UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
Commission File Number 1-9204
THE PACIFIC LUMBER COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3318327
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
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
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 / /
Number of shares of common stock outstanding at August 1, 1997: 100
Registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the
reduced disclosure format.
THE PACIFIC LUMBER COMPANY
INDEX
PART I. - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet at June 30, 1997 and
December 31, 1996 3
Consolidated Statement of Operations for the three and
six months ended June 30, 1997 and 1996 4
Consolidated Statement of Cash Flows for the six months
ended June 30, 1997 and 1996 5
Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature S-1
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
June 30, December 31,
1997 1996
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 37,573 $ 26,027
Receivables:
Trade 12,963 18,080
Other 2,408 2,514
Inventories 57,579 65,690
Prepaid expenses and other current assets 5,360 5,329
------------- -------------
Total current assets 115,883 117,640
Timber and timberlands, net of accumulated
depletion of $228,018 and $221,063,
respectively 325,815 324,986
Property, plant and equipment, net of
accumulated depreciation of $77,540 and
$73,772, respectively 95,323 95,515
Deferred financing costs, net 18,957 20,003
Deferred income taxes 30,021 34,639
Restricted cash 29,765 29,967
Other assets 8,830 6,424
------------- -------------
$ 624,594 $ 629,174
============= =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 4,225 $ 3,765
Accrued compensation and related benefits 9,944 9,673
Accrued interest 19,860 20,211
Deferred income taxes 10,173 10,173
Other accrued liabilities 1,486 2,325
Long-term debt, current maturities 18,319 16,258
------------- -------------
Total current liabilities 64,007 62,405
Long-term debt, less current maturities 551,147 555,596
Other noncurrent liabilities 27,056 25,887
------------- -------------
Total liabilities 642,210 643,888
------------- -------------
Contingencies
Stockholder's deficit:
Common stock, $.01 par value, 100 shares
authorized and issued -- --
Additional capital 157,520 157,520
Accumulated deficit (175,136) (172,234)
------------- -------------
Total stockholder's deficit (17,616) (14,714)
------------- -------------
$ 624,594 $ 629,174
============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ---------------------------
1997 1996 1997 1996
------------- ----------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales:
Lumber and logs $ 61,143 $ 60,651 $ 115,542 $ 110,760
Other 6,667 4,648 13,117 9,442
------------- ----------- ------------- -------------
67,810 65,299 128,659 120,202
------------- ----------- ------------- -------------
Operating expenses:
Cost of goods sold
(exclusive of depletion
and depreciation) 36,782 37,258 71,505 67,870
Selling, general and
administrative expenses 3,406 3,402 6,457 6,826
Depletion and depreciation 6,812 7,154 13,375 13,711
------------- ----------- ------------- -------------
47,000 47,814 91,337 88,407
------------- ----------- ------------- -------------
Operating income 20,810 17,485 37,322 31,795
Other income (expense):
Investment, interest and
other income (expense) 685 1,518 1,490 2,399
Interest expense (13,351) (13,652) (26,836) (27,368)
------------- ----------- ------------- -------------
Income before income taxes 8,144 5,351 11,976 6,826
Provision in lieu of income taxes (3,239) (2,207) (4,878) (2,798)
------------- ----------- ------------- -------------
Net income $ 4,905 $ 3,144 $ 7,098 $ 4,028
============= =========== ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
Six Months Ended
June 30,
---------------------------
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,098 $ 4,028
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion and depreciation 13,375 13,711
Amortization of deferred financing
costs 1,046 1,205
Increase (decrease) in cash resulting
from changes in:
Receivables 5,258 5,226
Inventories, net of depletion 6,156 5,803
Prepaid expenses and other assets (2,437) 704
Accounts payable 373 452
Accrued and deferred income taxes 4,667 2,669
Accrued interest (351) (291)
Other liabilities 601 (8,111)
Other 106 (609)
------------- -------------
Net cash provided by
operating activities 35,892 24,787
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,813) (5,329)
Net proceeds from sale of assets 66 94
------------- -------------
Net cash used for investing activities (5,747) (5,235)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (10,000) (6,500)
Redemptions, repurchases of and principal
payments on long-term debt (8,801) (8,539)
Restricted cash withdrawals, net 202 300
------------- ------------
Net cash used for financing activities (18,599) (14,739)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,546 4,813
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,027 26,480
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 37,573 $ 31,293
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 26,130 $ 26,454
Tax allocation payments to MAXXAM Inc. $ 211 $ 300
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Timber and timberlands acquired subject to
long-term debt $ 6,413 $ --
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. GENERAL
The information contained in the following notes to the
consolidated financial statements is condensed from that which would appear
in the annual consolidated financial statements; accordingly, the
consolidated financial statements included herein should be reviewed in
conjunction with the consolidated financial statements and related notes
thereto contained in the Annual Report on Form 10-K filed by The Pacific
Lumber Company with the Securities and Exchange Commission for the fiscal
year ended December 31, 1996 (the "Form 10-K"). Any capitalized terms used
but not defined in these Condensed Notes to Consolidated Financial
Statements have the same meaning given to them in the Form 10-K. All
references to the "Company" include The Pacific Lumber Company and its
subsidiary companies unless otherwise noted or the context indicates
otherwise. Accounting measurements at interim dates inherently involve
greater reliance on estimates than at year end. The results of operations
for the interim periods presented are not necessarily indicative of the
results to be expected for the entire year.
The consolidated financial statements included herein are
unaudited; however, they include all adjustments of a normal recurring
nature which, in the opinion of management, are necessary to present fairly
the consolidated financial position of the Company at June 30, 1997, the
consolidated results of operations for the three and six months ended June
30, 1997 and 1996 and consolidated cash flows for the six months ended June
30, 1997 and 1996. Certain reclassifications of prior period information
have been made to conform to the current presentation. The Company is an
indirect, wholly owned subsidiary of MGI. MGI is a wholly owned subsidiary
of MGHI which is a wholly owned subsidiary of MAXXAM.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
June 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Lumber $ 43,261 $ 46,882
Logs 14,318 18,808
------------- -------------
$ 57,579 $ 65,690
============= =============
</TABLE>
3. RESTRICTED CASH
Restricted cash represents the amount held by the Trustee under
the indenture governing the Timber Notes of the Company's wholly owned
subsidiary, Scotia Pacific. In addition, cash and cash equivalents
includes $10,916 and $17,600 at June 30, 1997 and December 31, 1996,
respectively, which is restricted for debt service payments on the Timber
Notes.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
June 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized
Notes due July 20, 2015 $ 327,418 $ 336,130
10-1/2% Pacific Lumber Senior Notes due March
1, 2003 235,000 235,000
Revolving Credit Agreement 6,413 --
Other 635 724
------------- -------------
569,466 571,854
Less: current maturities (18,319) (16,258)
------------- -------------
$ 551,147 $ 555,596
============= =============
</TABLE>
5. CONTINGENCIES
The Company's operations are subject to a variety of California
and federal laws and regulations dealing with timber harvesting, endangered
species and critical habitat, and air and water quality. Moreover, these
laws and regulations are modified from time to time and are subject to
judicial and administrative interpretation. Compliance with such laws,
regulations and judicial and administrative interpretations, together with
the cost of litigation incurred in connection with certain timber
harvesting operations of the Company, have increased the cost of logging
operations. The Company is subject to certain pending matters described
below which could have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity. There
can be no assurance that certain pending or future governmental
regulations, legislation, judicial or administrative decisions or
California ballot initiatives will not have a material adverse effect on
the Company.
In May 1996, the USFWS published the Final Designation of
critical habitat for the marbled murrelet, a coastal seabird, which
designated over four million acres as critical habitat for the marbled
murrelet. Although nearly all of the designated habitat is public land,
approximately 33,000 acres of the Company's timberlands are included in the
Final Designation, the substantial portion of such acreage being young
growth timberlands. In order to mitigate the impact of the Final
Designation, particularly with respect to timberlands occupied by the
marbled murrelet, the Company attempted to develop the Murrelet HCP. Due
to, among other things, the unfavorable response of the USFWS to the
Company's initial Murrelet HCP efforts, the Company and its subsidiaries
filed the Takings Litigation alleging that certain portions of their
timberlands had been "taken" and seeking just compensation. Pursuant to
the Headwaters Agreement entered into by the Company, MAXXAM, the United
States and California on September 28, 1996 and described in Note 6 below,
the Takings Litigation has been stayed at the request of the parties.
It is impossible for the Company to determine the potential
adverse effect of the Final Designation on the Company's consolidated
financial position, results of operations or liquidity until such time as
various regulatory and legal issues are resolved; however, if the Company
is unable to harvest, or is severely limited in harvesting, on timberlands
designated as critical habitat for the marbled murrelet, such effect could
be materially adverse to the Company. If the Company is unable to harvest
or is severely limited in harvesting, it intends to seek just compensation
from the appropriate governmental agencies on the grounds that such
restrictions constitute a governmental taking. There continue to be other
regulatory actions and lawsuits seeking to have other species listed as
threatened or endangered under the ESA and/or the CESA and to designate
critical habitat for such species. For example, on April 25, 1997 the NMFS
announced the listing of the coho salmon under the ESA in northern
California, including lands owned by the Company. It is uncertain what
impact, if any, such listings and/or designations of critical habitat would
have on the Company's consolidated financial position, results of
operations or liquidity.
In 1994, the BOF adopted certain regulations regarding compliance
with long-term sustained yield ("LTSY") objectives. These regulations
require that timber companies project timber growth and harvest on their
timberlands over a 100-year planning period and establish a LTSY harvest
level that takes into account environmental and economic considerations.
Timber companies must submit an SYP demonstrating that the average annual
harvest over any rolling ten-year period will not exceed the LTSY harvest
level and that their projected timber inventory is capable of sustaining
the LTSY harvest level in the last decade of the 100-year planning period.
On December 17, 1996, the Company submitted a proposed SYP to the CDF. The
proposed SYP sets forth an LTSY harvest level substantially the same as the
Company's average annual timber harvest over the last six years. The
proposed SYP also indicates that the Company's average annual timber
harvest during the first decade of the SYP would approximate the LTSY
harvest level. During the second decade of the proposed SYP, the Company's
average annual timber harvest would be approximately 8% less than that
proposed for the first decade. The SYP, when approved, will be valid for
ten years. Thereafter, revised SYPs will be prepared every decade that will
address the LTSY harvest level based upon reassessment of changes in the
resource base and protection of public resources.
The proposed SYP assumes that the transactions contemplated by
the Headwaters Agreement will be consummated and that the Multi-Species HCP
will permit the Company to harvest its timberlands (including over the next
two decades a substantial portion of its old growth timberlands not
transferred pursuant to the Headwaters Agreement) to achieve maximum
sustained yield. The SYP is subject to review and approval by the CDF, and
there can be no assurance that the SYP will be approved in its proposed
form. Until the SYP is reviewed and approved, the Company is unable to
predict the impact that these regulations will have on its future timber
harvesting practices. It is possible that the results of the review and
approval process could require the Company to reduce its timber harvest in
future years from the harvest levels set forth in the proposed SYP. The
Company believes it would be able to mitigate the effect of any required
reduction in harvest level by acquisitions of additional timberlands and
making corresponding amendments to the SYP; however, there can be no
assurance that the Company would be able to do so and the amount of such
acquisitions would be limited by the Company's available financial
resources. The Company is unable to predict the ultimate impact the
sustained yield regulations will have on its future financial position,
results of operations or liquidity.
Various groups and individuals have filed objections with the CDF
and the BOF regarding the CDF's and the BOF's actions and rulings with
respect to certain of the Company's THPs and other timber harvesting
operations, and the Company expects that such groups and individuals will
continue to file such objections. In addition, lawsuits are pending or
threatened which seek to prevent the Company from implementing certain of
its approved THPs or which challenge other operations by the Company. These
challenges have severely restricted the Company's ability to harvest old
growth timber on its property. To date, challenges with respect to the
Company's THPs relating to young growth timber and to its other operations
have been limited; however, no assurance can be given as to the extent of
such challenges in the future. The Company believes that environmentally
focused challenges to its timber harvesting and other operations are likely
to occur in the future, particularly with respect to virgin and residual
old growth timber. Although such challenges have delayed or prevented the
Company from conducting a portion of its operations, they have not had a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity. Nevertheless, it is impossible to
predict the future nature or degree of such challenges or their ultimate
impact on the Company's consolidated financial position, results of
operations or liquidity.
The Company is also involved in various claims, lawsuits and
proceedings. 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 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, results of operations or liquidity.
6. HEADWATERS AGREEMENT
On September 28, 1996, the Pacific Lumber Parties entered into
the Headwaters Agreement with the United States and California. The
Headwaters Agreement provides the framework for the acquisition by the
United States and California of approximately 5,600 acres of the Company's
timberlands commonly referred to as the Headwaters Forest and the Elk Head
Springs Forest (collectively, the "Headwaters Timberlands"). A substantial
portion of the Headwaters Timberlands consists of virgin old growth
timberlands. Approximately 4,900 of these acres are owned by Salmon Creek
and contain an area commonly referred to as the "Headwaters Forest." The
remaining acreage is owned by Scotia Pacific (the Company having harvesting
rights on a portion of the acreage). The Headwaters Timberlands would be
transferred in exchange for (a) property and other consideration (possibly
including cash) from the United States and California having an aggregate
fair market value of $300 million and (b) approximately 7,755 acres of
adjacent timberlands (the "Elk River Timberlands") to be acquired by the
United States and California from a third party. The United States and
California would also acquire and retain an additional 1,900 acres of
timberlands from such third party.
The Headwaters Agreement also provides, among other things, for
the expedited processing by the United States of a Permit (an incidental
take permit) to be based upon a Multi-Species HCP covering (a) the
Resulting Pacific Lumber Timber Property (the property the Company will own
after consummation of the Headwaters Agreement) and (b) the Headwaters
Timberlands and the 1,900 acres of additional timberlands to be acquired
and retained by the United States and California (both of the latter as
conserved habitat). The agreement also requires expedited processing by
California of an SYP covering the Resulting Pacific Lumber Timber Property.
As part of the Headwaters Agreement, the Pacific Lumber Parties
agreed to not enter the Headwaters Forest or the Elk Head Forest to conduct
logging operations, including salvage logging (the "Moratorium"). The
Moratorium was to terminate if by July 28, 1997 the parties had not
achieved the Specified Items to their respective satisfaction. On March
11, 1997, the Pacific Lumber Parties agreed to amend the Headwaters
Agreement to extend to February 17, 1998 the period of time during which
these closing conditions must be met. The extension is, however, subject
to the achievement of certain milestones toward completion of the
Headwaters Agreement, including satisfaction of the Pacific Lumber Parties
with the progress of the United States and California toward providing for
the consideration to be transferred at the closing.
The United States has recently focused its efforts on furnishing
the federal portion of the required consideration through a federal budget
appropriation. The Budget Agreement between President Clinton and the
Republican Congressional leadership would allocate $250,000 for the
acquisition pursuant to the Headwaters Agreement. In July 1997, the Senate
Appropriations Committee approved the interior appropriations bill, which
contained provisions allowing the expenditure of $700,000 for priority land
acquisitions, including the $250,000 for the acquisition pursuant to the
Headwaters Agreement. This bill does, however, contain a provision
requiring the passage of authorizing legislation for the Headwaters
acquisition. The corresponding appropriations bill approved by the House
of Representatives did not contain any part of the $700,000 priority land
acquisitions. Whether a federal budget appropriation for the Headwaters
acquisition will be enacted, or the terms of any such appropriation, is
uncertain as the full Senate must still consider the interior
appropriations bill, and a conference would have to resolve any differences
between the final Senate bill and the House version.
Although California has not enacted legislation providing funds
for its portion of the acquisition contemplated by the Headwaters
Agreement, representatives of the State of California continue to indicate
that they are considering various methods of furnishing the required
consideration.
Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands, (b) approval of an SYP and a Multi-Species HCP and issuance
of a Permit, each in form and substance satisfactory to the Company, (c)
the issuance by the Internal Revenue Service and the California Franchise
Tax Board of closing agreements in form and substance sought by and
satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial
decision in any litigation brought by third parties that any party
reasonably believes will significantly delay or impair the transactions
described in the Headwaters Agreement, and (e) the dismissal with prejudice
at closing of the Takings Litigation. The parties to the Headwaters
Agreement are working to satisfy these conditions; however, there can be no
assurance that the Headwaters Agreement will be consummated.
THE PACIFIC LUMBER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the response to
Part I, Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any
capitalized terms used but not defined in this Item have the same meaning
given to them in the Form 10-K.
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements appear in several places in this Form
10-Q. Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates," "will,"
"should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of
strategy. Readers are cautioned that any such forward-looking statements
are not guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in
the forward-looking statements as a result of various factors. These
factors include the effectiveness of management's strategies and decisions,
general economic and business conditions, developments in technology, new
or modified statutory or regulatory requirements and changing prices and
market conditions. This section and the Company's Form 10-K identify other
factors that could cause such differences. No assurance can be given that
these are all of the factors that could cause actual results to vary
materially from the forward-looking statements.
RESULTS OF OPERATIONS
The Company is engaged in forest products operations. Its
business is seasonal in that the Company generally experiences lower first
quarter sales due largely to the general decline in construction-related
activity during the winter months. Accordingly, the Company's results for
any one quarter are not necessarily indicative of results to be expected
for the full year. The following table presents selected operational and
financial information for the three and six months ended June 30, 1997 and
1996.
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
(In millions of dollars, except shipments and prices)
<S> <C> <C> <C> <C>
Shipments:
Lumber: (1)
Redwood upper grades 13.3 12.9 26.3 23.3
Redwood common
grades 41.7 42.9 78.3 81.0
Douglas-fir upper
grades 2.5 2.8 5.0 5.0
Douglas-fir common
grades 17.1 18.6 36.5 37.9
Other 4.3 6.4 7.3 8.3
------------- ------------- ------------- -------------
Total lumber 78.9 83.6 153.4 155.5
============= ============= ============= =============
Logs (2) 12.6 12.2 23.7 26.4
============= ============= ============= =============
Wood chips (3) 60.3 48.6 117.2 92.1
============= ============= ============= =============
Average sales price:
Lumber: (4)
Redwood upper grades $ 1,422 $ 1,392 $ 1,373 $ 1,389
Redwood common
grades 598 548 572 528
Douglas-fir upper
grades 1,153 1,158 1,181 1,156
Douglas-fir common
grades 497 438 491 407
Logs (4) 369 488 383 469
Wood chips (5) 78 69 78 80
Net sales:
Lumber, net of discount $ 56.5 $ 54.7 $ 106.5 $ 98.4
Logs 4.6 6.0 9.1 12.4
Wood chips 4.7 3.3 9.1 7.3
Cogeneration power 1.2 .9 2.2 1.3
Other .8 .4 1.8 .8
------------- ------------- ------------- -------------
Total net sales $ 67.8 $ 65.3 $ 128.7 $ 120.2
============= ============= ============= =============
Operating income $ 20.8 $ 17.5 $ 37.3 $ 31.8
============= ============= ============= =============
Operating cash flow (6) $ 27.6 $ 24.6 $ 50.7 $ 45.5
============= ============= ============ =============
Income before income taxes $ 8.1 $ 5.3 $ 12.0 $ 6.8
============= ============= ============= =============
Net income $ 4.9 $ 3.1 $ 7.1 $ 4.0
============= ============= ============= =============
<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>
Net sales
Net sales for the quarter ended June 30, 1997 increased from the
comparable prior year quarter due to higher average realized prices for
common grade redwood and Douglas-fir lumber partially offset by lower
volumes in most categories of lumber. Net sales for the six months ended
June 30, 1997 increased from the comparable prior year period principally
due to higher average realized prices for common grade lumber and higher
volumes of upper grade redwood lumber partially offset by lower volumes in
most other categories of lumber.
Operating income and income before income taxes
Operating income and income before income taxes for the three and
six months ended June 30, 1997 increased from the comparable prior year
periods, principally due to the increase in net sales discussed above.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
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 ability of Pacific Lumber and Scotia
Pacific to incur additional indebtedness and liens, to engage in
transactions with affiliates, to pay dividends and to make investments. As
of June 30, 1997, under the most restrictive of these covenants,
approximately $15.9 million of dividends could be paid by the Company to
MGI.
As of June 30, 1997, $27.1 million of borrowings was available
under the Revolving Credit Agreement, of which $3.5 million was available
for letters of credit and $23.6 million for timberland acquisitions. As of
June 30, 1997, $6.4 million was outstanding and letters of credit
outstanding amounted to $16.2 million.
As of June 30, 1997, the Company had consolidated long-term debt
of $521.4 million (net of current maturities and restricted cash deposited
in the Liquidity Account) as compared to $525.6 million at December 31,
1996. The decrease in long-term debt was principally due to principal
payments on the Timber Notes of $8.7 million offset by borrowings of $6.4
million under the Revolving Credit Agreement. The Company anticipates that
cash from operations, together with existing cash, cash equivalents and
available sources of financing, will be sufficient to fund its working
capital and capital expenditure requirements for the next year. With
respect to its long-term liquidity, the Company believes that its existing
cash and cash equivalents, together with its ability to generate sufficient
cash from operations and to obtain both short- and long-term financing,
should provide sufficient funds to meet its working capital and capital
expenditure requirements. However, due to its highly leveraged condition,
the Company is more sensitive than less leveraged companies to factors
affecting its operations, including governmental regulation affecting
timber harvesting practices, increased competition from other lumber
producers or alternative building products and general economic conditions.
TRENDS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See above for cautionary information with respect to
such forward-looking statements.
The Company's operations are subject to a variety of California
and federal laws, regulations and judicial and administrative
interpretations dealing with timber harvesting, endangered species and
critical habitat, and air and water quality. Moreover, these laws and
regulations are modified from time to time and are subject to judicial and
administrative interpretation. Compliance with such laws, regulations and
judicial and administrative interpretations, together with the cost of
litigation incurred in connection with certain timber harvesting operations
of the Company, have increased the cost of logging operations. The Company
is subject to certain pending matters which could have a material adverse
effect on its consolidated financial position, results of operations or
liquidity. There can be no assurance that these pending matters or future
governmental regulations, legislation or judicial or administrative
decisions would not have a material adverse effect on the Company. See
Part II, Item 1. "Legal Proceedings" and Note 5 to the Condensed
Consolidated Financial Statements for further information regarding
regulatory and environmental factors affecting the Company's operations.
See also Note 6 to the Condensed Consolidated Financial Statements for the
agreement to extend the Headwaters Agreement to February 17, 1998.
Judicial or regulatory actions adverse to the Company, increased
regulatory delays and inclement weather in northern California,
independently or collectively, could impair the Company's ability to
maintain adequate log inventories and force the Company to temporarily idle
or curtail operations at certain lumber mills from time to time.
THE PACIFIC LUMBER COMPANY
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Form 10-K for information
concerning material legal proceedings with respect to the Company. The
following material developments have occurred with respect to such legal
proceedings.
With respect to the Marbled Murrelet action described under
"Timber Harvesting Litigation," on April 18, 1997, the U.S. Ninth Circuit
Court of Appeals reversed the trial court's decision which had
preliminarily enjoined eight already-approved THPs to the extent they rely
on the Federal Owl Plan. On June 18, 1997, the court granted the
defendants' motions for summary judgment disposing of the remaining issues
in this case in favor of the defendants.
With respect to the Redway action described under "Timber
Harvesting Litigation," the trial was held on June 23, 1997; the court has
not yet issued its decision.
With respect to the Takings Litigation described under "Timber
Harvesting Litigation," the Pacific Lumber Parties have offered to continue
and extend the stay of proceedings through September 15, 1997 in response
to the request of the United States for an extension of the stay of
proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
27 Financial Data Schedule
B. REPORTS ON FORM 8-K:
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized, who has signed this report on
behalf of the Registrant and as the principal accounting officer of the
Registrant.
THE PACIFIC LUMBER COMPANY
Date: August 1, 1997 By: /S/ GARY L. CLARK
Gary L. Clark
Vice President - Finance and
Administration
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet and consolidated statement of operations
and is qualified in its entirety by reference to such consolidated financial
statements together with the related footnotes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 37,573
<SECURITIES> 0
<RECEIVABLES> 12,963
<ALLOWANCES> 0
<INVENTORY> 57,579
<CURRENT-ASSETS> 115,883
<PP&E> 172,863
<DEPRECIATION> 77,540
<TOTAL-ASSETS> 624,594
<CURRENT-LIABILITIES> 64,007
<BONDS> 569,466
0
0
<COMMON> 0
<OTHER-SE> (17,616)
<TOTAL-LIABILITY-AND-EQUITY> 624,594
<SALES> 128,659
<TOTAL-REVENUES> 128,659
<CGS> 71,505
<TOTAL-COSTS> 71,505
<OTHER-EXPENSES> 19,832
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,836
<INCOME-PRETAX> 11,976
<INCOME-TAX> 4,878
<INCOME-CONTINUING> 7,098
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,098
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
