FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1994 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 95565
125 MAIN STREET (Zip Code)
SCOTIA, CALIFORNIA
(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
/ /
All of the Registrant's voting stock is held by an affiliate of the
Registrant.
Number of shares of Common Stock outstanding at March 15, 1995: 100
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.
PART I
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ITEM 1. BUSINESS
GENERAL
The Pacific Lumber Company and its subsidiaries (collectively
referred to herein as the "Company" or "Pacific Lumber," unless the context
indicates otherwise) engage 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. The Company has been in
continuous operation for over 125 years.
The Company is an indirect wholly owned subsidiary of MAXXAM
Group Inc. ("MGI"). MGI is a wholly owned subsidiary of MAXXAM Inc.
("MAXXAM").
TIMBERLANDS
The Company owns and manages approximately 189,000 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.
Approximately 179,000 acres of the Company's timberlands are
owned by Scotia Pacific Holding Company (the "SPHC Timberlands"), a special
purpose Delaware corporation and wholly owned subsidiary of Pacific Lumber
("SPHC"). Pacific Lumber has the exclusive right to harvest (the "Pacific
Lumber Harvest Rights") approximately 8,000 non-contiguous acres of the
SPHC Timberlands consisting substantially of virgin old growth redwood and
virgin old growth Douglas-fir timber located on numerous small parcels
throughout the SPHC Timberlands. Substantially all of SPHC's assets,
including the SPHC Timberlands and the GIS (defined below), are pledged as
security for SPHC's 7.95% Timber Collateralized Notes due 2015 (the "Timber
Notes"). Pacific Lumber harvests and purchases from SPHC all or
substantially all of the logs harvested from the SPHC Timberlands. See "--
Relationships With SPHC and Britt Lumber" for a description of this and
other relationships among Pacific Lumber, SPHC and Britt Lumber Co., Inc.
("Britt"), an affiliate of the Company.
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
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1993-94 planting season (December through March), the Company planted
approximately 554,000 redwood and Douglas-fir seedlings.
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, 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 also utilizes a Global
Positioning System ("GPS") which allows precise location of geographic
features through satellite positioning. Use of the GPS greatly enhances
the quality and efficiency of GIS data.
The 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.
See also Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Trends."
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 259 million
board feet, with approximately 286, 228 and 264 million board feet produced
in 1994, 1993 and 1992, 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.
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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 1994,
the sale of surplus power to Pacific Gas and Electric Company accounted for
approximately 2% of the Company's total revenues.
PRODUCTS
Lumber
The Company primarily produces and markets lumber. In 1994, the
Company sold approximately 272 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 77% of the Company's total lumber revenues and
63% of the Company's total revenues in 1994. 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 1994, upper grade redwood
lumber products accounted for approximately 17% of the Company's total
lumber production volume (on a net board foot basis), 41% of its total
lumber revenues and 33% 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 1994, common grade redwood lumber
accounted for approximately 58% of the Company's total lumber production
volume (on a net board foot basis), 36% of its total lumber revenues and
29% of its total revenues.
<PAGE>
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 1994, upper
grade Douglas-fir lumber accounted for approximately 3% of the Company's
total lumber production volume (on a net board foot basis), 7% of its total
lumber revenues and 5% 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
1994, common grade Douglas-fir lumber accounted for approximately 20% of
the Company's total lumber production volume, 13% of its total lumber
revenues and 10% 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, an affiliate of the Company,
and surrounding mills which do not own sufficient timberlands to support
their mill operations. In 1994, log sales accounted for approximately 9%
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 1994, hardwood chips accounted for
approximately 4% 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 1994, softwood chips
accounted for approximately 4% of the Company's total revenues.
BACKLOG AND SEASONALITY
The Company's backlog of sales orders at December 31, 1994 and
1993 was approximately $11.9 million and $16.0 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
<PAGE>
River, with California accounting for approximately 55% of these sales in
1994. Common grades of Douglas-fir lumber are sold primarily in
California. In 1994, no single customer accounted for more than 4% of the
Company's total revenues. Exports of lumber accounted for approximately 4%
of the Company's total lumber revenues in 1994. 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, 1995, the Company had approximately 1,520
employees.
RELATIONSHIPS WITH SPHC AND BRITT LUMBER
In March 1993, Pacific Lumber consummated its offering of $235
million of 10-1/2% Senior Notes due 2003 (the "Senior Notes") and SPHC
consummated its offering of $385 million of Timber Notes. Upon the closing
of such offerings, Pacific Lumber, SPHC and Britt entered into a variety of
agreements. Pacific Lumber and SPHC entered into a Services Agreement (the
"Services Agreement") and an Additional Services Agreement (the "Additional
Services Agreement"). Pursuant to the Services Agreement, Pacific Lumber
provides operational, management and related services with respect to the
SPHC 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 SPHC's possession and
reasonably necessary for the operation and maintenance of the SPHC
Timberlands containing SPHC Timber. In particular, Pacific Lumber is
required to regenerate SPHC Timber, prevent and control loss of SPHC Timber
by fires, maintain a system of roads throughout the SPHC 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. Pacific Lumber is also 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 $114,000 per month in 1994
and is expected to be approximately $115,000 per month in 1995. Pursuant
to the Additional
<PAGE>
Services Agreement, SPHC provides Pacific Lumber with a variety of
services, including (a) assisting Pacific Lumber to operate, maintain and
harvest its own timber properties, (b) updating and providing access to the
GIS with respect to information concerning the Pacific Lumber's own timber
properties, and (c) assisting Pacific Lumber with its statutory and
regulatory compliance. Pacific Lumber 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.
Pacific Lumber and SPHC also entered into a Master Purchase
Agreement (the "Master Purchase Agreement"). The Master Purchase Agreement
governs all purchases of logs by Pacific Lumber from SPHC. Each purchase
of logs by Pacific Lumber 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 released
every six months. As the Company purchases logs from SPHC pursuant to the
Master Purchase Agreement, Pacific Lumber 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 Pacific Lumber until
the logs are transported to Pacific Lumber's log decks and measured.
Substantially all of SPHC's revenues are derived from the sale of logs to
Pacific Lumber under the Master Purchase Agreement.
Pacific Lumber, SPHC and Salmon Creek Corporation ("Salmon
Creek," a wholly owned subsidiary of Pacific Lumber) 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, Pacific Lumber entered into an
Environmental Indemnification Agreement with SPHC pursuant to which Pacific
Lumber 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 SPHC Timberlands.
Pacific Lumber entered into an agreement with Britt (the "Britt
Agreement") which governs the sale of logs by Pacific Lumber and Britt to
each other, the sale of hog fuel (wood residue) by Britt to Pacific Lumber
for use in Pacific Lumber's cogeneration plant, the sale of lumber by
Pacific Lumber and Britt to each other, and the provision by Pacific Lumber
of certain administrative services to Britt (including accounting,
purchasing, data processing, safety and human resources services). The
logs which Pacific Lumber sells to Britt and which are used in Britt's
manufacturing operations are sold at approximately 75% of applicable SBE
prices (to reflect the lower quality of these logs). Logs which either
Pacific Lumber or Britt purchases from third parties and which are then
sold to each other are transferred at the actual cost of such logs. Hog
fuel is sold at applicable market prices, and administrative services are
provided by Pacific Lumber based on Pacific Lumber's actual costs and an
allocable share of Pacific Lumber's overhead expenses consistent with past
practice.
<PAGE>
REGULATORY AND ENVIRONMENTAL FACTORS
Regulatory and environmental issues play a significant role in
the Company's forest products operations. The Company'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 the Company's operations be conducted so as to reasonably protect the
water quality of nearby rivers and streams. The regulations under certain
of these laws are periodically modified. For instance, in March and May
1994, the BOF approved additional rules providing for among other things,
inclusion of additional information in THPs (concerning, among other
things, timber generation systems, the presence or absence of fish,
wildlife and plant systems, potentially impacted watersheds and compliance
with long term sustained yield objectives) and modification 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). See also Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Trends" for a
description of the sustained yield regulations. The Company 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 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 certain of 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 timber on its
property during the past few years. To date, litigation with respect to
the Company'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--Timber
Harvesting Litigation."
In June 1990, the U.S. Fish and Wildlife Service (the "USFWS")
designated the northern spotted owl as threatened under the ESA. The owl's
range includes all of the Company's timberlands. The ESA and its
implementing regulations (and related California 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
utilization studies of northern spotted owls on the Company's timberlands.
The Company has developed and the USFWS has given its full concurrence to a
comprehensive wildlife management plan for the northern spotted owl (the
"Owl Plan"). By incorporating the Owl Plan into each THP filed with the
CDF the Company is able 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.
<PAGE>
In March 1992, the marbled murrelet was approved for listing as
endangered under the CESA. The Company has incorporated, and will continue
to incorporate as required, 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 the Company 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 review and approval process with respect to certain of the THPs
filed by the Company. The results of such surveys could prevent the
Company 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.
The Company'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. The Company 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.
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. From time to time, bills are
introduced in the California legislature and the U.S. Congress which relate
to the business of the Company, including the protection and acquisition of
old growth and other timberlands, endangered species, environmental
protection and the restriction, regulation and administration of timber
harvesting practices. Because such 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 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.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
MERGER LITIGATION
As a result of the below-described settlement of the In Re Ivan
F. Boesky Multidistrict Securities Litigation (the "Boesky Settlement"),
all material stockholder claims against the Company and other defendants
have been resolved and have been dismissed or are in the process of being
dismissed.
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"). As of the date the
Court approved the Boesky Settlement, the Humboldt County Lawsuits which
remained open were 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 alleged, 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 were alleged to
have aided and abetted these violations and committed other wrongs. The
Thompson State, Omicini and Fries State suits sought compensatory damages
in excess of $1 billion, exemplary damages in excess of $750 million,
rescission and other relief. The Russ suit did not specify the amount of
damages sought.
In 1988, two lawsuits similar to the Humboldt County Lawsuits
were filed in the United States District Court, Central District of
California--Fries, et al. v. Hurwitz, et al. (No. 88-3493 RMT) ("Fries
Federal") and Thompson, et al. v. MAXXAM Group Inc., et al. (No. 88-06274)
("Thompson Federal"). These actions sought damages and relief similar to
that sought in the Humboldt County Lawsuits. 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"), was
also consolidated with the Boesky action. The American Red Cross action
contained allegations and sought damages and relief similar to that
contained in the Humboldt County Lawsuits.
At a fairness hearing held on November 17, 1994, the Court
approved a settlement of, and dismissed with prejudice, the pending federal
actions against the settling defendants. The actions dismissed with
prejudice include specifically: In Re Ivan F. Boesky Multidistrict
Securities Litigation; the Fries Federal action; the Thompson Federal
action; and the American Red Cross, et al. v. Hurwitz, et al. action. The
court's order also provides for the dismissal of all other shareholder
claims against the defendants, including dismissal of the Fries State,
Omicini, and Russ actions in their entirety, and all shareholder claims in
the Thompson State action. Of the approximately $52 million settlement,
approximately $33 million was paid by insurance carriers of MAXXAM, MGI and
the Company, approximately $14.8 million was paid by the Company and the
balance was paid by the other defendants and through the assignment of
certain claims. Dismissals have already been entered or are in process
with respect to all of the dismissed actions.
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
<PAGE>
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 3, 1994, the U.S. House of Representatives approved a bill amending
ERISA, which had previously been passed by the U.S. Senate, and is
intended, in part, to overturn the U.S. District Court's dismissal of the
Miller action and to make available certain remedies not previously
provided under ERISA. On October 22, 1994, the President signed this
legislation (the Pension Annuitants' Protection Act of 1994). As a result
of the passage of this legislation, the Miller plaintiffs have asked the
U.S. Ninth Circuit Court of Appeals to vacate the U. S. District Court
judgment dismissing their case and to remand the case to the U.S. District
Court; defendants have opposed this request. It is uncertain what effect,
if any, this legislation will have on the pending appeal or the final
disposition of this case. The defendants and plaintiff in the DOL civil
action have invited the Miller plaintiffs to participate in the court-
supervised settlement discussions concerning the Miller and DOL civil
actions.
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. Formal
settlement negotiations continue to be overseen by the court in this
matter.
Management is of the opinion that the outcome of the foregoing
litigation should not have a material adverse effect on the Company's
consolidated financial position or results of operations.
TIMBER HARVESTING 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 EPIC v. The California Department of Forestry, et
al. (No. 90CP0341) action in Superior Court of Humboldt County, filed by
the Environmental Protection Information Center ("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 by the Company; however,
<PAGE>
the Company has decided to withdraw the THP involved in the above-referenced
litigation and moot 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 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 under the ESA. The Court 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 was stayed pending outcome of a trial
which commenced in August 1994 and concluded in September 1994. On
February 24, 1995, the judge ruled that THP 237 is occupied by the marbled
murrelet and permanently enjoined implementation of THP 237 in order to
protect the marbled murrelet.
On March 10, 1995, the Sierra Club and EPIC filed an action
entitled Sierra Club and EPIC v. The California Department of Forestry,
Scotia Pacific Holding Co., et al. (No. 95 DR 0072) in Superior Court of
Humboldt County. This action relates to an exemption for forest health
which SPHC had previously filed covering SPHC timberlands. The plaintiffs
allege, among other things, that the defendants have violated the CEQA, the
CESA and the Forest Practice Act and seek, among other things, to stay all
operations authorized by the exemption.
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--
egulatory and Environmental Factors" above for a description of regulatory
and similar matters which could affect Pacific Lumber's timber harvesting
practices and future operating results.
OTHER LITIGATION MATTERS
The Company is involved in various other claims, lawsuits and
other proceedings relating to a wide variety of matters. While
uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management believes that the resolution of such uncertainties and
the incurrence of such costs should not have a material adverse effect on
the Company's consolidated 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. The Company declared and paid dividends on its
common stock in the amount of $24.5 million and $25.0 million in 1994 and
1993, respectively. As of December 31, 1994, approximately $20.8 million
of dividends could be paid by the Company. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition and Investing and Financing Activities" and Note 4 to
the Consolidated Financial Statements appearing in Item 8.
All of the Company's issued and outstanding common stock is
pledged as collateral for MGI's 11-1/4% Senior Secured Notes due 2003 and
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--Financial
Condition and Investing and Financing Activities" and Note 7 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, 1994 and 1993.<PAGE>
<TABLE>
<CAPTION>
Years Ended
December 31,
1994 1993
(In millions of dollars,
except shipments
and prices)
<S> <C> <C>
Shipments:
Lumber: (1)
Redwood upper grades 52.9 68.3
Redwood common grades 144.3 114.5
Douglas-fir upper grades 8.6 10.7
Douglas-fir common grades and other 66.3 46.4
------------ ------------
Total lumber 272.1 239.9
============ ============
Logs (2) 34.4 36.5
============ ============
Wood chips (3) 197.7 149.1
============ ============
Average sales price:
Lumber: (4)
Redwood upper grades $ 1,443 $ 1,275
Redwood common grades 481 492
Douglas-fir upper grades 1,420 1,218
Douglas-fir common grades 444 447
Logs (4) 567 555
Wood chips (5) 86 83
Net sales:
Lumber, net of discount $ 186.0 $ 173.0
Logs 19.5 20.2
Wood chips 17.1 12.4
Cogeneration power 3.5 3.8
Other 1.3 1.2
------------ ------------
Total net sales $ 227.4 $ 210.6
============ ============
Operating income $ 70.4 $ 51.2
============ ============
Operating cash flow (6) $ 95.9 $ 76.6
============ ============
Income (loss) before income taxes, extraordinary items and
cumulative effect of changes in accounting principles $ 26.3 $ (4.0)
============ ============
Net income (loss) $ 10.0 $ (10.5)
============ ============
<FN>
(1) Lumber shipments are expressed in millions of board feet.
(2) Log shipments are expressed in millions of feet, net Scribner scale.
(3) Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds.
(4) Dollars per thousand board feet.
(5) Dollars per bone dry unit.
(6) Operating income before depletion and depreciation, also referred to as "EBITDA."
</TABLE>
<PAGE>
Shipments
Lumber shipments in 1994 were 272.1 million board feet, an
increase of 13% from 239.9 million board feet in 1993. This increase was
attributable to a 26% increase in redwood common lumber shipments and a 43%
increase in shipments of common grade Douglas-fir and other lumber,
partially offset by a 23% decrease in shipments of upper grade redwood
lumber. Log shipments in 1994 were 34.4 million feet (net Scribner scale),
a decrease of 6% from 36.5 million feet in 1993.
Old growth trees constitute the Company's principal source of
upper grade redwood lumber. Due to the severe restrictions on the
Company's ability to harvest virgin old growth timber on its property (see
"--Trends"), the Company's supply of upper grade lumber has decreased in
some premium product categories. The Company has been able to lessen the
impact of these decreases by augmenting its production facilities to
increase its recovery of upper grade lumber from smaller diameter logs and
increasing the production of manufactured upper grade lumber products
through its end and edge glue facility (which was expanded during 1994).
However, unless the Company is able to sustain the harvest level of old
growth trees it has experienced in recent years, the Company expects that
its supply of premium upper grade lumber products will decrease from
current levels and that its manufactured lumber products will constitute a
higher percentage of its shipments of upper grade lumber products.
Net sales
Revenues from net sales of lumber and logs for 1994 increased by
approximately 6% from 1993. This increase was principally due to increased
shipments of redwood common lumber, a 13% increase in the average realized
price of upper grade redwood lumber and increased shipments of common grade
Douglas-fir and other lumber, partially offset by decreased shipments of
upper grade redwood lumber, a 2% decrease in the average realized price of
redwood common lumber and decreased shipments of logs. The increase in
other sales for 1994 as compared to 1993 was attributable to increased
sales of wood chips reflecting higher demand from pulp mills.
Operating income
Operating income for 1994 increased by approximately 37% as
compared to 1993. This increase was principally due to higher sales of
lumber and wood chips, lower purchases of lumber and logs from third
parties, improved sawmill productivity and reduced overhead costs. The
Company arranged for the purchase of a significant number of logs early in
1993 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 1993 was reduced by a $1.2
million business interruption insurance claim as a result of the April 1992
earthquake.
Cost of goods sold as a percentage of sales was approximately 51%
and 55% for 1994 and 1993, respectively. The decrease for 1994 reflects
the impact of purchased logs in 1993 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 capacity for
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
<PAGE>
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.
Income (loss) before income taxes, extraordinary items and
cumulative effect of changes in accounting principles
Income before income taxes, extraordinary items and cumulative
effect of changes in accounting principles increased for 1994 as compared
to 1993. This increase resulted from the increase in operating income,
higher investment, interest and other income and decreased interest
expense. Investment, interest and other income for 1994 includes the
receipt of a franchise tax refund of $7.2 million (as described in Note 1
to the Consolidated Financial Statements). Interest expense decreased due
to lower interest rates resulting from the refinancing of the Company's
long-term debt in March of 1993.
Credit (provision) in lieu of income taxes
The provision in lieu of income taxes for 1994 includes a credit
relating to reserves the Company no longer believes are necessary.
Extraordinary items
The litigation settlement in the second quarter of 1994 (as
described in Note 8 to the Consolidated Financial Statements) resulted in
an extraordinary loss of $14.9 million, net of related income taxes of $6.3
million. The extraordinary loss consists of the Company's $14.8 million
cash payment to the settlement fund, a $2.0 million accrual for additional
contingent claims and $4.4 million of related legal fees. See also Item 3.
"Legal Proceedings--Merger Litigation."
The refinancing of the Company's outstanding public indebtedness
on March 23, 1993, consisting of the 12% Series A Senior Notes due July 1,
1996, the 12.2% Series B Senior Notes due July 1, 1996 and the 12-1/2%
Senior Subordinated Debentures due July 1, 1998 (collectively, 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 4 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 5 and 6 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.
<PAGE>
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
As of December 31, 1994, the Company had consolidated working
capital of $60.0 million and long-term debt of $553.6 million (net of
current maturities and restricted cash deposited in a liquidity account for
the benefit of the holders of the Timber Notes) as compared to $71.7
million and $565.2 million, respectively, at December 31, 1993. The
decrease in long-term debt was primarily due to principal payments on the
Timber Notes. The decline in working capital was primarily due to the cash
payment for the litigation settlement, the principal payments on the Timber
Notes, dividends and capital expenditures, partially offset by improved
cash flows from operations. The Company anticipates that cash flows from
operations, together with existing cash and available sources of financing,
will be sufficient to fund the Company's working capital and capital
expenditures requirements for the foreseeable future; 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, 1994 and 1993, the Company's
operating income before depletion and depreciation ("operating cash flow")
amounted to $95.9 million and $76.6 million, respectively, which exceeded
interest accrued on all of its indebtedness in those years by $39.8 million
and $17.4 million, respectively.
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 required amount of amortization due on any Timber Note payment date is
determined by various mathematical formulas set forth in the Timber Note
Indenture. The minimum amount of principal which 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, 1995 - $5.7 million; 1996 - $8.3 million; 1997 - $8.5
million; 1998 - $8.7 million; 1999 - $10.2 million; thereafter - $322.4
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, 1995 - $13.6 million; 1996 - $14.1
million; 1997 - $16.2 million; 1998 - $19.3 million; 1999 - $21.7 million;
thereafter - $278.9 million. During 1993, 1994 and on January 20, 1995,
SPHC repaid approximately $8.0 million, $13.1 million and $8.2 million,
respectively, of the aggregate principal amount outstanding on the Timber
Notes in accordance with Scheduled Amortization.
<PAGE>
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 is made for current debt service on the Timber Notes
and expenditures for operating and capital costs, 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
$88.9 million and $58.3 million of dividends to the Company during the year
ended December 31, 1994 and the period from March 23, 1993 to December 31,
1993, respectively.
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, 1994, $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, 1994, and
letters of credit outstanding amounted to $10.3 million. In May 1994, the
Revolving Credit Agreement was amended to extend its maturity date to May
31, 1997 and modify the dividend restriction existing at December 31, 1993.
The Revolving Credit Agreement 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. As of
December 31, 1994, under the most restrictive of these covenants,
approximately $20.8 million of dividends could be paid by the Company. The
Company paid an aggregate of $24.5 million of dividends in 1994.
On August 4, 1993, all of the Company's issued and outstanding
common stock was pledged as collateral for the MGI Notes. MGI conducts its
operations primarily through subsidiary companies. The Company represents
the substantial portion of MGI's assets and operations. The indenture
governing the MGI Notes requires the Company's board of directors to
declare and pay dividends on the Company's common stock to the maximum
extent permitted by any consensual restriction or encumbrance on the
Company's ability to declare and pay dividends, unless the Board determines
in good faith that such declaration and payment would be detrimental to the
capital or other operating needs of the Company.
The Company's capital expenditures were made to improve
production efficiency and reduce operating costs. The Company's capital
expenditures were $11.0 million and $10.5 million for the years ended
December 31, 1994 and 1993, respectively. Capital expenditures for 1995
are expected to be $10 million and for the 1996 - 1997 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 $1.9 million for 1993 and
$2.6 million for 1994 when construction was 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.
<PAGE>
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 or financial position; however, these laws and regulations are
periodically modified. For example, in 1994 the California Board of
Forestry adopted certain regulations regarding compliance with long term
sustained yield objectives. These regulations require timber companies to
project the average annual growth they will have on their timberlands
during the last decade of a 100-year planning period ("Projected Annual
Growth"). During any rolling ten-year period, the average annual harvest
over such ten-year period may not exceed Projected Annual Growth. The
first ten-year period began in May 1994. The Company is required to
submit, by October 1996, a plan setting forth, among other things, its
Projected Annual Growth. The Company has not completed its analysis of the
projected productivity of its timberlands and is therefore unable to
predict the impact that these regulations will have on its future timber
harvesting practices; however, the final results of this analysis could
require the Company to reduce (or permit it to increase) its timber harvest
in future years from the average annual harvest that it has experienced in
recent years. The Company believes that it would be able to mitigate the
effect of any required reduction in harvest level by acquisitions of
additional timberlands and by increasing the productivity of its
timberlands. In addition, new laws and regulations are frequently
introduced concerning the California timber industry. From time to time,
bills are introduced in the California legislature and the U.S. Congress
which relate to the business of the Company, including the protection and
acquisition of old growth and other timberlands, endangered species,
environmental protection and the restriction, regulation and administration
of timber harvesting practices. Since these 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 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. See Item 3. "Legal Proceedings--Timber
Harvesting Litigation." 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.
<PAGE>
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, 1994 and 1993, 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, 1994. 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, 1994 and
1993, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
As explained in Notes 5 and 6 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 LLP
San Francisco, California
January 27, 1995
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1994 1993
(In thousands of dollars)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,330 $ 38,760
Marketable securities - 5,635
Receivables:
Trade 23,258 14,750
Other 4,035 3,801
Inventories 68,168 66,241
Prepaid expenses and other current assets 3,660 2,939
------------ ------------
Total current assets 123,451 132,126
Timber and timberlands, net of depletion of
$188,003 and $171,007 at December 31, 1994
and 1993, respectively 350,871 365,511
Property, plant and equipment, net 96,960 96,541
Deferred financing costs, net 24,516 26,500
Deferred income taxes 50,142 52,066
Restricted cash 32,402 33,562
Other assets 5,925 6,630
------------ ------------
$ 684,267 $ 712,936
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 3,309 $ 2,360
Accrued compensation and related benefits 10,285 7,782
Accrued interest 21,109 21,627
Deferred income taxes 12,986 14,132
Other accrued liabilities 2,105 1,377
Long-term debt, current maturities 13,670 13,191
------------ ------------
Total current liabilities 63,464 60,469
Long-term debt, less current maturities 586,007 598,811
Other noncurrent liabilities 23,517 27,925
------------ ------------
Total liabilities 672,988 687,205
------------ ------------
Contingencies
Stockholder's equity:
Common stock, $.01 par value, 100 shares
authorized and issued - -
Additional capital 157,520 157,520
Accumulated deficit (146,241) (131,789)
------------ ------------
Total stockholder's equity 11,279 25,731
------------ ------------
$ 684,267 $ 712,936
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
(In thousands of dollars)
<S> <C> <C> <C>
Net sales:
Lumber and logs $ 205,504 $ 193,227 $ 182,545
Other 21,875 17,407 21,746
---------- ---------- ----------
227,379 210,634 204,291
---------- ---------- ----------
Operating expenses:
Cost of goods sold (exclusive of depletion and
depreciation) 116,316 115,175 98,454
Selling, general and administrative 15,190 18,869 15,695
Depletion and depreciation 25,485 25,374 30,038
---------- ---------- ----------
156,991 159,418 144,187
---------- ---------- ----------
Operating income 70,388 51,216 60,104
Other income (expense):
Investment, interest and other income 12,022 3,884 3,404
Interest expense (56,067) (59,145) (65,632)
---------- ---------- ----------
Income (loss) before income taxes, extraordinary items and
cumulative effect of changes in accounting principles 26,343 (4,045) (2,124)
Credit (provision) in lieu of income taxes (1,429) 1,683 -
---------- ---------- ----------
Income (loss) before extraordinary items and cumulative
effect of changes in accounting principles 24,914 (2,362) (2,124)
Extraordinary items:
Loss on litigation settlement, net of related credit in
lieu of income taxes of $6,312 (14,866) - -
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 income (loss) $ 10,048 $ (10,539) $ (2,124)
========== ========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
(In thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 10,048 $ (10,539) $ (2,124)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depletion and depreciation 25,485 25,374 30,038
Net sales (purchases) of marketable
securities 6,619 6,025 (5,419)
Amortization of deferred financing
costs 2,197 2,580 1,212
Net gains on marketable securities (984) (1,310) (840)
Net loss (gain) on asset dispositions (830) 134 (153)
Incurrence of financing costs (213) (28,235) (505)
Extraordinary loss on early
extinguishment of debt, net - 10,802 -
Cumulative effect of changes in
accounting principles, net - (2,625) -
Decrease (increase) in accrued and
deferred income taxes 1,627 (1,697) -
Increase (decrease) in accounts payable 949 53 (3,588)
Decrease (increase) in receivables (8,742) 9,991 (15,019)
Increase (decrease) in other
liabilities (2,027) (394) 1,408
Decrease (increase) in inventories, net
of depletion (1,608) 987 9,968
Decrease (increase) in prepaid expenses
and other current assets (721) 237 647
Decrease in accrued interest (518) (9,398) -
Other 706 (74) (524)
---------- ---------- ----------
Net cash provided by operating
activities 31,988 1,911 15,101
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets 1,119 229 573
Capital expenditures (10,962) (10,472) (8,257)
---------- ---------- ----------
Net cash used for investing
activities (9,843) (10,243) (7,684)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash released 1,160 1,438 -
Dividends paid (24,500) (25,000) -
Redemptions, repurchase of and principal
payments on long-term debt (13,235) (557,883) (4,654)
Proceeds from issuance of long-term debt - 620,000 -
Restricted cash deposits - (35,000) -
---------- ---------- ----------
Net cash provided by (used for)
financing activities (36,575) 3,555 (4,654)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (14,430) (4,777) 2,763
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 38,760 43,537 40,774
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 24,330 $ 38,760 $ 43,537
========== ========== ==========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Timber and timberlands acquired subject to
loans from seller $ 910
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 54,388 $ 65,963 $ 64,420
Income taxes paid 1,170 14 927
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common
Stock Additional Accumulated
($.01 Par) Capital Deficit Total
(In thousands of dollars)
<S> <C> <C> <C> <C>
Balance, January 1, 1992 $ - $ 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
Net income - - 10,048 10,048
Dividends - - (24,500) (24,500)
------------ ---------- ------------ ----------
Balance, December 31, 1994 $ - $ 157,520 $ (146,241) $ 11,279
============ ========== ============ ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</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.
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 fair value beginning 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. Included in investment, interest and other income for each of the
three years ended December 31, 1994 were: 1994 - a decrease in net
unrealized holding gains of $264 and net realized gains of $1,248; 1993 -
net realized gains of $1,046 and net unrealized gains of $264; and 1992 -
net realized gains of $717 and the recovery of $123 of net unrealized
losses. 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. Subsequent to the adoption of SFAS 115, purchases
and sales of marketable securities are presented as cash flows from
operating activities in the Consolidated Statement of Cash Flows.
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>
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 4. 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 in Note
4) and interest on the Timber Notes if and to the extent that cash flows
are insufficient to make such payments. The required Liquidity Account
balance will generally decline as principal payments are made on the Timber
Notes. Investment, interest and other income for the years ended December
31, 1994 and 1993 includes approximately $2,490 and $2,101, respectively,
attributable to an investment rate agreement (at 7.95% per annum) with the
financial institution which holds the Liquidity Account.
At December 31, 1994 and 1993, cash and cash equivalents includes
$19,439 and $20,280, respectively, (the "Payment Account") which is
reserved for debt service payments on the Timber Notes (see Note 4). The
Payment Account and the Liquidity Account are each held by a different
financial institution. In the event of nonperformance by such financial
institutions, the Company's exposure to credit loss is represented by the
amounts deposited plus any unpaid accrued interest thereon. The Company
mitigates its concentrations of credit risk with respect to these
restricted cash deposits by maintaining them at high credit quality
financial institutions and monitoring the credit ratings of these
institutions.
Investment, Interest and Other Income
In February 1994, the Company received a franchise tax refund of
$7,243, the substantial portion of which represents interest, from the
State of California relating to tax years 1972 through 1985. This amount
is included in investment, interest and other income for the year ended
December 31, 1994.
Items Related to 1992 Earthquake
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, interest and other
income on a casualty insurance claim for the loss of certain commercial
property due to the earthquake. Other receivables at December 31, 1994 and
1993 included $1,684 and $1,235, respectively, related to these and other
earthquake related insurance claims.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and restricted
cash approximate fair value. The fair value of marketable securities is
determined based on quoted market prices. The estimated fair value of
long-term debt is determined based on the quoted market prices for the
Timber Notes and the 10-1/2% Senior Notes due 2003 (the "Senior Notes"),
and on the current rates offered for borrowings similar to the other debt.
The Timber Notes and the Senior Notes are thinly traded financial
instruments; accordingly, their market prices at any balance sheet date may
not be representative of the prices which would be derived from a more
active market.
<PAGE>
The estimated fair values of the Company's financial instruments,
along with the carrying amounts of the related assets (liabilities), are as
follows:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 24,330 $ 24,330 $ 38,760 $ 38,760
Marketable securities (held for trading purposes) - - 5,635 5,635
Restricted cash 32,402 32,402 33,562 33,562
Long-term debt (599,677) (558,801) (612,002) (637,700)
</TABLE>
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:<PAGE>
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
Lumber $ 53,393 $ 50,906
Logs 14,775 15,335
---------- ----------
$ 68,168 $ 66,241
========== ==========
</TABLE>
During 1993 and 1992, 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. 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 for the year ended December 31, 1992.
3. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows:<PAGE>
<TABLE>
<CAPTION>
Estimated December 31,
Useful Lives 1994 1993
<S> <C> <C>
Machinery and equipment 5 - 15 years $ 119,280 $ 116,455
Buildings 33 years 27,666 21,932
Logging roads 15 years 7,102 6,857
---------- ----------
154,048 145,244
Less: accumulated depreciation (57,088) (48,703)
---------- ----------
$ 96,960 $ 96,541
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1994, 1993
and 1992 was $8,808, $8,233 and $8,189, respectively.
<PAGE>
4. LONG-TERM DEBT
Long-term debt consists of the following:<PAGE>
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
7.95% Timber Collateralized Notes due July 20, 2015 $ 363,811 $ 376,953
10-1/2% Senior Notes due March 1, 2003 235,000 235,000
Other 866 49
---------- ----------
599,677 612,002
Less: current maturities (13,670) (13,191)
---------- ----------
$ 586,007 $ 598,811
========== ==========
/TABLE
<PAGE>
On March 23, 1993, the Company issued $235,000 of the Senior
Notes and its newly-formed wholly owned subsidiary, Scotia Pacific Holding
Company ("SPHC"), 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 (representing $192,445 of the Company's
consolidated balance at December 31, 1994), (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 required
amount of amortization due on any Timber Note payment date is determined by
various mathematical formulas set forth in the Timber Note Indenture. The
minimum amount of principal which 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
<PAGE>
Amortization on the Timber Notes is as follows: years ending December 31,
1995 - $13,578; 1996 - $14,103; 1997 - $16,165; 1998 - $19,335; 1999 -
$21,651; thereafter - $278,979.
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 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, 1997. 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 1-1/4% or the bank's offshore rate plus 2-1/4%. 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, 1994,
$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, 1994, 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,
1994, under the most restrictive of these covenants, approximately $20,800
of dividends could be paid by the Company.
Scheduled maturities of long-term debt outstanding at December
31, 1994 are as follows: years ending December 31, 1995 - $13,670; 1996 -
$14,195; 1997 - $16,258; 1998 - $19,429; 1999 - $21,745; thereafter -
$514,380.
5. CREDIT (PROVISION) IN LIEU OF INCOME TAXES
The Company and its subsidiaries are members of MAXXAM's
consolidated return group for federal income tax purposes. The Company's
tax allocation agreement with MAXXAM, as amended on March 23, 1993 (the
"Amended Tax Allocation Agreement"), provides that The Pacific Lumber
Company, excluding its wholly owned subsidiaries ("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. Under the tax allocation agreement with MAXXAM, prior to the
effective date of its amendment on March 23, 1993, Pacific Lumber recorded
tax liabilities or benefits computed as if it filed separate tax returns.
<PAGE>
The credit (provision) in lieu of income taxes on income (loss)
before income taxes, extraordinary items and cumulative effect of changes
in accounting principles for the two years ended December 31, 1994 consists
of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
<S> <C> <C>
Current:
Federal credit (provision) in lieu of income
taxes $ - $ -
State and local (50) -
----------- ------------
(50) -
----------- ------------
Deferred:
Federal credit (provision) in lieu of income
taxes (1,748) 1,913
State and local 369 (230)
----------- ------------
(1,379) 1,683
----------- ------------
$ (1,429) $ 1,683
=========== ============
</TABLE>
Pursuant to the principles of Accounting Principles Board Opinion
No. 11, Accounting for Income Taxes ("APB 11"), the Company did not record
a credit in lieu of income taxes for 1992 due to the uncertainty of
realizing the benefit of the 1992 net operating loss in future periods.
The 1994 deferred federal provision in lieu of income taxes of
$1,748 includes a credit relating to reserves the Company no longer
believes are necessary. The 1993 deferred federal credit in lieu of income
taxes of $1,913 includes an $850 benefit for increasing net deferred income
tax assets (liabilities) as of the date of enactment (August 10, 1993) of
the Omnibus Budget Reconciliation Act of 1993 which retroactively increased
the federal statutory income tax rate from 34% to 35% for periods beginning
on or after January 1, 1993.
A reconciliation between the credit (provision) in lieu of income
taxes and the amount computed by applying the federal statutory income tax
rate to income (loss) before income taxes, extraordinary items and
cumulative effect of changes in accounting principles is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Income (loss) before income taxes, extraordinary items
and cumulative effect of changes in accounting
principles $ 26,343 $ (4,045) $ (2,124)
========== ========== ==========
Amount of federal income tax based upon the statutory
rate $ (9,220) $ 1,416 $ 722
Revision of prior years' tax estimates and other changes
in valuation allowances 7,148 (566) -
State and local taxes, net of federal tax benefit 207 (150) -
Increase in net deferred income tax assets due to tax
rate change - 850 -
Losses and expenses for which no federal tax benefit was
recognized - - (722)
Other 436 133 -
---------- ---------- ----------
$ (1,429) $ 1,683 $ -
========== ========== ==========
</TABLE>
<PAGE>
As shown in the Consolidated Statement of Operations for the year
ended December 31, 1994, the Company recorded an extraordinary loss related
to the settlement of litigation in connection with MGI's acquisition of the
Company (see Note 8). The Company reported the loss net of related
deferred income taxes of $6,312 which is less than the federal and state
statutory income tax rates due to expenses for which no tax benefit was
recognized.
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.
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 changed the Company's method of accounting
for income taxes to an asset and liability approach from the deferral
method prescribed by 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. 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.
The components of the Company's net deferred income tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
Deferred income tax assets:
Timber and timberlands $ 37,209 $ 36,443
Loss and credit carryforwards 29,301 35,013
Other liabilities 4,840 4,627
Postretirement benefits other than pensions 2,145 1,734
Other 892 3,019
Valuation allowances (2,664) (5,613)
---------- ----------
Total deferred income tax assets, net 71,723 75,223
---------- ----------
Deferred income tax liabilities:
Inventories (16,339) (17,172)
Property, plant and equipment (14,848) (19,101)
Other (3,380) (1,016)
---------- ----------
Total deferred income tax liabilities (34,567) (37,289)
---------- ----------
Net deferred income tax assets $ 37,156 $ 37,934
========== ==========
</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
$33,540 and $36,056 at December 31, 1994 and 1993, respectively, 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, 1994.
<TABLE>
<CAPTION>
Expiring
Through
<S> <C> <C>
Regular Tax Attribute Carryforwards:
Prior year net operating losses $ 72,012 2008
Net capital losses 3,997 1997
Alternative Minimum Tax Attribute Carryforwards:
Current year net operating loss $ 3,853 2009
Prior year net operating losses 30,679 2008
</TABLE>
6. 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:<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 1,643 $ 1,600 $ 1,546
Interest cost on projected benefit obligation 1,263 918 749
Actual loss (gain) on plan assets 10 (2,128) (1,013)
Net amortization and deferral (859) 1,359 352
---------- ---------- ----------
Net periodic pension cost $ 2,057 $ 1,749 $ 1,634
========== ========== ==========
</TABLE>
<PAGE>
The following table sets forth the funded status and amounts
recognized in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation $ 11,809 $ 11,047
Non-vested benefit obligation 779 1,183
---------- ----------
Total accumulated benefit obligation $ 12,588 $ 12,230
========== ==========
Projected benefit obligation $ 15,047 $ 15,303
Plan assets at fair value, primarily equity and debt
securities (13,184) (12,216)
---------- ----------
Projected benefit obligation in excess of plan assets 1,863 3,087
Unrecognized net transition asset 29 35
Unrecognized net gain (loss) 1,475 (582)
Unrecognized prior service cost (50) (89)
---------- ----------
Accrued pension liability $ 3,317 $ 2,451
========== ==========
/TABLE
<PAGE>
The assumptions used in accounting for the defined benefit plan were as
follows:<PAGE>
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Rate of increase in compensation levels 5.0% 5.0% 5.0%
Discount rate 8.5% 7.5% 8.0%
Expected long-term rate of return on assets 8.0% 8.0% 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 Statement of Financial Accounting Standards
No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions ("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. The deferred income tax benefit related
to the adoption of SFAS 106 was recorded at the federal and state statutory
rates in effect on the date SFAS 106 was adopted.
A summary of the components of net periodic postretirement
benefit cost is as follows:<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
<S> <C> <C>
Service cost - benefits earned during the year $ 216 $ 153
Interest cost on accumulated postretirement benefit
obligation 294 315
Net amortization and deferral (7) -
------------ ------------
Net periodic postretirement benefit cost $ 503 $ 468
============ ============
</TABLE>
<PAGE>
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.
The postretirement benefit liability recognized in the Company's
Consolidated Balance Sheet is as follows:<PAGE>
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
Retirees $ 860 $ 963
Actives eligible for benefits 656 696
Actives not eligible for benefits 2,355 2,549
---------- ----------
Accumulated postretirement benefit obligation 3,871 4,208
Unrecognized net gain 972 71
---------- ----------
Postretirement benefit liability $ 4,843 $ 4,279
========== ==========
</TABLE>
The annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 13.0% for 1995 and
is assumed to decrease gradually to 5.5% for 2008 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, 1994 by approximately $512 and the aggregate
of the service and interest cost components of net periodic postretirement
benefit cost by approximately $85.
The discount rates used in determining the accumulated
postretirement benefit obligation were 8.5% and 7.5% at December 31, 1994
and 1993, respectively.
Subsequent to December 31, 1993, the Company's employees were
eligible to participate in a defined contribution savings plan sponsored by
MAXXAM. This plan is designed to enhance the existing retirement programs
of participating employees. Employees may elect to contribute up to 16% of
their compensation to the plan. For those participants who have elected to
make voluntary contributions to the plan, the Company's contributions
consist of a matching contribution of up to 4% of the compensation of
participants for each calendar quarter. The cost to the Company of this
plan was $1,215 for the year ended December 31, 1994.
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
$9,233 and $7,008 at December 31, 1994 and 1993, respectively. Workers'
compensation expenses amounted to $3,698, $3,317 and $2,944 for the years
ended December 31, 1994, 1993 and 1992, respectively.
7. RELATED PARTY TRANSACTIONS
MAXXAM provides the Company with personnel, insurance, legal,
accounting, financial, and certain other services. MAXXAM is compensated
by the Company through the payment of a fee representing the reimbursement
of actual out-of-pocket expenses incurred by MAXXAM, including, but not
limited to, labor costs of personnel of MAXXAM rendering services to the
Company. Charges by MAXXAM for such services were $1,744, $2,598 and
$2,735 for the years ended December 31, 1994, 1993 and 1992, respectively.
Net sales for the years ended December 31, 1994, 1993 and 1992
include revenues of $10,326, $9,198 and $6,942, respectively, from Britt
Lumber Co., Inc., an indirect wholly owned subsidiary of MGI. The Company
<PAGE>
recognized operating income of $5,571, $1,972 and $1,335 on these revenues
for the years ended December 31, 1994, 1993 and 1992, respectively. At
December 31, 1994 and 1993, receivables include $1,283 and $178,
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, the "MGI Notes"). MGI conducts its
operations primarily through subsidiary companies. The Company represents
the substantial portion of MGI's assets and operations. The indenture
governing the MGI Notes requires the Company's board of directors to
declare and pay dividends on the Company's common stock to the maximum
extent permitted by any consensual restriction or encumbrance on the
Company's ability to declare and pay dividends, unless the Board determines
in good faith that such declaration and payment would be detrimental to the
capital or other operating needs of the Company.
In 1994, in connection with the litigation settlement described
in Note 8, the Company paid approximately $3,185 to a law firm in which a
director of the Company is also a partner. In 1993, the Company paid
approximately $1,931 in connection with the offering of the Senior Notes
and the Timber Notes to this same law firm.
8. LOSS ON LITIGATION SETTLEMENT AND CONTINGENCIES
During 1994, MAXXAM, the Company and others agreed to a
settlement, subsequently approved by the Court, of class and related
individual claims brought by former stockholders of the Company against
MAXXAM, MGI, the Company, former directors of the Company and others
concerning MGI's acquisition of the Company. Of the approximately $52,000
settlement, approximately $33,000 was paid by insurance carriers of MAXXAM
and the Company, approximately $14,800 was paid by the Company and the
balance was paid by other defendants and through the assignment of certain
claims. In 1994, the Company recorded an extraordinary loss of $14,866
related to the settlement and associated costs, net of benefits for federal
and state income taxes of $6,312.
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 or financial position. 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 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 on the Company's
consolidated financial position or results of operations.
9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summary quarterly financial information for the years ended
December 31, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1994:
Net sales $ 50,816 $ 55,120 $ 55,001 $ 66,442
Operating income 12,148 19,527 17,092 21,621
Income before extraordinary item 3,381 4,380 9,555 7,598
Extraordinary item, net - (14,866) - -
Net income (loss) 3,381 (10,486) 9,555 7,598
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)
</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<PAGE>
<TABLE>
<CAPTION>
(A) INDEX TO FINANCIAL STATEMENTS PAGE
1. FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):
<S> <C>
Report of Independent Public Accountants 20
Consolidated balance sheet at December 31, 1994 and 1993 21
Consolidated statement of operations for the years ended December 31, 1994, 1993
and 1992 22
Consolidated statement of cash flows for the years ended December 31, 1994, 1993
and 1992 23
Consolidated statement of stockholder's equity for the years ended December 31, 1994,
1993 and 1992 24
Notes to consolidated financial statements 25
</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 40), 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.<PAGE>
THE PACIFIC LUMBER COMPANY
Date: March 24, 1995 By: PAUL N. SCHWARTZ
Paul N. Schwartz
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: March 24, 1995 By: GARY L. CLARK
Gary L. Clark
Vice President - Finance and Administration
(Principal Accounting Officer)<PAGE>
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.<PAGE>
Date: March 24, 1995 By: JOHN A. CAMPBELL
John A. Campbell
President, Chief Executive Officer
and Director
Date: March 24, 1995 By: PAUL N. SCHWARTZ
Paul N. Schwartz
Vice President, Chief Financial Officer
and Director
Date: March 24, 1995 By: JOHN T. LA DUC
John T. La Duc
Vice President and Director
Date: March 24, 1995 By: EZRA G. LEVIN
Ezra G. Levin
Director
Date: March 24, 1995 By: ANTHONY R. PIERNO
Anthony R. Pierno
Vice President, General Counsel
and Director
Date: March 24, 1995 By: WILLIAM S. RIEGEL
William S. Riegel
Vice President - Sales and Director
<PAGE>
THE PACIFIC LUMBER COMPANY
INDEX OF EXHIBITS
Exhibit
Number Description
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 (incorporated herein by
reference to Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1993)
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 SPHC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993; the "SPHC
1993 Form 10-K")
4.3 Revolving Credit Agreement dated as of June 23, 1993
(the "Revolving Credit Agreement") 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)
4.5 Second Amendment, dated as of May 26, 1994, to the
Revolving Credit Agreement (incorporated herein by
reference to Exhibit 4.2 to the Quarterly Report on
Form 10-Q of MAXXAM Inc. for the quarter ended June
30, 1994; File No. 1-3924)
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 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 Amendment No. 3 to the Form S-1 Registration
Statement of SPHC, Registration No. 33-55538)
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
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 Purchase and Services Agreement between the Company
and Britt Lumber Co., Inc. (incorporated herein by
reference to Exhibit 10.17 to Amendment No. 2 to the
Form S-2 Registration Statement of Pacific Lumber,
Registration Statement No. 33-56332)
10.13 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)
*27 Financial Data Schedule
* Included with this filing.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Company's consolidated balance sheet and consolidated statement of
operations and is qualified in its entirety by reference to such consolidated
financial statements together with the related footnotes thereto.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<CASH> 24,330
<SECURITIES> 0
<RECEIVABLES> 23,258
<ALLOWANCES> 0
<INVENTORY> 68,168
<CURRENT-ASSETS> 123,451
<PP&E> 154,048
<DEPRECIATION> 57,088
<TOTAL-ASSETS> 684,267
<CURRENT-LIABILITIES> 63,464
<BONDS> 599,677
<COMMON> 0
0
0
<OTHER-SE> 11,279
<TOTAL-LIABILITY-AND-EQUITY> 684,267
<SALES> 227,379
<TOTAL-REVENUES> 227,379
<CGS> 116,316
<TOTAL-COSTS> 116,316
<OTHER-EXPENSES> 40,675
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,067
<INCOME-PRETAX> 26,343
<INCOME-TAX> 1,429
<INCOME-CONTINUING> 24,914
<DISCONTINUED> 0
<EXTRAORDINARY> (14,866)
<CHANGES> 0
<NET-INCOME> 10,048
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
