION 10.14. The table of contents, cross-reference sheet
and headings of the Articles and Sections of this Indenture have been
inserted for convenience of reference only, are not intended to be
considered a part hereof and shall not modify, restrict or otherwise
affect the meaning or interpretation of any of the terms or provisions
hereof.
SECTION 10.15. BENEFITS OF INDENTURE. Nothing in this
Indenture or the Securities, express or implied shall give to any
person, other than the parties hereto and their successors hereunder,
and the Holders, any benefit or any legal or equitable right, remedy
or claim under this Indenture.
SECTION 10.16. NO CHALLENGE. (a) The Trustee agrees, and
each Holder of a Security by its acceptance thereof agrees, that
neither the Trustee nor any such Holder shall take any action to
challenge or to contest, in any bankruptcy or insolvency proceeding or
otherwise, or vote in any way so as to authorize or participate,
directly or indirectly, in any such challenge or contest of, or file
any claim in any bankruptcy or insolvency proceeding or otherwise
inconsistent with: (i) the validity, priority or enforceability of the
Liens and security interests granted to secure payment of the Bank
Debt, whether outstanding at the date hereof or hereafter, (ii) the
rights of the holders of the Bank Debt, or any agent for such holders,
set forth in any security agreement, mortgage or other collateral
document with respect to such Liens and security interests, or (iii)
the validity or enforceability of any provision of this Section 10.16.
For purposes of this Indenture, the Liens and security interests
granted in connection with the Bank Debt shall be deemed to have been
given in exchange for reasonably equivalent or fair value received by
the Company.
<PAGE>
(b) Except as expressly stated in this Section 10.16,
the Trustee and the Holders of the Securities retain their rights to
vote their claims and otherwise to act on their own behalf in any
proceeding under the Bankruptcy Law.
(c) The Trustee acknowledges, on behalf of itself and
the Holders of the Securities, that the holders of the Bank Debt have
entered or will enter into the Credit Agreement and have extended or
will extend credit pursuant thereto in reliance upon this Section
10.16. This Section 10.16 shall inure to the benefit of and be en-
forceable by the holders of the Bank Debt and any agent for such
holders.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Indenture
to be duly executed as of the date first written above.
THE PACIFIC LUMBER COMPANY
By: __________________________
Name:
Title:
THE FIRST NATIONAL
BANK OF BOSTON
By: __________________________
Name:
Title:
EXHIBIT A
(FORM OF FACE OF SECURITY)
No.
$
THE PACIFIC LUMBER COMPANY
10 1/2% Senior Notes due 2003
The Pacific Lumber Company, a Delaware corporation, promises to pay
to _______________________, or registered assigns, the principal sum of
_____________________________ Dollars on March 1, 2003.
Interest Payment Dates: March 1 and September 1.
Interest Record Dates: February 15 and August 15.
Reference is made to the further provisions of this Security set
forth on the following pages hereof, which further provisions are
incorporated and shall for all purposes have the same effect as if set
forth at this place. All terms used in this Security which are defined
in the Indenture referred to herein have the respective meanings assigned
to them in the Indenture.
Date of Initial Issuance:
Dated:
THE PACIFIC LUMBER COMPANY
By
President
[Seal]
By
Secretary
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
The First National Bank of Boston, a national banking association, as
Trustee, certifies that this is one of the Securities referred to in the
Indenture.
By____________________________
Authorized Officer
<PAGE>
[FORM OF REVERSE SIDE OF SECURITY]
THE PACIFIC LUMBER COMPANY
10 1/2% Senior Notes due 2003
1. Interest
THE PACIFIC LUMBER COMPANY, a Delaware corporation (such
corporation, and its permitted successors and assigns under the Indenture
hereinafter referred to, being herein called the "Company"), promises to
pay interest on the principal amount of this Security at the rate per
annum shown above. The Company will pay interest semi-annually on March
1 and September 1 of each year. Interest on the Securities will accrue
from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of initial issuance set forth on
the face of this Security. Interest will be computed on the basis of a
360-day year consisting of twelve 30-day months. The Company shall pay
interest on overdue principal at the rate per annum shown above, and it
shall pay interest on overdue installments of interest at the same rate
at which interest was paid prior to default, to the extent lawful.
2. Method of Payment
The Company will pay interest on the Securities (except defaulted
interest) to the persons who are registered holders of Securities at the
close of business on the February 15 or August 15, as the case may be,
next preceding an interest payment date even if the Securities are
canceled after the interest record date and on or before such interest
payment date. Holders must surrender the Securities to a Paying Agent to
collect principal payments. The Company will pay principal and interest
in money of the United States that at the time of payment is legal tender
for payment of public and private debts. However, the Company may pay
principal and interest by check payable in such money. It may mail an
interest check to a Holder's registered address.
3. Paying Agent and Registrar
Initially, The First National Bank of Boston, a national banking
association, (the "Trustee") will act as Paying Agent and Registrar. The
Company may appoint and change any Paying Agent or Registrar without
notice, except as provided in the Indenture (as defined below).
<PAGE>
The Company or any of its Subsidiaries or Affiliates may act as Paying
Agent or Registrar.
4. Indenture
The Company issued the Securities under an Indenture, dated as of
March 23, 1993 (the "Indenture"), between the Company and the Trustee.
The terms of the Securities include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act
of 1939 (15 U.S.C. 77aaa-77bbbb) as in effect on the date of the
Indenture, except as expressly provided in the Indenture (the "Act").
The Securities are subject to all such terms, and Securityholders are
referred to the Indenture and the Act for a statement of those terms.
The Securities are unsecured obligations of the Company limited to
$235,000,000 aggregate principal amount (subject to Section 2.07 of the
Indenture). The Indenture imposes certain limitations on the Company and
its Subsidiaries including, without limitation, certain limitations on
the issuance of Indebtedness by the Company and its Restricted
Subsidiaries, the issue, disposition and pledging of any Capital Stock or
Redeemable Stock of any Restricted Subsidiary, the payment of certain
dividends and other distributions by the Company and its Restricted
Subsidiaries, the sale or transfer of certain assets, certain
transactions with Affiliates and the creation of certain Liens. In
addition, the Indenture limits the ability of the Company and its
Restricted Subsidiaries to restrict dividends from Restricted Sub-
sidiaries and certain other payments to the Company.
5. Optional Redemption
The Securities may not be redeemed prior to March 1, 1998. On and
after that date, the Company may redeem the Securities, at any time as a
whole or from time to time in part, on not less than 15 days (or 30 days
if legally required by The Depositary Trust Company) nor more than 60
days notice to each holder of the Securities to be redeemed, at the
following redemption prices (expressed as percentages of principal
amount) plus accrued interest (if any) to the redemption date.
<PAGE>
If redeemed during the 12-month period commencing March 1:
</TABLE>
<TABLE>
<CAPTION>
Year Price
---- -----
<S> <C>
1998 103.00%
1999 101.50%
</TABLE>
and thereafter beginning March 1, 2000, at 100% of principal amount of
the Securities, plus accrued interest.
6. Notice of Redemption
Notice of redemption will be mailed at least 15 days (or 30 days if
legally required by The Depository Trust Company) but not more than 60
days before the redemption date to each holder of Securities to be
redeemed at his or her registered address. Securities in denominations
larger than $1,000 may be redeemed in part, but only in multiples of
$1,000. If money sufficient to pay the redemption price of and accrued
interest on all the Securities (or portions thereof) to be redeemed on
the redemption date is deposited with the Paying Agent on or before the
redemption date and certain other conditions are satisfied, on and after
the redemption date interest shall cease to accrue on the Securities or
the portions of them called for redemption.
7. Change of Control Purchase Offer;
Asset Sale Purchase Offer
Upon a Change of Control, a Holder of Securities will have the right
to cause the Company to repurchase all or any part of the Securities of
such Holder at a repurchase price equal to 100% of the principal amount
of the Securities to be repurchased plus accrued and unpaid interest, if
any, to (but not including) the date of repurchase as provided in, and
subject to the terms of, the Indenture.
Upon certain Asset Sales, a Holder of Securities will have the right
to cause the Company to repurchase all or any part of the Securities of
such Holder at a repurchase price equal to 100% of the principal amount
of the Securities to be purchased plus accrued and unpaid interest, if
any, to (but not including) the date of repurchase as provided in, and
subject to the terms of, the Indenture.
<PAGE>
8. Denominations; Transfer; Exchange
The Securities are in registered form without coupons in
denominations of $1,000 and integral multiples of $1,000. A Holder may
transfer or exchange Securities in accordance with the Indenture. The
Registrar may require a Holder, among other things, to furnish appro-
priate endorsements and transfer documents and to pay any taxes and fees
required by law or permitted by the Indenture. The Registrar need not
transfer or exchange any Securities selected for redemption (except, in
the case of a Security to be redeemed in part, the portion of the
Security not to be redeemed) or any Securities for a period of 15 days
before the mailing of a notice of redemption of Securities selected for
redemption or before an interest payment date as set forth in this
Security.
9. Persons Deemed Owners
The registered Holder of this Security may be treated as the owner
of it for all purposes.
10. Unclaimed Money
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to
the Company at its request unless an abandoned property law designates
another person. After any such payment, Holders entitled to any portion
of such money must look only to the Company for payment as general
creditors, unless applicable law designates another person.
11. Amendment, Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended, supplemented, or otherwise
modified with the written consent of the Holders of at least a majority
in aggregate principal amount outstanding of the Securities and (ii) any
nonpayment default or noncompliance with any provision may be waived with
the written consent of the Holders of a majority in principal amount
outstanding of the Securities. Subject to certain exceptions set forth
in the Indenture, without the consent of any Securityholder, the Company
and the Trustee may amend, supplement or otherwise modify the Indenture
or the Securities to cure any ambiguity, omission, defect or
inconsistency, to comply with Article 5 of the Indenture to provide for
uncertificated Securities in addition to or in place of certificated
Securities, to add to the covenants of the
<PAGE>
Company for the benefit of the Holders, to surrender any right or power
conferred upon the Company in the Indenture, to make any change that does
not adversely affect the rights of any Securityholder or to comply with
the Act.
12. Defaults and Remedies
Under the Indenture, Events of Default include (i) default for 30
days in payment of interest on the Securities; (ii) default in payment of
principal of the Securities at maturity, upon redemption or required re-
purchase pursuant to paragraph 5 or 7 of the Securities, upon declaration
or otherwise; (iii) failure by the Company to comply with other covenants
or agreements in the Indenture or the Securities, in certain cases
subject to notice and lapse of time; (iv) certain defaults with respect
to other Indebtedness of the Company or its Subsidiaries if the aggregate
amount of such Indebtedness exceeds $10,000,000; (v) certain events of
bankruptcy or insolvency; and (vi) certain judgments or orders for the
payment of money aggregating in excess of $10,000,000 (to the extent not
covered by insurance) which remain undischarged or unsatisfied for a
period of 60 consecutive days after the judgments or orders become final
and the right to appeal them has expired. If an Event of Default occurs
and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the Securities may declare all the Securities to be
due and payable in the manner and with the effect provided in the
Indenture. Certain events of bankruptcy or insolvency with respect to the
Company are Events of Default that will result in the Securities being
due and payable immediately upon the occurrence of such Events of
Default.
Securityholders may not enforce the Indenture or the Securities
except as provided in the Indenture. The Trustee may refuse to enforce
the Indenture or the Securities unless it receives reasonable indemnity
or security. Subject to certain limitations, Holders of a majority in
principal amount of the Securities may direct the Trustee in its exercise
of any trust or power. The Trustee may withhold from Securityholders
notice of any continuing Default (except a Default in payment of prin-
cipal or interest) if it determines that withholding notice is in their
interest.
13. Trustee Dealings with the Company
Subject to certain limitations imposed by the Act, the Trustee under
the Indenture, in its individual
<PAGE>
or any other capacity, may become the owner or pled gee of Securities and
may otherwise deal with and collect obligations owed to it by the Company
or its Affiliates and may otherwise deal with the Company or its
Affiliates with the same rights it would have if it were not Trustee,
subject to the eligibility requirements contained in the Indenture.
14. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the
Company or the Trustee shall not have any liability for any obligations
of the Company or the Trustee under the Securities or the Indenture or
for any claim based on, in respect of or by reason of such obligations or
their creation. By accepting a Security, each Securityholder waives and
releases all such liability. The waiver and release are part of the
consideration for the issue of the Securities.
15. Authentication
This Security shall not be valid until an authorized signatory of
the Trustee (or an authenticating agent appointed by the Trustee and
acceptable to the Company) manually signs the certificate of
authentication on the other side of this Security.
16. Abbreviations
Customary abbreviations may be used in the name of a Securityholder
or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants
by the entirety), JT TEN (=joint tenants with right of survivorship and
not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift
to Minors Act).
17. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures the Company has caused CUSIP numbers
to be printed on the Securities and has directed the Trustee to use CUSIP
numbers in notices of redemption as a convenience to Securityholders. No
representation is made as to the accuracy of such numbers either as
printed on the Securities or as contained in any notice of redemption and
reliance may be placed only on the other identification numbers placed
thereon.
<PAGE>
The Company will furnish to any Securityholder upon written request
and without charge a copy of the Indenture which has in it the text of
this Security in large type. Requests may be made to:
The Pacific Lumber Company
P.O. Box 37
125 Main Street
Scotia, California 95565
Attention: Vice President -
Finance and Administration
<PAGE>
ASSIGNMENT FORM
To assign this Security, fill in the form below and have your signature
guaranteed:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint attorney or agent to transfer
this Security on the books of the Company. The attorney or agent may
substitute another to act for him or her.
Date:
Your Signature:
Sign exactly as your name appears on the face of
this Security.
Signature Guarantee:
(Signature must be guaranteed by a member firm
of the New York Stock Exchange or a commercial
bank or trust company)
IMPORTANT NOTICE: WHEN YOU SIGN YOUR NAME TO THIS ASSIGNMENT FORM
WITHOUT FILLING IN THE NAME OF YOUR "ASSIGNEE" OR "ATTORNEY OR AGENT",
THIS SECURITY BECOMES FULLY NEGOTIABLE, SIMILAR TO A CHECK ENDORSED IN
BLANK. THEREFORE, TO SAFEGUARD A SIGNED NOTE, IT IS RECOMMENDED THAT YOU
EITHER (i) FILL IN THE NAME OF THE NEW OWNER IN THE "ASSIGNEE" BLANK, OR
(ii) IF YOU ARE SENDING THE SIGNED SECURITY TO YOUR BANK OR BROKER IN THE
"ATTORNEY OR AGENT" BLANK. ALTERNATIVELY, INSTEAD OF USING THIS
ASSIGNMENT FORM, YOU MAY SIGN A SEPARATE "POWER OF ATTORNEY" AND THEN
MAIL THE UNSIGNED NOTE AND THE SIGNED "POWER OF ATTORNEY" IN SEPARATE
ENVELOPES. FOR ADDED PROTECTION, USE CERTIFIED OR REGISTERED MAIL FOR A
SECURITY.
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the Company
pursuant to Section 4.07 of the Indenture, state the principal amount and
certificate number, and check the box:
$__________; certificate number _______
___
/ /
---
If you want to elect to have only part of this Security purchased by the
Company pursuant to Section 4.07 of the Indenture, state the principal
amount (must be $1,000 or an integral multiple thereof) and certificate
number, and check the box:
$__________; certificate number _______
___
/ /
---
If you want to elect to have this Security repurchased by the Company
pursuant to Section 4.09 of the Indenture, state the principal amount and
certificate number, and check the box:
$__________; certificate number _______
___
/ /
---
If you want to elect to have only part of this Security repurchased by
the Company pursuant to Section 4.09 of the Indenture, state the
principal amount (must be $1,000 or an integral multiple thereof) and
certificate number, and check the box:
$__________; certificate number _______
___
/ /
---
<PAGE>
The undersigned agrees that the above referenced Security or portion of a
Security will be purchased pursuant to the terms and conditions specified
in the Security and the Indenture.
Date:_______ Your Signature:
(Sign exactly as your name ap-
pears on the face of this Secu-
rity)
Signature Guarantee:_______________________
(Signature must be guaranteed by
a member firm of the New York
Stock Exchange or a commercial
bank or trust company)
