UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
---------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1996 33-55538
SCOTIA PACIFIC HOLDING COMPANY
(Exact name of Registrant as Specified in its Charter)
DELAWARE 74-2652575
(State or other (I.R.S. Employer
jurisdiction Identification Number)
of incorporation or
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
---------------
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, 1997: 3,000
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:
Not applicable.
---------------
PART I
ITEM 1. BUSINESS
GENERAL
Scotia Pacific Holding Company (the "Company" or "Scotia
Pacific") is the owner of commercial timber properties in northern
California (the "Company Timberlands"). The Company was organized as a
special purpose Delaware corporation to facilitate the sale in March 1993
of $385.0 million aggregate principal amount of 7.95% Timber Collateralized
Notes due 2015 (the "Timber Notes"). The Company is a wholly owned
subsidiary of The Pacific Lumber Company ("Pacific Lumber"). Pacific
Lumber has been in continuous operation for over 125 years. On the same
day the offering of Timber Notes was completed (the "Transfer Date"),
Pacific Lumber transferred the Company Timberlands, its geographical
information system ("GIS") and certain other assets to the Company solely
in exchange for the assumption of certain of Pacific Lumber's public
indebtedness and all of the Company's common stock. Substantially all of
the Company's assets serve as collateral for the Timber Notes.
Pacific Lumber is an indirect wholly owned subsidiary of MAXXAM
Group Inc. ("MGI"). MGI is a wholly owned subsidiary of MAXXAM Group
Holdings Inc. ("MGHI") which in turn is a wholly owned subsidiary of MAXXAM
Inc. ("MAXXAM"). As used herein, the terms "MGHI," "MGI," "Pacific Lumber"
or "MAXXAM" refer to the respective companies and their subsidiaries,
unless otherwise noted or the context indicates otherwise.
This Annual Report on Form 10-K contains statements which
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a
number of places (see Item 1. "Business--Regulatory and Environmental
Factors," Item 3. "Legal Proceedings," and Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Financial
Condition and Investing and Financing Activities" and "Trends"). 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 report identifies 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.
COMPANY TIMBERLANDS
The Company Timberlands consist of approximately 179,000 acres of
virtually contiguous commercial timber property located in Humboldt County
along the northern California coast which has very favorable soil and
climate conditions. Pacific Lumber has the exclusive right to harvest (the
"Pacific Lumber Harvest Rights") approximately 8,000 non-contiguous acres
of the Company Timberlands consisting substantially of virgin old growth
redwood and virgin old growth Douglas-fir timber located on numerous small
parcels throughout the Company Timberlands (the "Excluded Timber").
Pacific Lumber is responsible, at its own expense, for the operation and
management of the Excluded Timber. The timber on the Company Timberlands
which is not subject to the Pacific Lumber Harvest Rights is referred to
herein as the "Company Timber." Pacific Lumber harvests and purchases from
the Company all or substantially all the logs harvested from the Company
Timberlands. See "--Harvesting Practices."
Timber generally is categorized by species and the age of a tree
when it is harvested. "Old growth" trees are often defined as trees which
have been growing for approximately 200 years or longer, and "young growth"
trees are those which have been growing for less than 200 years. "Residual
old growth" trees are located in timber stands which have been partially
harvested in the past. "Virgin" old growth trees are located in timber
stands that have not previously been harvested. The forest products
industry grades lumber into various classifications according to quality.
The two broad categories within which all grades fall based on the absence
or presence of knot are called "upper" and "common" grades, respectively.
Old growth trees have a higher percentage of upper grade lumber than young
growth trees.
The Company Timber consists of approximately 2.8 million "Mbfe"
of timber (by volume). 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 under "--Harvesting Practices") 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 Company Timber consists primarily of young growth and
residual old growth redwood and Douglas-fir timber. A small portion of the
Company Timber is currently sub-merchantable, but mature enough to be
measured in Mbfe units. In addition, substantial quantities of
sub-merchantable trees exist on the Company Timberlands which are not yet
mature enough to be measured in Mbfe units. The table below sets forth, on
an Mbfe basis, the approximate composition of the merchantable Company
Timber on the Company Timberlands as of the most recent date available,
January 1, 1997. The estimates of the volume of timber comprising the
Company Timber are based on a timber cruise performed in 1986 of all of
Pacific Lumber's properties, as adjusted to reflect actual harvest levels
since the cruise and estimated growth rates of the Company Timber.
<TABLE>
<CAPTION>
Percentage of
Merchantable
Timber
Ownership
------------------
<S> <C>
Redwood:
Residual old growth 28%
Young growth 57%
----
Total redwood 85%
----
Douglas-fir:
Residual old growth 6%
Young growth 8%
----
Total Douglas-fir 14%
Other types of timber 1%
----
Total 100%
====
</TABLE>
Redwood is commercially grown only along the northern coast of
California and possesses certain unique characteristics that 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. Douglas-fir 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.
Pacific Lumber engages in extensive efforts to supplement the
natural regeneration of the Company Timberlands and increase the amount of
timber on its timberlands. The Company is required to comply with
California forestry regulations regarding reforestation, which generally
require that an area be reforested to specified standards within an
established period of time. Pursuant to the Services Agreement described
below (see "--Operation of the Company Timberlands"), Pacific Lumber is
required to conduct regeneration activities on the Company Timberlands on
behalf of the Company. During 1996, Pacific Lumber planted an estimated
456,000 redwood and Douglas-fir seedlings on timberlands containing Company
Timber. Pacific Lumber also actively engages in efforts to establish
timberlands from open areas such as pasture land.
OPERATION OF COMPANY TIMBERLANDS
On the Transfer Date, the Company acquired from Pacific Lumber a
portion of Pacific Lumber's forestry department (including several
registered professional foresters) and the GIS, subject to certain rights
of concurrent use by Pacific Lumber. An extensive network of roads
throughout the Company Timberlands allows the Company's foresters access to
employ forest stewardship techniques and facilitates the transportation of
logs harvested from the Company Timber. The Company's foresters are
responsible for providing a number of forest stewardship techniques,
including protecting the forest from forest fires, erosion, insects and
other damage, overseeing replanting activities and monitoring environmental
and regulatory compliance. The Company's personnel are also responsible
for preparing timber harvesting plans ("THPs") and updating the information
contained in the Company's GIS. See "--Harvesting Practices" for a
description of the Company's GIS and the THP preparation process. The
Company also employs wildlife biologists and a fisheries biologist.
Pursuant to a Services Agreement entered into on the Transfer
Date (the "Services Agreement"), the Company relies on Pacific Lumber to
provide operational, management and related services not performed by its
own employees with respect to the Company Timberlands containing the
Company Timber. Such services include the furnishing of all equipment,
personnel and expertise not within the Company's possession and reasonably
necessary for the operation and maintenance of such timberlands, taking
into consideration soil conditions, stand arrangements and other factors
relevant to cultivation and harvesting of the Company Timber. In
particular, Pacific Lumber is required to regenerate Company Timber,
prevent and control loss of Company Timber by fires, maintain a system of
roads throughout the Company Timberlands, take measures to control the
spread of disease and insect infestation and comply with environmental laws
and regulations. Pacific Lumber is also required to provide all services
under the Services Agreement in a manner consistent in all material
respects with the past practices of Pacific Lumber with respect to its own
timber properties, with such changes (a) as, in the reasonable judgment of
Pacific Lumber, are consistent with then current applicable industry
standards or the practices of Pacific Lumber with respect to its then
current timber resources, or (b) do not, individually or in the aggregate,
have a material adverse effect on the Company and its operations. As
compensation for the services provided by Pacific Lumber pursuant to the
Services Agreement, the Company pays a monthly fee which is adjusted
annually based upon a specified government index relating to wood products.
The fee was approximately $112,000 per month in 1996 and is expected to be
approximately $115,200 per month in 1997.
The Company also entered into an Additional Services Agreement
(the "Additional Services Agreement") with Pacific Lumber on the Transfer
Date whereby the Company agreed to provide to Pacific Lumber (and its
subsidiaries) a variety of services. These services include (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 Pacific Lumber's own timber properties, and (c) assisting
Pacific Lumber with its statutory and regulatory compliance. Pacific
Lumber pays the Company a fee for such services equal to the actual cost of
providing such services, as determined in accordance with generally
accepted accounting principles.
HARVESTING PRACTICES
The ability of the Company to sell logs will depend, in part,
upon its ability to obtain regulatory approval of THPs. THPs are required
to be developed by registered professional foresters and must be filed
with, and approved by, the California Department of Forestry ("CDF") prior
to the harvesting of timber. Each THP is designed to comply with
applicable 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. See "--Regulatory and Environmental Factors"
for information regarding a critical habitat designation, sustained yield
regulations and similar matters with respect to, among other things, the
Company Timberlands.
The GIS contains information regarding numerous aspects of the
Company Timberlands, including timber type, tree class, wildlife data,
roads, rivers and streams. Subject to the terms of the Services Agreement,
Pacific Lumber will, to the extent necessary, provide the Company with
personnel and technical assistance to assist the Company in updating,
upgrading and improving the GIS and the other computer equipment acquired
by the Company. By carefully monitoring and updating this data base and
conducting field studies, the Company's foresters, with the assistance (if
required) of Pacific Lumber pursuant to the Services Agreement, are better
able to develop detailed THPs addressing the various regulatory
requirements. 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 employs a variety of well-accepted methods of
selecting trees for harvest. These methods, which are designed to achieve
optimal regeneration are referred to as "silvicultural systems" in the
forestry profession. Silvicultural systems range from very light thinnings
aimed at enhancing the growth rate of retained trees to clear cutting which
results in the harvest of all trees in an area and replacement with a new
forest stand. In between are a number of varying levels of partial
harvests which can be employed. The Company's foresters select the
appropriate silvicultural system for any given site based upon the specific
conditions of that site. The systems chosen are those which will most
closely emulate those natural processes that result in the cycling of
natural forest stands. Due to the magnitude of its timberlands and
conservative application of silvicultural systems, Pacific Lumber has
historically conducted harvesting operations on approximately 5% of its
timberlands in any given year.
The number of the Company's approved THPs and the amount of
timber covered by such THPs varies significantly from time to time,
depending upon seasonality and other factors. Timber covered by an
approved THP is typically harvested over more than one year. The
indenture covering the Timber Notes (the "Indenture") requires the Company
to use its best efforts (consistent with the past practices of Pacific
Lumber and prudent business practices) to maintain a number of pending THPs
which, together with THPs previously approved, would cover rights to
harvest a sufficient quantity of Company Timber adequate to pay accrued
interest and principal amortization generally equivalent to Rated
Amortization moved forward by two years (see Note 2 to the Financial
Statements of the Company contained in Item 8 of this Report for a
description of Rated Amortization). Pursuant to the Services Agreement,
Pacific Lumber provides a variety of services to the Company in connection
with the preparation, filing and performance of THPs by the Company,
including defending any legal challenge to a THP.
After obtaining an approved THP covering Company Timber, the
Company offers for sale the logs to be harvested pursuant to such THP.
Although the Company could sell logs to third parties, the Company
currently derives and expects to continue to derive all of its revenue from
the sale of logs to Pacific Lumber pursuant to a Master Purchase Agreement
(the "Master Purchase Agreement") and related log purchase agreements. The
Company and Pacific Lumber enter, pursuant to the terms of the Master
Purchase Agreement, into a separate log purchase agreement in connection
with each approved THP providing for the sale to Pacific Lumber of the logs
harvested from the Company Timber covered by such THP. However, the timing
and amount of log purchases by Pacific Lumber will be affected by factors
outside the control of the Company, including regulatory and environmental
factors, the financial condition of Pacific Lumber, Pacific Lumber's own
supply of timber and its ability to harvest such timber, and the supply and
demand for lumber products (which, in turn, will be influenced by demand in
the housing, construction and remodeling industries). As Pacific Lumber
purchases logs from the Company pursuant to the Master Purchase Agreement,
Pacific Lumber is responsible, at its own expense, for harvesting and
removing the standing Company Timber covered by approved THPs, and the
purchase price is therefore based upon "stumpage prices." Title to, and
the obligation to pay for, harvested logs does not pass to Pacific Lumber
until the logs are transported to Pacific Lumber's log decks and measured.
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 the purpose 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 are not necessarily
representative of actual prices that would be realized from unrelated
parties at subsequent dates.
OTHER PRINCIPAL AGREEMENTS
On the Transfer Date, Pacific Lumber, the Company and Salmon
Creek Corporation ("Salmon Creek," a wholly owned subsidiary of Pacific
Lumber) 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 their
respective properties and their respective businesses. In addition, the
Company and Pacific Lumber entered into an Environmental Indemnification
Agreement pursuant to which Pacific Lumber agreed to indemnify the Company
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 Company
Timberlands. In particular, Pacific Lumber is liable with respect to any
contamination which occurred on the Company Timberlands prior to the
Transfer Date.
EMPLOYEES
As of March 1, 1997, the Company employed 40 persons, 8 of whom
were registered professional foresters and none of whom are covered by a
collective bargaining agreement.
PRINCIPAL EXECUTIVE OFFICES
The principal executive offices of the Company are located at 125
Main Street, 2nd Floor, P.O. Box 712, Scotia, California 95565. The
telephone number of the Company is (707) 764-2330.
MISCELLANEOUS
For information concerning the business and financial condition
of Pacific Lumber, see the Annual Report on Form 10-K of Pacific Lumber for
the fiscal year ended December 31, 1996. Such report is available at no
charge by writing to the following address: The Pacific Lumber Company,
Shareholder Services Department, 5847 San Felipe, Suite 2600, P.O. Box
572887, Houston, Texas 77257-2887.
REGULATORY AND ENVIRONMENTAL FACTORS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.
Regulatory and environmental issues play a significant role in
the Company's operations. 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. Moreover, these laws and regulations are modified from time to
time and are subject to judicial and administrative interpretation. 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 and Federal Clean Water Act require, in part, that the
Company's operations be conducted so as to reasonably protect the water
quality of nearby rivers and streams. The Company is subject to certain
pending matters described below which could have a material adverse effect
on its consolidated financial position, results of operations or liquidity.
There can be no assurance that certain pending or future legislation,
governmental regulations or judicial or administrative decisions will not
have a material adverse effect on the Company.
In March 1992, the marbled murrelet was approved for listing as
endangered under the CESA. In October 1992, the United States Fish and
Wildlife Service ("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. The Company has incorporated, and will
continue to incorporate as required, mitigation measures into its THPs to
protect and maintain habitat for the marbled murrelet on its timberlands.
The BOF requires the Company and Pacific Lumber to conduct pre-harvest
marbled murrelet surveys to provide certain site specific mitigations in
connection with THPs covering virgin old growth timber and unusually dense
stands of residual old growth timber. Such surveys can only be conducted
during a portion of the murrelet's nesting and breeding season, which
extends from April through mid-September. 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 to date
(based upon current survey protocols) have indicated that the Company has
approximately 1,200 acres (all containing virgin or residual old growth
timber) of Company Timber which are occupied marbled murrelet habitat. The
Company is unable to predict when or if it will be able to harvest this
acreage.
In May 1996, the USFWS published its final designation of
critical habitat for the marbled murrelet (the "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 timberlands are included in the
Final Designation, the substantial portion of such acreage being young
growth timber. The bulk of the Company's 1,200 acres of occupied marbled
murrelet habitat falls within the 25,000 acres of the Company's timberlands
included in 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 over the last few years has attempted to
develop a habitat conservation plan for the marbled murrelet (the "Murrelet
HCP"). Due to, among other things, the unfavorable response of the USFWS
to Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its
subsidiaries, including the Company, filed two actions (the "Takings
Litigation") alleging that certain portions of their timberlands have been
"taken" and seeking just compensation. See Item 3. "Legal Proceedings" for
a description of the Takings Litigation. Pursuant to an agreement entered
into by Pacific Lumber, MAXXAM, the United States and the State of
California on September 28, 1996 (the "Headwaters Agreement") and described
below under "--Headwaters Agreement," 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 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, the National Marine
Fisheries Service has announced that by April 25, 1997 it will make a final
determination whether to list the coho salmon under the ESA in northern
California, including, potentially, 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 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.
The sustained yield plan ("SYP") must demonstrate that the average annual
harvest over any rolling ten-year period will not exceed the LTSY harvest
level and that Pacific Lumber's 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, Pacific Lumber submitted to the
CDF a proposed SYP covering all of the timberlands of Pacific Lumber and
its subsidiaries. The proposed SYP sets forth an LTSY harvest level
substantially the same as Pacific Lumber's average annual timber harvest
over the last six years. The proposed SYP also indicates that Pacific
Lumber'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, Pacific Lumber'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
(as defined below under "--Headwaters Agreement") will permit Pacific
Lumber 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, Pacific Lumber 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 Pacific Lumber to reduce its timber harvest in future years from
the harvest levels set forth in the proposed SYP (including that relating
to the Company Timber). The Company believes that Pacific Lumber would be
able to mitigate the effect of any required reduction in harvest level by
acquisitions of additional timberlands (and making corresponding amendments
to Pacific Lumber's SYP); however, there can be no assurance that they
would be able to do so and the amount of such acquisitions would be limited
by Pacific Lumber'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 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 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
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 financial position, results of
operations or liquidity.
In early 1997, the Environmental Protection Agency ("EPA") entered
into a consent decree agreeing to establish limits on sedimentation,
temperature and other factors (i.e., non-point source total maximum daily
loadings, "TMDL") under the Federal Clean Water Act for seventeen northern
California rivers and certain of their tributaries, including rivers within
the Company's timberlands. The TMDL scheme will be primarily aimed at
protecting fish habitat. It is impossible to predict the ultimate impact
this consent decree will have on the Company's consolidated financial
position, results of operations or liquidity.
In June 1990, 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 and Pacific Lumber's timberlands. The Company has
developed and the USFWS has given its full concurrence to a northern
spotted owl management plan (the "Federal Owl Plan"). The Federal Owl Plan,
as amended from time to time, is currently applicable through 1999 and the
USFWS expressed its agreement that operations consistent with the Federal
Owl Plan would not result in the taking of any owls. Pacific Lumber has
also developed a Spotted Owl Resource Plan (the "State Owl Plan"), and the
California Department of Fish and Game has expressed its agreement that
operations consistent with the State Owl Plan would not result in the
taking of any owls. By incorporating the Federal Owl Plan or the State Owl
Plan into each THP filed with the CDF, the Company is able to expedite the
approval time with respect to its THPs. The plaintiffs in the Marbled
Murrelet action have requested and received injunctive relief with respect
to certain THPs involving the Federal Owl Plan. See Item 3. "Legal
Proceedings." 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 or impact on the Company.
Laws, regulations and related judicial and administrative
interpretations 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, air and
water quality, and the restriction, regulation and administration of timber
harvesting practices. It is impossible to predict the content of any such
bills, the likelihood of any of the bills passing or the impact of any of
these bills on the future liquidity, financial position or operating
results 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 impossible, however, to assess the effect of such matters
on the Company's financial position, operating results or liquidity.
HEADWATERS AGREEMENT
On September 28, 1996, Pacific Lumber (on behalf of itself, its
subsidiaries and affiliates) and MAXXAM (collectively, "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 certain timberlands of
Pacific Lumber.
The Headwaters Agreement requires the parties to use their
respective best, good faith efforts to achieve certain items (the
"Specified Items"). The Specified Items include the transfer to the United
States and California of approximately 5,600 acres of Pacific Lumber's
timberlands commonly referred to as the Headwaters Forest and the Elk Head
Springs Forest and related buffer zones (respectively, the "Headwaters
Forest" and the "Elk Head Forest" and, 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. The remaining acreage is owned by the
Company (Pacific Lumber 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 both
the United States and California having an aggregate fair market value of
$300 million and (b) 7,755 acres of adjacent timberlands to be acquired by
the United States and California from a third party (the "Elk River
Timberlands"). The United States and California would also acquire and
retain an additional 1,900 acres of timberlands from such third party. An
additional Specified Item is the expedited development and submission by
Pacific Lumber and processing by the United States of an incidental take
permit ("Permit") to be based upon a habitat conservation plan for
multiple species ("Multi-Species HCP") covering (a) the timberlands and
timber harvesting rights which Pacific Lumber will own after consummation
of the Headwaters Agreement (the "Resulting Pacific Lumber Timber
Property") and (b) the Headwaters Timberlands and the 1,900 acres of Elk
River Timberlands retained by the United States and California (both as
conserved habitat). The agreement also requires expedited processing by
California of an SYP covering the Resulting Pacific Lumber Timber Property.
The Headwaters Agreement contains various provisions regarding the
processing of the Multi-Species HCP, the Permit and the SYP. The Specified
Items also require, among other things, dismissal with prejudice at closing
of the Takings Litigation pending against the United States and California.
See Item 3. "Legal Proceedings." Pursuant to the Headwaters Agreement, the
parties have stayed the Takings Litigation, subject to certain rights of the
parties to terminate the stay.
The Headwaters Agreement also requires the United States and/or
California to provide to Pacific Lumber a list of property interests owned
or controlled by the United States and/or California meeting certain
conditions, including that they have a good faith estimated fair market
value equal to or in excess of $300 million. On December 5, 1996, the
United States and California each furnished a list of properties for
Pacific Lumber's review and approval. Neither list was accompanied by the
requisite background information, although both lists did indicate that
additional information would be made available. The list of United States
properties consisted of oil and gas interests in Kern County, California,
approximately 3,000 acres of young growth timberlands in Humboldt,
Mendocino and Trinity Counties in California, and surplus acreage next to a
federal office building in Laguna Niguel, California.
In February 1997, after full and careful consideration, Pacific
Lumber notified California that its Presented Properties were not
acceptable due to, among other things, various physical problems and
encumbrances on the properties, certain properties having been withdrawn by
the state and public opposition to the transfer of some of the properties.
Pacific Lumber also advised California that it should proceed with the
steps necessary to assure that California can provide cash for its portion
of the consideration to be paid to Pacific Lumber. There have been ongoing
discussions between the Pacific Lumber Parties and the United States
regarding the properties or other consideration to be furnished by the
United States.
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 the period of time during which these closing
conditions must be met to February 17, 1998. The extension is, however,
subject to the achievement of certain milestones toward completion of the
Headwaters Agreement. The parties have agreed to execute an amendment to
the Headwaters Agreement evidencing these modifications.
Closing of the Headwaters Agreement is subject to various
conditions, including (a) completion of the Specified Items, (b) approval
of a Multi-Species HCP and SYP and issuance of the Permit, each in form and
substance satisfactory to Pacific Lumber, (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) approval by the boards of directors of the applicable
Pacific Lumber Parties. The Headwaters Agreement also provides that the
parties will cooperate and act in good faith to preserve diligently the
Headwaters Agreement, the Multi-Species HCP, the Permit and the SYP against
third party challenge. 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.
ITEM 2. PROPERTIES
A description of the Company's properties is included under Item
1. above.
ITEM 3. LEGAL PROCEEDINGS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.
Various actions, similar to each other, have been filed against
the Company, Pacific Lumber and its subsidiaries, as well as MAXXAM,
various state officials and others, alleging, among other things,
violations of the Forest Practice Act, CEQA, ESA, CESA and/or related
regulations. These actions seek to prevent the Company and Pacific Lumber
from harvesting certain of their THPs and conducting certain other timber
operations.
On September 15, 1995, an action entitled Marbled Murrelet, et
al. v. Bruce Babbitt, et al. (No. C-95-3261) (the "Marbled Murrelet
action") was filed in the U.S. District Court for the Northern District of
California. This action relates to, among other things, exemptions for
forest health which Pacific Lumber and its subsidiaries had previously
filed covering their entire timberlands. These exemptions allow Pacific
Lumber to harvest dead, dying or diseased trees ("exempt harvesting
operations"). As amended, the complaint alleges, among other things,
violations of the ESA, the National Environmental Protection Act ("NEPA")
and the Administrative Procedures Act ("APA"). Plaintiffs claim, among
other things, that the exempt harvesting operations will contribute to the
destruction of habitat for the marbled murrelet and the northern spotted
owl. After the U.S. Ninth Circuit Court of Appeals reversed a preliminary
injunction order granted by the trial court enjoining the exempt harvesting
operations, the plaintiffs asked for leave to amend their pleadings. On
April 3, 1996, the trial court granted a preliminary injunction preventing
harvesting on eight already-approved THPs to the extent that they rely on
the Federal Owl Plan. In addition to appealing the preliminary injunction,
Pacific Lumber has obtained regulatory reapproval of seven of the eight
enjoined THPs without reliance on the Federal Owl Plan and has, to date,
confirmed with the trial court that six of those THPs are no longer subject
to the preliminary injunction. On November 4, 1996, the U.S. Ninth Circuit
Court of Appeals heard oral arguments concerning Pacific Lumber's appeal
but has not yet rendered a decision on this matter. In January 1997, the
trial court dismissed plaintiffs' claims that Pacific Lumber had and was
causing "takes" of the marbled murrelet and northern spotted owl. The
Company does not believe this matter will have a material adverse effect on
the Company's financial position, results of operations or liquidity. See
"Business--Regulatory 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.
On May 7, 1996, the Company, Pacific Lumber, and Salmon Creek
filed a lawsuit entitled The Pacific Lumber Company, et al. v. The United
States of America (No. 96-257L) in the United States Court of Federal
Claims. The suit alleges that the federal government has "taken" over
3,800 acres of Pacific Lumber's old growth timberlands (including
approximately 900 acres of the Company's timberlands on which Pacific
Lumber has harvesting rights) through its application of the ESA. The
Company, Pacific Lumber, and Salmon Creek seek constitutional "just
compensation" damages for the taking of these timberlands by the federal
government's actions. Salmon Creek has filed a similar action in the
Superior Court of Sacramento County with respect to eight acres of virgin
old growth timber. The Court in each of these actions (collectively, the
"Takings Litigation") has granted the parties' agreed motions to stay the
actions pursuant to the Headwaters Agreement. These actions would be
dismissed if the Headwaters Agreement is consummated. See Item 1.
"Business-- Headwaters Agreement" for a description of the Headwaters
Agreement.
The Company is involved in other claims, lawsuits and other
proceedings. 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 financial position, results of operations
or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
All of the Company's common stock is owned by Pacific Lumber.
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 cash dividends on its common stock in the amount of $76.9 million,
$59.0 million and $88.9 million in 1996, 1995 and 1994, respectively. As
of December 31, 1996, approximately $1.7 million of dividends could be paid
by the Company, which were paid in January 1997. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition and Investing and Financing Activities" and Note 2 to
the Financial Statements appearing in Item 8.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company is a special purpose corporation organized in
November 1992 to facilitate the offering of the Timber Notes and did not
conduct any operations prior to the issuance of the Timber Notes. The
following should be read in conjunction with the Company's Financial
Statements and the Notes thereto appearing in Item 8.
RESULTS OF OPERATIONS
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
Revenues from the sale of logs were $124.3 million and $106.8
million for the years ended December 31, 1996 and 1995, respectively. The
volume of log deliveries for such periods represented approximately 187,900
Mbfe and 172,500 Mbfe, respectively (as defined in Item 1. "Business--
Company Timberlands"). The increase in revenues was due to the higher
volume of log sales and an increase in average realized prices of 6.9%.
Average realized prices increased due to higher SBE prices.
Revenues from the sale of logs were $106.8 million and $134.8
million for the years ended December 31, 1995 and 1994, respectively. The
volume of log deliveries for such periods represented approximately 172,500
Mbfe and 187,800 Mbfe, respectively. The 1995 decrease in revenues was due
to the lower volume of log sales and a decrease in average realized prices
of 14%. Average realized prices declined due to changes in the composition
of the timber harvest, along with lower SBE prices for certain grades of
timber.
Operating income
Operating income was $101.3 million, $85.3 million and $110.2
million for the years ended December 31, 1996, 1995 and 1994, respectively.
The changes between the years are primarily a result of the factors
affecting revenues as described above. Operating income is net of a
provision for timber depletion and depreciation of property and equipment,
the estimated cost of yield taxes for the logs sold, administrative costs
and the costs for operational, management and related services provided by
Pacific Lumber in respect of the Company Timberlands pursuant to the
Services Agreement.
Income before income taxes
Income before income taxes was $76.0 million, $59.0 million and
$82.8 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The increase in 1996 over 1995 and the decrease in 1995 from
1994 was primarily due to the change in operating income between these
years. Income before income taxes represents the sum of operating income
and interest income on the funds deposited in a liquidity account (the
"Liquidity Account") and other required deposits, less interest expense,
including amortization of deferred financing costs on the Timber Notes.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.
Pursuant to the Indenture, the Company is not permitted to incur
any indebtedness for borrowed money other than the Timber Notes, and the
business activities of the Company are limited to the ownership and
operation of the Company's timber and timberlands and matters incidental
thereto.
Although the Company could sell logs or standing timber from its
timberlands to other purchasers, the Company derives all of its revenue
from the sale of logs to Pacific Lumber pursuant to the Master Purchase
Agreement and related log purchase agreements and expects to continue doing
so. The quantities and timing of log sales for logs harvested from the
Company's timberlands depend largely upon purchases of logs by Pacific
Lumber under the Master Purchase Agreement and related log purchase
agreements. The timing and amount of such purchases by Pacific Lumber may
be affected by factors outside the control of the Company, including
regulatory and environmental factors, the financial condition of Pacific
Lumber, Pacific Lumber's own supply of timber and its ability to harvest
such timber, and the supply and demand for lumber products (which, in turn,
will be influenced by demand in the housing, construction and remodeling
industries).
Revenues from the sale of the Company's logs or timber from the
Company's timberlands are deposited directly into a designated account (the
"Collection Account") maintained with the trustee under the Indenture.
Pursuant to the Indenture, an expense reserve (the "Expense Reserve") is
replenished each month on a specified day (generally the 20th day of each
month, referred to as the "Monthly Deposit Date") from the Collection
Account. Funds may be released from the Collection Account and the Expense
Reserve for, among other things, certain operating expenses (to the extent,
in certain cases, of the balance of the Expense Reserve). Amounts to be
utilized for payments on the Timber Notes generally are withdrawn from the
Collection Account on each Monthly Deposit Date, deposited into an account
(the "Payment Account"), and (if the Monthly Deposit Date is not also a day
on which a principal payment is due on the Timber Notes - a "Note Payment
Date") invested in Eligible Investments (as defined) until the next Note
Payment Date. The amount to be transferred from the Collection Account to
the Payment Account on each Monthly Deposit Date will (to the extent of
available cash) be calculated so that the amount in the Payment Account
will be sufficient to pay all accrued interest (and deficiency premiums if
applicable) on the Timber Notes to the Monthly Deposit Date and the
appropriate portion of principal amortization (and prepayment premiums, if
any) expected to be payable on the next Note Payment Date (or, if the
Monthly Deposit Date is also a Note Payment Date, on such Note Payment
Date). Amounts remaining in the Collection Account on each Monthly Deposit
Date after the required transfer of funds into the Payment Account may be
released to the Company free and clear of the lien and security interest of
the Deed of Trust.
On each Note Payment Date, the amounts on deposit in the Payment
Account will be utilized to make required payments on the Timber Notes (or
to make any required deposits, if any, to the Liquidity Account). Required
principal payments in excess of Rated Amortization (as defined in Note 2 to
the Financial Statements) on the Timber Notes will be due and payable only
to the extent of available cash in the Payment Account. However, if for
24 consecutive months, the amount transferred from the Collection Account
to the Payment Account is less than the Targeted Monthly Deposit Amount (as
defined), the Company will be required to make a payment into the Payment
Account in an amount equal to the difference between the Targeted Monthly
Deposit Amount in the last such month and the actual amount transferred
from the Collection Account to the Payment Account in such month. To the
extent funds on deposit in the Payment Account are inadequate to make
payments of interest (excluding interest on premiums) and Rated
Amortization when due, additional amounts will be drawn from the Liquidity
Account to the extent of the balance thereof. To the extent that amounts
on deposit in the Payment Account on a Note Payment Date exceed the
required payments on the Timber Notes (and any required deposits to the
Liquidity Account) on such Note Payment Date, such excess amounts may be
released to the Company free and clear of the lien and security interest of
the Deed of Trust.
The amortization of the Timber Notes is generally structured to
link, to the extent of available cash, the deemed depletion of the
Company's timber as a result of the harvest and sale of logs (or sales of
timber, if any) to the required amortization on the Timber Notes (See Note
2 to the Financial Statements). Regardless of the amount of timber
actually harvested and sold, if there is sufficient cash (which could be
available due to, among other things, favorable prices realized from
harvested timber), the Timber Notes will amortize at least as fast as
Capture Amortization (as defined). In any event, the Company is obligated
to pay the Rated Amortization due on any Note Payment Date. During 1995,
1996 and in January 1997, the Company repaid approximately $13.6 million,
$14.1 million and $8.7 million, respectively, of the aggregate principal
amount outstanding on the Timber Notes in accordance with Scheduled
Amortization (as defined in Note 2 to the Financial Statements).
The Company initially deposited $35.0 million in the Liquidity
Account and, as of December 31, 1996, the Liquidity Account had a balance
of $30.0 million. The balance in the Liquidity Account will be maintained
at the Required Liquidity Balance (as defined). Funds may be released from
the Liquidity Account to the extent that the balance in the Liquidity
Account exceeds the Required Liquidity Balance. The Required Liquidity
Balance will generally decline as principal payments are made on the Timber
Notes. The Liquidity Account is, except under certain limited
circumstances, only available to pay interest and Rated Amortization on the
Timber Notes if and to the extent that the Company does not have sufficient
cash in the Payment Account. The Liquidity Account is not available to
fund any premiums, interest on premiums or prepayment amounts (other than
Rated Amortization) in respect of the Timber Notes. During the years ended
December 31, 1996 and 1995, the Required Liquidity Balance decreased by
approximately $1.4 million and $1.0 million, respectively, and such amounts
have been released from the Liquidity Account.
Once the Company's debt service, operating and capital
expenditure requirements have been met, substantially all of the cash
released to the Company free of the lien and security interest of the Deed
of Trust is periodically distributed to Pacific Lumber. In connection with
the foregoing, the Company paid $76.9 million, $59.0 million and $88.9
million of dividends during 1996, 1995 and 1994, respectively. At December
31, 1996, the Indenture permitted the payment of $1.7 million of dividends,
which were paid in January 1997.
The Company's capital expenditures relate primarily to
reforestation of timberlands and to construction of logging roads. The
Company's capital expenditures for 1996, 1995 and 1994 were approximately
$1.8 million, $2.0 million and $0.8 million, respectively. In addition,
Pacific Lumber made a $3.2 million capital contribution of capital
expenditures attributable to the Company Timberlands in 1996. The
Company's capital expenditures, excluding expenditures for timberlands, for
the next several years are expected to approximate $2.0 million to $3.0
million per year.
The Company anticipates that cash flow from operations, together
with existing cash, will be sufficient to fund its working capital and
capital expenditures for the next year. With respect to its long-term
liquidity, the Company believes that its existing cash, together with its
ability to generate sufficient levels of cash flow from operations, should
provide sufficient funds to meet its long-term working capital and capital
expenditure requirements.
TRENDS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.
The Company's business is 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. The Company is subject to certain pending
matters 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 these pending matters or future governmental
regulations, legislation or judicial or administrative decisions would not
materially and adversely affect the Company. See Item 1. "Business--
Regulatory and Environmental Factors"; Item 3. "Legal Proceedings--Timber
Harvesting Litigation" and Note 5 to the Financial Statements for
information regarding regulatory and environmental factors affecting the
Company. See also Item 1. "Business--Headwaters Agreement" for the recent
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 Pacific Lumber's ability to
conduct normal timber harvesting operations on the Company's timberlands.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Scotia Pacific Holding Company:
We have audited the accompanying balance sheets of Scotia Pacific
Holding Company (a Delaware corporation and a wholly owned subsidiary of
The Pacific Lumber Company) as of December 31, 1996 and 1995, and the
related statements of income and cash flows for the years ended December
31, 1996, 1995 and 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 financial statements referred to above
present fairly, in all material respects, the financial position of Scotia
Pacific Holding Company as of December 31, 1996 and 1995, and the results
of its operations and its cash flows for the years ended December 31, 1996,
1995 and 1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 24, 1997
SCOTIA PACIFIC HOLDING COMPANY
BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 20,345 $ 21,542
Receivables:
Due from Pacific Lumber 5,007 4,471
Accrued interest 150 157
Prepaid timber harvesting costs 1,509 1,914
Other prepaid expenses and current assets 98 106
------------- -------------
Total current assets 27,109 28,190
Timber and timberlands, net of accumulated
depletion of $144,679 and $129,666 at
December 31, 1996 and 1995, respectively 165,970 179,364
Property and equipment, net of accumulated
depreciation of $5,458 and $4,873 at
December 31, 1996 and 1995, respectively 6,597 3,804
Deferred financing costs, net 14,707 15,954
Deferred income taxes 31,377 32,683
Restricted cash 29,967 31,367
Other assets 1,139 --
------------- -------------
$ 276,866 $ 291,362
============= =============
LIABILITIES AND DEFICIENCY IN NET ASSETS
Current liabilities:
Due to Pacific Lumber $ 174 $ 825
Accrued interest 11,877 12,375
Other accrued liabilities 892 1,136
Long-term debt, current maturities 16,165 14,103
------------- -------------
Total current liabilities 29,108 28,439
Long-term debt, less current maturities 319,965 336,130
------------- -------------
Total liabilities 349,073 364,569
------------- -------------
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 (12,834) (13,834)
------------- -------------
Total deficiency in net assets (72,207) (73,207)
------------- -------------
$ 276,866 $ 291,362
============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
SCOTIA PACIFIC HOLDING COMPANY
STATEMENT OF INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Log sales to Pacific Lumber $ 124,325 $ 106,822 $ 134,842
------------- ------------- -------------
Operating expenses:
General and administrative expenses 7,357 6,801 8,411
Depletion and depreciation 15,632 14,763 16,235
------------- ------------- -------------
22,989 21,564 24,646
------------- ------------- -------------
Operating income 101,336 85,258 110,196
Other income (expense):
Interest and other income 2,901 3,036 2,859
Interest expense (28,255) (29,258) (30,235)
------------- ------------- -------------
Income before income taxes 75,982 59,036 82,820
Provision in lieu of income taxes (29,743) (24,242) (32,656)
------------- ------------- -------------
Net income $ 46,239 $ 34,794 $ 50,164
============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
SCOTIA PACIFIC HOLDING COMPANY
STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 46,239 $ 34,794 $ 50,164
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision in lieu of income
taxes 29,743 24,242 32,656
Depletion and depreciation 15,632 14,763 16,235
Amortization of deferred
financing costs 1,247 1,142 1,137
Increase (decrease) in cash
resulting from changes in:
Receivables (529) 34 946
Prepaid timber harvesting
costs (734) (516) (110)
Accrued interest (498) (480) (547)
Other accrued liabilities (244) 403 (256)
Amounts due to Pacific
Lumber (651) 618 (103)
Other prepaid expenses and
current assets 8 (89) (3)
Other 34 5 21
------------- ------------- -------------
Net cash provided by
operating activities 90,247 74,916 100,140
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,841) (1,991) (796)
------------- ------------- -------------
Net cash used for
investing activities (1,841) (1,991) (796)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (76,900) (59,000) (88,900)
Principal payments on Timber Notes (14,103) (13,578) (13,142)
Restricted cash withdrawals 1,400 1,035 1,160
------------- ------------- -------------
Net cash used for
financing activities (89,603) (71,543) (100,882)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,197) 1,382 (1,538)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 21,542 20,160 21,698
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 20,345 $ 21,542 $ 20,160
============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
SCOTIA PACIFIC HOLDING COMPANY
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Scotia Pacific Holding Company (the "Company") is wholly owned by
The Pacific Lumber Company ("Pacific Lumber") which is a wholly owned
indirect subsidiary of MAXXAM Group Inc. ("MGI"). MGI is a wholly owned
subsidiary of MAXXAM Group Holdings Inc., which is a wholly owned
subsidiary of MAXXAM Inc. ("MAXXAM"). The Company is a special purpose
corporation organized in November 1992 to facilitate the offering of
$385,000 of 7.95% Timber Collateralized Notes due 2015 (the "Timber
Notes"). Consistent with the Company's purpose and pursuant to the terms
of the indenture governing the Timber Notes (the "Indenture"), the Company
is obligated to set aside each month a portion of the funds it receives
from the sale of logs to Pacific Lumber sufficient to make the specified
payments of principal and interest on the Timber Notes computed in
accordance with the Indenture and to have a sufficient amount to pay
operating expenses and capital improvements. Once the Company has
satisfied its obligations under the Indenture, the Company is free to
distribute any remaining cash to Pacific Lumber free of the lien of the
Deed of Trust (the "Deed of Trust") securing the Timber Notes.
Accordingly, the Company's ability to pay dividends on its common stock is
not dependent upon any measure of financial performance. The Company
expects that substantially all of its cash which is free of the lien of the
Deed of Trust will be periodically distributed to Pacific Lumber.
On March 23, 1993 (the "Transfer Date"), Pacific Lumber
transferred to the Company, subject to certain timber harvest rights
retained by Pacific Lumber, a substantial portion of its commercial timber
property located in Humboldt County on the northern California coast,
together with a portion of Pacific Lumber's forestry department personnel,
its geographical information system, certain timber harvesting plans and
other property, solely in exchange for the assumption by the Company of
$323,394 aggregate principal amount of Pacific Lumber debt (the "Assumed
Pacific Lumber Securities") and all of the Company's common stock
(collectively, the "Transfer").
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of estimates and
assumptions that affect (i) the reported amounts of assets and liabilities,
(ii) disclosure of contingent assets and liabilities known to exist as of
the date the financial statements are published and (iii) the reported
amount of revenues and expenses recognized during each period presented.
The Company reviews all significant estimates affecting its financial
statements on a recurring basis and records the effect of any necessary
adjustments prior to their publication. Adjustments made with respect to
the use of estimates often relate to improved information not previously
available. Uncertainties with respect to such estimates and assumptions
are inherent in the preparation of the Company's financial statements;
accordingly, it is possible that the subsequent resolution of any one of
the contingent matters described in Note 5 could differ materially
from current estimates. The results of an adverse resolution of such
uncertainties could have a material effect on the Company's financial
position, results of operations or liquidity.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents consist of highly liquid money market
instruments with original maturities of three months or less. At December
31, 1996 and 1995, the Company had approximately $17,600 and $19,742,
respectively, of such money market instruments (which meet the eligible
investment criteria set forth in the Indenture) deposited in the Payment
Account (as defined) held by the trustee under the Indenture (the
"Trustee") for the payment of accrued interest and principal on the next
Note Payment Date (as defined in Note 2).
Prepaid Timber Harvesting Costs
Prepaid timber harvesting costs are expensed as the timber
covered by the related timber harvesting plans ("THPs") is harvested.
Timber and Timberlands
Timber and timberlands were recorded at Pacific Lumber's
historical cost as of the Transfer Date, net of accumulated depletion.
Depletion is computed utilizing the unit-of-production method based upon
estimates of timber values and quantities.
Property and Equipment
Property and equipment were recorded at Pacific Lumber's
historical cost as of the Transfer Date, 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. The
major classes of property and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
Estimated ---------------------------
Useful Lives 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Logging roads 15 years $ 11,430 $ 8,025
Other 5 - 15 years 625 652
------------- -------------
12,055 8,677
Less: accumulated depreciation (5,458) (4,873)
------------- -------------
$ 6,597 $ 3,804
============= =============
</TABLE>
Depreciation expense for 1996, 1995 and 1994 was $618, $594 and
$563, respectively.
Deferred Financing Costs
Costs incurred to obtain financing are deferred and amortized
over the estimated term of the related borrowing.
Restricted Cash
Restricted cash represents the amount deposited into an account
(the "Liquidity Account") held by the Trustee under the Indenture. 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 2) and interest on the
Timber Notes if and to the extent that cash flows are insufficient to make
such payments. The Liquidity Account is not available to pay any Timber
Note prepayments (other than Rated Amortization), premiums or interest on
premiums in the event the Company does not have sufficient funds for such
payments. The Indenture requires the Company to maintain a minimum balance
in the Liquidity Account, to the extent of available cash (the "Required
Liquidity Balance"). Funds may be released from the Liquidity Account to
the extent that the balance in the Liquidity Account exceeds the Required
Liquidity Balance. The Required Liquidity Balance will generally decline
as principal payments are made on the Timber Notes. Interest and other
income for 1996, 1995 and 1994 includes approximately $2,457, $2,560 and
$2,638, respectively, attributable to an investment rate agreement (at
7.95% per annum) with the financial institution which holds the Liquidity
Account.
Log Sales to Pacific Lumber
The Company and Pacific Lumber entered into a Master Purchase
Agreement on the Transfer Date (the "Master Purchase Agreement") which
governs all log sales by the Company to Pacific Lumber. The harvested logs
are purchased by Pacific Lumber (i.e., title passes and the obligation to
make payment therefor is incurred) at the time each log is delivered to
Pacific Lumber's log decks and scaled. 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 generally
published by the California State Board of Equalization at six month
intervals for purposes of computing the 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 sales 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. However, such prices may not necessarily be representative
of actual prices that would be realized from unrelated parties at
subsequent dates.
Concentrations of Credit Risk
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.
Fair Value of Financial Instruments
The carrying amounts of cash equivalents and restricted cash
approximate fair value. As of December 31, 1996 and 1995, the estimated
fair value of long-term debt, including current maturities, was $338,231
and $367,745, respectively. The estimated fair value of long-term debt is
determined based on the quoted market price for the Timber Notes. The
Timber Notes are thinly traded financial instruments; accordingly, their
market price at any balance sheet date may not be representative of the
price which would be derived from a more active market.
Reclassifications
Certain reclassifications have been made to the prior year's
financial statements to be consistent with the presentation in the current
year.
2. LONG-TERM DEBT
Long-term debt consists of the Timber Notes. The Company issued
$385,000 aggregate principal amount of Timber Notes on the Transfer Date.
The net proceeds from the sale of the Timber Notes were utilized by the
Company (i) to fund the initial deposits to the Liquidity Account of
$35,000 and an expense reserve of $625 (the "Expense Reserve") held by the
Trustee under the Indenture, and (ii) to redeem the Assumed Pacific Lumber
Securities.
The Timber Notes are senior secured obligations of the Company
and do not constitute obligations of, and are not guaranteed by, Pacific
Lumber or any other person. Pursuant to the terms of the Indenture, the
Company is not permitted to incur any indebtedness for borrowed money other
than the indebtedness represented by the Timber Notes. The Timber Notes
are secured by a lien on (i) the Company's timber and timberlands (subject
to Pacific Lumber's exclusive right to harvest certain of the timber on
such timberlands), (ii) certain contract rights and certain other assets,
(iii) the proceeds of the foregoing, (iv) the Payment Account, (v) the
Liquidity Account, and (vi) substantially all of the other property and
equipment transferred to the Company by Pacific Lumber (subject to certain
rights of concurrent use by Pacific Lumber). Amounts payable on the Timber
Notes will be paid semi-annually generally on January 20 and July 20 of
each year (each, a "Note Payment Date").
The Timber Notes are structured to link, to the extent of cash
available, the deemed depletion of the Company's timber (through the
harvest and sale of logs) to required amortization of the Timber Notes.
The required amount of amortization on any Note Payment Date is determined
by various mathematical formulas set forth in the Indenture. Scheduled
Amortization of the Timber Notes represents the amount of principal which
the Company must pay through each Note Payment Date in order to avoid
payment of prepayment or deficiency premiums. The Scheduled Maturity Date,
which is July 20, 2009, represents the Note Payment Date on which the
Company will pay the final installment of principal if all payments of
principal are made in accordance with Scheduled Amortization. Rated
Amortization of the Timber Notes represents the minimum amount of principal
which the Company must pay (on a cumulative basis) through any Note Payment
Date in order to avoid an Event of Default (as defined). The Rated
Maturity Date, which is July 20, 2015, is the Note Payment Date by which
the Company must pay all outstanding principal on the Timber Notes.
Regardless of the amount of timber actually harvested and sold, if there is
sufficient cash (which could be available due to, among other things,
favorable prices realized from harvested timber), the Timber Notes will
amortize at least as fast as Capture Amortization. If the Timber Notes
were amortized in accordance with Capture Amortization, the final
installment of principal on the Timber Notes would be paid on January 20,
2012.
The Company has the right to cause additional prepayments of
principal to be made on any Note Payment Date. If the principal of the
Timber Notes is paid in advance of Scheduled Amortization, the Company will
pay a prepayment premium on such accelerated payment. The prepayment
premium on any Note Payment Date is equal to the excess, if any, of (a) the
sum of (i) the present value of the prepayment amount (discounted from the
date(s) that the prepayment amount would otherwise have been paid under the
Scheduled Amortization to the Note Payment Date) plus (ii) the sum of the
present values of the amounts of interest that would have accrued
thereafter with respect to the prepayment amount over (b) the amount of the
prepayment. The present value shall be computed using a "Reinvestment
Yield" (as defined in the Indenture) which is comparable to the yield of
like term U.S. Treasury securities plus 0.50% per annum.
If the principal of the Timber Notes is paid later than as
provided for under the Scheduled Amortization, the Company will pay a
deficiency premium on such deficient amount. The deficiency premium
payable on any Note Payment Date equals an amount of interest on the amount
of the deficient principal amount from the previous Note Payment Date to
the current Note Payment Date at 1.50% per annum.
The following table presents the amortization of the Timber Notes
based on Rated Amortization, Capture Amortization and Scheduled
Amortization:
<TABLE>
<CAPTION>
Rated Capture Scheduled
Amortization Amortization Amortization
------------- ------------- -------------
<S> <C> <C> <C>
Years Ending December 31:
1997 8,487 12,316 16,165
1998 8,690 15,130 19,335
1999 10,206 17,244 21,651
2000 12,557 19,333 23,970
2001 14,090 19,698 24,734
Thereafter 282,100 252,409 230,275
------------- ------------- -------------
$ 336,130 $ 336,130 $ 336,130
============= ============= =============
</TABLE>
In 1994, 1995, 1996 and in January 1997, the Company repaid
$13,142, $13,578, $14,103 and $8,712, respectively, of the aggregate
principal amount outstanding on the Timber Notes in accordance with
Scheduled Amortization.
At December 31, 1996, the Indenture permitted the payment of
$1,700 of dividends, which were paid in January 1997.
3. RELATED PARTY TRANSACTIONS
The Master Purchase Agreement and the related log purchase
agreements govern all log sales by the Company to Pacific Lumber. Under the
Master Purchase Agreement, Pacific Lumber is responsible for harvesting the
Company's standing timber and transporting harvested logs to its log decks.
Payments for the log sales outstanding at December 31, 1996 were received
by the Company in January 1997.
The Company and Pacific Lumber also entered into a Services
Agreement on the Transfer Date (the "Services Agreement"), pursuant to
which Pacific Lumber provides a variety of operational, management and
related services in respect of the Company's timber properties not provided
by the Company's employees, including reforestation, fire protection, road
maintenance and disease control. The Company pays Pacific Lumber an annual
fee, payable in equal monthly installments and subject to annual adjustment
provisions, for such services. For the years ended December 31, 1996, 1995
and 1994, amounts recorded by the Company for services pursuant to the
terms of the Services Agreement totaled $1,345, $1,382 and $1,364,
respectively.
4. INCOME TAXES
Income taxes are determined using an asset and liability approach
which 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 Company and Pacific Lumber are members of MAXXAM's
consolidated return group for federal income tax purposes. Pursuant to the
tax allocation agreement among MAXXAM, Pacific Lumber, Salmon Creek
Corporation and the Company (the "Tax Allocation Agreement"), all federal
and state income tax liabilities of the Company will be paid by Pacific
Lumber and all federal and state income tax refunds of the Company will be
paid to Pacific Lumber. Accordingly, the Company records a charge or
benefit for income taxes computed as if the Company filed separate income
tax returns and a corresponding adjustment to capital (net of the
applicable adjustments relating to the Company's deferred income tax
assets).
The provision in lieu of income taxes on income before income
taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Current provision in lieu of income
taxes:
Federal $ 21,994 $ 16,855 $ 24,385
State 6,443 4,971 7,144
------------- ------------- -------------
28,437 21,826 31,529
------------- ------------- -------------
Deferred provision in lieu of income
taxes:
Federal 706 1,884 1,052
State 600 532 75
------------- ------------- -------------
1,306 2,416 1,127
------------- ------------- -------------
$ 29,743 $ 24,242 $ 32,656
============= ============= =============
</TABLE>
A reconciliation between the provision in lieu of income taxes
and the amount computed by applying the federal statutory income tax rate
to income before income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Income before income taxes $ 75,982 $ 59,036 $ 82,820
============= ============= =============
Amount of federal income tax based
upon the statutory rate $ 26,594 $ 20,663 $ 28,987
State taxes, net of federal tax
benefit 4,578 3,577 4,692
Other (1,429) 2 (1,023)
------------- ------------- -------------
$ 29,743 $ 24,242 $ 32,656
============= ============= =============
</TABLE>
The components of the Company's net deferred income tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
Deferred income tax assets:
Timber and timberlands $ 32,202 $ 32,995
Property and equipment 140 152
------------- -------------
Total deferred income tax assets 32,342 33,147
------------- -------------
Deferred income tax liabilities:
Other (965) (464)
------------- -------------
Total deferred income tax
liabilities (965) (464)
------------- -------------
Net deferred income tax assets $ 31,377 $ 32,683
============= =============
</TABLE>
The 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 in excess of its tax basis. The Company
has not provided a valuation allowance on its deferred income tax assets.
The net deferred income tax assets listed above are recorded pursuant to
the Tax Allocation Agreement.
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 Pacific Lumber have increased the cost of logging operations.
The Company and Pacific Lumber are subject to certain pending matters
described below which could have a material adverse effect on the Company's
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 United States Fish and Wildlife Service ("USFWS")
published its final designation of critical habitat for the marbled
murrelet (the "Final Designation"), which designated 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 timberlands are included in the Final Designation, the
substantial portion of such acreage being young growth timber. In order to
mitigate the impact of the Final Designation, particularly with respect to
timberlands occupied by the marbled murrelet, Pacific Lumber over the last
few years has attempted to develop a habitat conservation plan for the
marbled murrelet (the "Murrelet HCP"). Due to, among other things, the
unfavorable response of the USFWS to Pacific Lumber's initial Murrelet HCP
efforts, the Company and Pacific Lumber filed two actions (the "Takings
Litigation") alleging that certain portions of their timberlands have been
"taken" and seeking just compensation. Pursuant to an agreement entered
into by Pacific Lumber, MAXXAM, the United States and California on
September 28, 1996 (the "Headwaters Agreement") 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 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 federal Endangered Species Act ("ESA")
and/or the California Endangered Species Act ("CESA") and to designate
critical habitat for such species. For example, the National Marine
Fisheries Service has announced that by April 25, 1997 it will make a
final determination concerning whether to list the coho salmon under the
ESA in northern California, including, potentially, 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 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 ("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. The sustained yield plan ("SYP") must demonstrate
that the average annual harvest over any rolling ten-year period will not
exceed the LTSY harvest level and that Pacific Lumber's 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, Pacific
Lumber submitted a proposed SYP to the California Department of Forestry
("CDF"). The proposed SYP sets forth an LTSY harvest level substantially
the same as Pacific Lumber's average annual timber harvest over the last
six years. The proposed SYP also indicates that Pacific Lumber'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,
Pacific Lumber'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 (see Note 6) will be consummated and that the
Multi-Species HCP (as defined in Note 6) will permit Pacific Lumber 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 that
Pacific Lumber 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 Pacific Lumber would be able to do so and the amount of such
acquisitions would be limited by Pacific Lumber'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 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 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
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 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 financial position, results of operations
or liquidity.
6. HEADWATERS AGREEMENT
On September 28, 1996, Pacific Lumber (on behalf of itself, its
subsidiaries and affiliates) and MAXXAM (collectively, 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 the approximately 5,600
acres of Pacific Lumber's timberlands commonly referred to as the
Headwaters Forest and the Elk Head Springs Forest ("Headwaters
Timberlands"). A substantial portion of the Headwaters Timberlands
consists of virgin old growth timberlands. Approximately 700 of these
acres are owned by the Company. 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 to be acquired by the United States and California
("Elk River Timberlands") 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 an incidental take permit
("Permit") to be based upon a habitat conservation plan with respect to
Pacific Lumber for multiple species ("Multi-Species HCP") covering (a)
the timberlands and timber harvesting rights which Pacific Lumber will own
after consummation of the Headwaters Agreement (the "Resulting Pacific
Lumber Timber Property") and (b) the Headwaters Timberlands and the 1,900
acres of Elk River Timberlands retained by the United States and California
(both as conserved habitat). The agreement also requires expedited
processing by California of an SYP covering the Resulting Pacific Lumber
Timber Property.
On December 5, 1996, the United States and California each
furnished a list of properties consisting of oil and gas interests,
timberlands and a variety of other real estate properties for Pacific
Lumber's review and approval. There have been ongoing discussions between
the Pacific Lumber Parties and the United States regarding the properties
and other consideration to be furnished by the United States.
Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands from a third party, (b) approval of an SYP and a Multi-Species
HCP and issuance of a Permit, each in form and substance satisfactory to
Pacific Lumber, (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.
7. DEFICIENCY IN NET ASSETS
A reconciliation of the activity for the deficiency in net assets
is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of period $ (13,834) $ (11,454) $ (4,247)
Net income 46,239 34,794 50,164
Contribution of assets by Pacific
Lumber 3,224 -- --
Assumption of net tax liabilities by
Pacific Lumber 28,437 21,826 31,529
Dividends paid (76,900) (59,000) (88,900)
------------- ------------- -------------
Balance at end of period $ (12,834) $ (13,834) $ (11,454)
============= ============= =============
</TABLE>
8. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental information on non-cash
investing and financing activities:
Assumption of net tax liabilities by
Pacific Lumber $ 28,437 $ 21,826 $ 31,529
Contribution of assets by Pacific
Lumber 3,224 -- --
Supplemental disclosure of cash flow
information:
Interest paid $ 27,506 $ 28,596 $ 29,645
</TABLE>
9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summary quarterly financial information for the years ended
December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1996:
Log sales to Pacific
Lumber $ 20,060 $ 37,206 $ 42,050 $ 25,009
Operating income 16,027 30,751 34,603 19,955
Net income 5,665 14,370 16,658 9,546
1995:
Log sales to Pacific
Lumber $ 16,206 $ 23,564 $ 38,535 $ 28,517
Operating income 12,088 18,468 31,071 23,631
Net income 3,204 7,009 14,447 10,134
</TABLE>
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.
The Company expects that its revenues and cash flows will continue to
reflect that seasonality.
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
(A) INDEX TO FINANCIAL STATEMENTS PAGE
1. FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):
Report of Independent Public Accountants 17
Balance sheet at December 31, 1996 and 1995 18
Statement of income for the years ended December 31,
1996, 1995 and 1994 19
Statement of cash flows for the years ended December 31,
1996, 1995 and 1994 20
Notes to financial statements 21
2. FINANCIAL STATEMENT SCHEDULES:
Schedules are inapplicable or the required information is
included in the financial statements or the notes thereto.
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K during the fourth quarter of 1996.
However, on March 12, 1997, the Company filed a Current Report on Form 8-K
(under Item 5), dated March 11, 1997, concerning an agreement to amend the
Headwaters Agreement to extend the period of time during which the closing
conditions must be met to February 17, 1998.
(C) EXHIBITS
Reference is made to the Index of Exhibits immediately preceding
the exhibits hereto (beginning on page 34), which index is incorporated
herein by reference.
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.
SCOTIA PACIFIC HOLDING COMPANY
Date: March 28, 1997 By: /S/ PAUL N. SCHWARTZ
Paul N. Schwartz
Vice President, Chief Financial
Officer and Director
Date: March 28, 1997 By: /S/ GARY L. CLARK
Gary L. Clark
Vice President - Finance and
Administration
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.
Date: March 28, 1997 By: /S/ JOHN A. CAMPBELL
John A. Campbell
Chairman of the Board, President
and Director
Date: March 28, 1997 By: /S/ PAUL N. SCHWARTZ
Paul N. Schwartz
Vice President, Chief Financial
Officer and Director
(Principal Financial Officer)
Date: March 28, 1997 By: /S/ JOHN T. LA DUC
John T. La Duc
Vice President and Director
Date: March 28, 1997 By: /S/ EZRA G. LEVIN
Ezra G. Levin
Director
Date: March 28, 1997 By: /S/ STUART C. LEWIS
Stuart C. Lewis
Director
Date: March 28, 1997 By: /S/ JACK M. WEBB
Jack M. Webb
Director
Date: March 28, 1997 By: /S/ GARY L. CLARK
Gary L. Clark
Vice President - Finance and
Administration
(Principal Accounting Officer)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------------ ----------------------------------------------
<S> <C>
3.1 Certificate of Incorporation of Scotia Pacific
Holding Company (the "Company") (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, 1993)
3.2 By-laws of the Company (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, 1993)
4.1 Indenture between the Company and State Street
Bank and Trust Company (as successor trustee
to The First National Bank of Boston) ("State
Street"), including the form of Note
(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 Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment among
the Company, State Street, as Trustee, and
State Street, as Collateral Agent
(incorporated herein by reference to Exhibit
4.2 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1993)
10.1 Master Purchase Agreement between the Company
and The Pacific Lumber Company ("Pacific
Lumber") (incorporated herein by reference to
Exhibit 10.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December
31, 1993)
10.2 Services Agreement between the Company and
Pacific Lumber (incorporated herein by
reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1993)
10.3 Additional Services Agreement between the
Company and Pacific Lumber (incorporated
herein by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
10.4 Reciprocal Rights Agreement among the Company,
Pacific Lumber and Salmon Creek Corporation
("Salmon Creek") (incorporated herein by
reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1993)
10.5 Environmental Indemnification Agreement
between the Company and Pacific Lumber
(incorporated herein by reference to Exhibit
10.5 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31,
1993)
10.6 Tax Allocation Agreement between the Company,
Pacific Lumber, Salmon Creek and MAXXAM Inc.
(incorporated herein by reference to Exhibit
10.1 to Amendment No. 3 to the Form S-1
Registration Statement of the Company,
Registration No. 33-55538)
10.7 Agreement dated September 28, 1996 among
MAXXAM Inc., The Pacific Lumber Company (on
behalf of itself, its subsidiaries and its
affiliates), the United States of America and
the State of California (incorporated herein
by reference to Exhibit 10.1 to MAXXAM Inc.'s
Form 8-K dated September 28, 1996; File No. 1-
3924)
*27 Financial Data Schedule
<FN>
- ---------------
* Included with this filing.
</TABLE>
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 20,345
<SECURITIES> 0
<RECEIVABLES> 5,007
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,109
<PP&E> 12,055
<DEPRECIATION> 5,458
<TOTAL-ASSETS> 276,866
<CURRENT-LIABILITIES> 29,108
<BONDS> 336,130
0
0
<COMMON> 3
<OTHER-SE> (72,210)
<TOTAL-LIABILITY-AND-EQUITY> 276,866
<SALES> 124,325
<TOTAL-REVENUES> 124,325
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 22,989
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,255
<INCOME-PRETAX> 75,982
<INCOME-TAX> 29,743
<INCOME-CONTINUING> 46,239
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,239
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
