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, 1996
Commission File Number 33-55538
SCOTIA PACIFIC HOLDING COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 74-2652575
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
P. O. BOX 712 95565
125 MAIN STREET, 2ND FLOOR (Zip Code)
SCOTIA, CALIFORNIA
(Address of Principal
Executive Offices)
Registrant's telephone number, including area code: (707) 764-2330
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Number of shares of common stock outstanding at August 1, 1996: 3,000
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.
INDEX
PART I. - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheet at June 30, 1996 and December 31, 1995 3
Statement of Income for the three and six months
ended June 30, 1996 and 1995 4
Statement of Cash Flows for the six months ended
June 30, 1996 and 1995 5
Condensed Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. - OTHER INFORMATION
Item 1. Legal Proceeding 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures S-1
BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,241 $ 21,542
Receivables:
Due from Pacific Lumber 15,217 4,471
Accrued interest 100 157
Prepaid timber harvesting costs and other
current assets 2,204 2,020
------------ ------------
Total current assets 29,762 28,190
Timber and timberlands, net of depletion of
$136,361 and $129,666 at June 30, 1996
and December 31, 1995, respectively 173,343 179,364
Property and equipment, net of accumulated
depreciation of $5,056 and $4,873 at
June 30, 1996 and December 31, 1995,
respectively 3,804 3,804
Deferred financing costs, net 15,330 15,954
Deferred income taxes 31,514 32,683
Restricted cash 31,067 31,367
------------ ------------
$ 284,820 $ 291,362
============ ============
LIABILITIES AND DEFICIENCY IN NET ASSETS
Current liabilities:
Due to Pacific Lumber $ 325 $ 825
Accrued interest 12,075 12,375
Other accrued liabilities 1,272 1,136
Long-term debt, current maturities 14,322 14,103
------------ ------------
Total current liabilities 27,994 28,439
Long-term debt, less current maturities 327,418 336,130
------------ ------------
Total liabilities 355,412 364,569
------------ ------------
Contingencies
Deficiency in net assets:
Common stock, $1.00 par value, 3,000 shares
authorized and issued 3 3
Excess of liabilities assumed and common
stock issued over assets
contributed (59,376) (59,376)
Cumulative activity since inception (11,219) (13,834)
------------ ------------
Total deficiency in net assets (70,592) (73,207)
------------ ------------
$ 284,820 $ 291,362
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Log sales to Pacific Lumber $ 37,206 $ 23,564 $ 57,266 $ 39,770
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 1,994 1,907 3,577 3,469
Depletion and depreciation 4,461 3,189 6,911 5,745
------------ ------------ ------------ ------------
6,455 5,096 10,488 9,214
------------ ------------ ------------ ------------
Operating income 30,751 18,468 46,778 30,556
Other income (expense):
Interest and other income 728 776 1,451 1,511
Interest expense (7,104) (7,353) (14,245) (14,742)
------------ ------------ ------------ ------------
Income before income taxes 24,375 11,891 33,984 17,325
Provision in lieu of income
taxes (10,005) (4,882) (13,949) (7,112)
------------ ------------ ------------ ------------
Net income $ 14,370 $ 7,009 $ 20,035 $ 10,213
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,035 $ 10,213
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision in lieu of income taxes 13,949 7,112
Depletion and depreciation 6,911 5,745
Amortization of deferred financing
costs 624 571
Increase in other accrued liabilities 136 291
Increase in receivables (10,689) (6,142)
Decrease in accrued interest (300) (291)
Decrease in amounts due to Pacific
Lumber (500) (73)
Other (182) (41)
------------ ------------
Net cash provided by operating
activities 29,984 17,385
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets 32 -
Capital expenditures (924) (605)
------------ ------------
Net cash used for investing
activites (892) (605)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash withdrawals, net 300 77
Dividends paid (30,200) (14,600)
Principal payments on Timber Notes (8,493) (8,235)
------------ ------------
Net cash used for financing
activities (38,393) (22,758)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (9,301) (5,978)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,542 20,160
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,241 $ 14,182
============ ============
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Assumption of net tax liabilities by
Pacific Lumber $ 12,780 $ 5,880
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 13,921 $ 14,462
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
CONDENSED NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. GENERAL
The information contained in the following notes to the financial
statements is condensed from that which would appear in the annual
financial statements; accordingly, the financial statements included herein
should be reviewed in conjunction with the financial statements and related
notes thereto contained in the Annual Report on Form 10-K filed by Scotia
Pacific Holding Company (the "Company") with the Securities and Exchange
Commission for the fiscal year ended December 31, 1995 (the "Form 10-K").
Any capitalized terms used but not defined in the following Condensed Notes
to Consolidated Financial Statements have the same meaning given to them in
the Form 10-K. Accounting measurements at interim dates inherently involve
greater reliance on estimates than at year end. The results of operations
for the interim periods presented are not necessarily indicative of the
results to be expected for the entire year.
The financial statements included herein are unaudited; however,
they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary to present fairly the financial
position of the Company at June 30, 1996, the results of operations for the
three and six months ended June 30, 1996 and 1995 and cash flows for the
six months ended June 30, 1996 and 1995. Certain reclassifications of
prior period information have been made to conform to the current
presentation. The Company is a wholly owned subsidiary of The Pacific
Lumber Company ("Pacific Lumber"). Pacific Lumber is a wholly owned
indirect subsidiary of MAXXAM Group Inc. ("MGI") which is a wholly owned
subsidiary of MAXXAM Inc. ("MAXXAM").
2. RESTRICTED CASH
Restricted cash represents the amount deposited into an account
held by the Trustee under the indenture governing the Company's Timber
Notes.
At June 30, 1996 and December 31, 1995, cash and cash equivalents
also includes $11,327 and $19,742, respectively, which is restricted for
debt service payments on the succeeding note payment date for the Timber
Notes. In January 1996 and July 1996, the Company repaid $8,493 and
$5,610, respectively, of the aggregate principal amount outstanding on the
Timber Notes.
3. CONTINGENCIES
The Company's business is 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. While the Company
does not expect that compliance with such existing laws and regulations
will have a material adverse effect on its financial position, results of
operations or liquidity, the Company is subject to certain pending matters,
including the resolution of issues relating to the final designation of
critical habitat for the marbled murrelet (described below), which could
have a material adverse effect on the Company's financial position, results
of operations or liquidity. Moreover, the laws and regulations relating to
the Company's business are modified from time to time and are subject to
judicial and administrative interpretation. There can be no assurance that
certain pending or future governmental regulations, legislation or judicial
or administrative decisions would not materially and adversely affect the
Company or its ability to sell logs or timber.
In May 1996, the U.S. Fish and Wildlife Service (the "USFWS")
published its final designation of critical habitat for the marbled
murrelet ("Final Designation"), designating over four million acres as
critical habitat for the marbled murrelet. Although nearly all of the
designated habitat is public land, approximately 25,000 acres of the
Company's (privately owned) timberlands are included in the Final
Designation, the substantial portion of such 25,000 acres being young
growth timber. Pacific Lumber's wildlife surveys to date (based upon
current survey protocols) have indicated that the Company has approximately
1,200 acres of Company Timber which is occupied marbled murrelet habitat, the
bulk of it falling within the area of the Company's Timberlands covered by
the Final Designation. In order to mitigate the impact of the Final
Designation, particularly with respect to timberlands occupied by the marbled
murrelet, Pacific Lumber has attempted over the last few years to develop a
habitat conservation plan for the marbled murrelet (the "Murrelet HCP").
The USFWS has given unfavorable responses to Pacific Lumber's Murrelet HCP
efforts. For this reason and a variety of others, Pacific Lumber and its
subsidiaries, including the Company, have filed an action alleging that
certain portions of the Company's Timberlands have been "taken" and seeking
just compensation (see Part II, Item 1, "Legal Proceedings--Timber Harvesting
Litigation").
It is impossible for the Company to determine the potential
adverse effect of the Final Designation on the Company's financial
position, results of operations or liquidity until such time as the related
regulatory and legal issues are fully resolved. However, if the Company is
unable to harvest, or is severely limited in harvesting, on timberlands
designated as marbled murrelet critical habitat, such effect could be
material. 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 various other species listed as threatened or endangered
under the federal Endangered Species Act and/or the California Endangered
Species Act and to designate critical habitat for such species. It is
uncertain what impact, if any, such listings and/or designations of
critical habitat would have on the Company's financial position, results of
operations or liquidity.
In 1994, the California Board of Forestry ("BOF") 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. Pacific Lumber is required to submit, by
October 1996, a plan setting forth, among other things, its Projected
Annual Growth. Pacific Lumber has not completed its analysis of the
projected productivity of its timberlands (including enhancements to
productivity which could be achieved by a variety of methods) and the
Company 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 Pacific Lumber to reduce its timber
harvest in future years from the average annual harvest that it has
experienced in recent years (including that relating to the Company's
timberlands). The Company and Pacific Lumber believe that they would be
able to mitigate the effect of any required reduction in harvest level by
acquisitions of additional timberlands, although there can be no assurance
that they would be able to do so. 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
California Department of Forestry ("CDF") and the BOF regarding the CDF's
and the BOF'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 certain of the
Company's THPs. In addition, lawsuits are pending which seek to prevent
the Company from implementing certain of its approved THPs and other
harvesting operations. These challenges have severely restricted Pacific
Lumber'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
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 THPs are likely to occur in the future,
particularly with respect to 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 financial position, results of operations or liquidity. It is,
however, impossible to predict the future nature or degree of such challenges
or their ultimate impact on the Company's financial position, results of
operations or liquidity.
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 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
financial position, results of operations or liquidity.
4. DEFICIENCY IN NET ASSETS
A reconciliation of the cumulative activity component of the
Company's Deficiency in Net Assets is as follows:
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
1996
------------
<S> <C>
Balance at beginning of period $ (13,834)
Net income 20,035
Assumption of net tax liabilities by Pacific Lumber 12,780
Dividends paid (30,200)
------------
Balance at end of period $ (11,219)
============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the response to
Part I, Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any
capitalized terms used but not defined in this Item have the same meaning
given to them in the Form 10-K.
RESULTS OF OPERATIONS
In order to take account of the relative values of the species
and categories of timber included in the Company Timber, the Mbfe concept
was developed for use in structuring the Timber Notes. Under the Mbfe
concept, one thousand board feet, net Scribner scale, of residual old
growth redwood timber equates to one Mbfe. One thousand board feet, net
Scribner scale, of each other species and category of timber included in
the Company Timber was assigned a value in Mbfe equal to a fraction of an
Mbfe. This fraction was generally determined by dividing the SBE Price (as
defined below) applicable to such species and category for the first half
of 1992 by the SBE Price applicable to residual old growth redwood for the
first half of 1992.
The Master Purchase Agreement generally contemplates that all
sales of logs by the Company to Pacific Lumber will be at a price which
equals or exceeds the applicable 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 (the "SBE Price"). The
Harvest Value Schedule is published by the California State Board of
Equalization at six month intervals for purposes of computing yield taxes
imposed on the harvesting of timber. SBE Prices are established by the
State of California for tax purposes and are intended by the taxing
authorities to represent average actual log prices (adjusted for an
estimated timber industry inflation factor) between unrelated parties
during the approximate twenty-four month period ended sixty days prior to
the date such SBE Prices are published. SBE Prices may not necessarily be
representative of actual prices that would be realized from unrelated
parties at subsequent dates.
Logging operations on the Company's timberlands are highly
seasonal. Logging activity is normally significantly higher in the months
of April through November than in the months of December through March.
Management expects that the Company's revenues and cash flows will continue
to reflect that seasonality.
Log sales to Pacific Lumber
Net sales from logs were $37.2 million and $23.6 million for the
second quarter of 1996 and 1995, respectively. The volume of log
deliveries for such periods represented approximately 54,000 Mbfe and
39,600 Mbfe, respectively. Net sales from logs were $57.3 million and
$39.8 million for the six months ended June 30, 1996 and 1995,
respectively. The volume of log deliveries for such periods represented
approximately 83,700 Mbfe and 68,300 Mbfe, respectively. The increase in
revenues for the quarter and six months ended June 30, 1996 compared to the
same periods in 1995 is due to a higher volume of log deliveries and an
approximate 15% increase in average realized prices (see "--Trends").
Operating income
Operating income was $30.8 million and $18.5 million for the
second quarter of 1996 and 1995, respectively. Operating income was $46.8
million and $30.6 million for the six months ended June 30, 1996 and 1995,
respectively. These increases were primarily due to the increases in log
sales, as discussed above.
Income before income taxes
Income before income taxes was $24.4 million and $11.9 million
for the second quarter of 1996 and 1995, respectively. Income before
income taxes was $34.0 million and $17.3 million for the six months ended
June 30, 1996 and 1995, respectively. These increases were primarily due
to the increases in operating income.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
In January 1996 and July 1996, the Company repaid approximately
$8.5 million and $5.6 million, respectively, of the aggregate principal
amount outstanding on the Timber Notes in accordance with Scheduled
Amortization.
The Company paid $30.2 million of dividends to Pacific Lumber
during the six months ended June 30, 1996. At June 30, 1996, the Indenture
permitted the payment of $6.7 million of dividends which were paid on July
22, 1996.
TRENDS
The Company's business is 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. While the Company
does not expect that compliance with such existing laws and regulations
will have a material adverse effect on its financial position, results of
operations or liquidity, the Company is subject to certain pending matters,
including the resolution of issues relating to the Final Designation of
critical habitat for the marbled murrelet, which could have a material
adverse effect on the Company's financial position, results of operations
or liquidity. Moreover, the laws and regulations relating to the Company's
business are modified from time to time and are subject to judicial and
administrative interpretation. There can be no assurance that certain
pending or future governmental regulations, legislation or judicial or
administrative decisions would not materially and adversely affect the
Company or its ability to sell logs or timber. See also Note 3 of the
Condensed Notes to Financial Statements set forth in Part I, Item and Part
II, Item 1. "Legal Proceedings--Timber Harvesting Litigation" for further
information, including a government takings action recently filed the
Company and additional takings claims which could be filed by Pacific
Lumber and its subsidiaries, including the Company.
Judicial or regulatory actions adverse to the Company, increased
regulatory delays and inclement weather in northern California,
independently or collectively, could impair Pacific Lumber's ability to
conduct normal timber harvesting operations on the Company's timberlands.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Form 10-K and Part II, Item 1
of the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1996 (the "Form 10-Q") for information concerning material
legal proceedings with respect to the Company. The following material
developments have occurred with respect to such legal proceedings.
TIMBER HARVESTING LITIGATION
In connection with the Marbled Murrelet action, on May 7, 1996,
the U. S. Ninth Circuit Court of Appeals reversed the preliminary
injunction order concerning harvesting pursuant to exemptions for forest
health. In addition to appealing the preliminary injunction issued on
April 3, 1996 preventing harvesting on eight THPs to the extent each
relies on the Owl Plan, Pacific Lumber has obtained reapproval of two of
the THPs without reliance on the Owl Plan and has received confirmation
from the Court that these two THPs are not subject to the preliminary
injunction. Pacific Lumber continues to review and seek reapproval of the
THPs covered by the April 3, 1996 preliminary injunction.
In connection with The Pacific Lumber Company, et al. v. The
United States of America, the Court has granted the parties' agreed motion
to stay this action until September 15, 1996 in order to negotiate a
possible settlement involving approximately 4,500 acres of Pacific Lumber's
timberlands (none of which is owned by the Company), including a 3,000 acre
stand of virgin old growth timber often referred to as the "Headwaters
Forest." Settlement discussions have commenced. On July 23, 1996, EPIC
and the Sierra Club filed a motion to intervene in this lawsuit.
In connection with Lost Coast League v. The California Department
of Forestry, et al., on June 19, 1996, the Court dissolved the injunction
concerning the THP and awarded costs to the defendants. On June 28, 1996,
the Court of Appeal reinstated the injunction on the THP, pending review.
On July 22, 1996, the Court of Appeal dissolved the injunction and denied
plaintiff's appeal.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
27 Financial Data Schedule
B. REPORTS ON FORM 8-K:
None.
SIGNATURES
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.
SCOTIA PACIFIC HOLDING COMPANY
Date: August 13, 1996 By: 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 12,241
<SECURITIES> 0
<RECEIVABLES> 15,217
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,762
<PP&E> 8,860
<DEPRECIATION> 5,056
<TOTAL-ASSETS> 284,820
<CURRENT-LIABILITIES> 13,672
<BONDS> 341,740
0
0
<COMMON> 3
<OTHER-SE> (70,595)
<TOTAL-LIABILITY-AND-EQUITY> 284,820
<SALES> 57,266
<TOTAL-REVENUES> 57,266
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,488
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,245
<INCOME-PRETAX> 33,984
<INCOME-TAX> 13,949
<INCOME-CONTINUING> 20,035
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,035
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
