-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IrWflBlt6dUC9tFxYrGiCXV83sw7h5dBZgxNlxDAY5sNUQ8BUwSU1SySVOiNHQIF d+02CbgKS2VzKeZhwDzWgg== 0000900421-98-000042.txt : 19980804 0000900421-98-000042.hdr.sgml : 19980804 ACCESSION NUMBER: 0000900421-98-000042 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980803 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXXAM GROUP HOLDINGS INC CENTRAL INDEX KEY: 0001029500 STANDARD INDUSTRIAL CLASSIFICATION: PRIMARY PRODUCTION OF ALUMINUM [3334] IRS NUMBER: 760518669 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-18723 FILM NUMBER: 98675822 BUSINESS ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7139757600 MAIL ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 10-Q 1 MGHI 2ND QTR. 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q --------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 Commission File Number 333-18723 MAXXAM GROUP HOLDINGS INC. (Exact name of Registrant as specified in its charter) DELAWARE 76-0518669 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification Number) organization) 5847 SAN FELIPE, SUITE 2600 77057 HOUSTON, TEXAS (Zip Code) (Address of Principal Executive Offices) Registrant's telephone number, including area code: (713) 975-7600 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Number of shares of common stock outstanding at July 31, 1998: 1,000 Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format. TABLE OF CONTENTS PAGE PART I. - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheet at June 30, 1998 and December 31, 1997 3 Consolidated Statement of Operations for the three and six months ended June 30, 1998 and 1997 4 Consolidated Statement of Cash Flows for the six months ended June 30, 1998 and 1997 5 Condensed Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. - OTHER INFORMATION Item 1. Legal Proceedings 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures S-1 Appendix A - Glossary of Defined Terms A-1 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 1998 1997 ------------ ------------ (UNAUDITED) ASSETS $ 123,718 $ 91,753 Marketable securities 21,996 51,324 Receivables: Trade 13,522 19,269 Other 7,755 6,667 Inventories 53,992 61,355 Prepaid expenses and other current assets 8,754 13,080 ------------ ------------ Total current assets 229,737 243,448 Timber and timberlands, net of accumulated depletion of $173,242 and $169,167, respectively 297,458 299,153 Property, plant and equipment, net of accumulated depreciation of $81,079 and $76,420, respectively 102,282 103,388 Note receivable from MAXXAM Inc. 125,875 125,000 Investment in Kaiser Aluminum Corporation 51,532 41,402 Deferred financing costs, net 24,003 25,739 Deferred income taxes 61,932 58,767 Restricted cash 28,108 28,434 Other assets 5,039 4,209 ------------ ------------ $ 925,966 $ 929,540 ============ ============ LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Accounts payable $ 5,125 $ 3,535 Accrued interest 30,450 30,838 Accrued compensation and related benefits 9,888 12,544 Deferred income taxes 10,784 10,882 Other accrued liabilities 1,592 1,631 Long-term debt, current maturities 20,607 19,429 ------------ ------------ Total current liabilities 78,446 78,859 Long-term debt, less current maturities 888,083 892,896 Other noncurrent liabilities 28,594 28,976 ------------ ------------ Total liabilities 995,123 1,000,731 ------------ ------------ Contingencies Stockholder's deficit: Common stock, $1.00 par value; 3,000 shares authorized; 1,000 shares issued 1 1 Additional capital 123,167 123,167 Accumulated deficit (192,325) (194,359) ------------ ------------ Total stockholder's deficit (69,157) (71,191) ------------ ------------ $ 925,966 $ 929,540 ============ ============ The accompanying notes are an integral part of these financial statements.
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS OF DOLLARS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ (UNAUDITED) Net sales: Lumber and logs $ 57,789 $ 70,139 $ 106,291 $ 130,405 Other 5,730 6,709 9,135 13,258 ------------- ------------- ------------- ------------- 63,519 76,848 115,426 143,663 ------------ ------------ ------------ ------------ Operating expenses: Cost of goods sold 39,526 42,057 72,590 80,102 Selling, general and administrative expenses 3,527 3,867 6,698 7,248 Depletion and depreciation 5,734 6,660 11,351 13,207 ------------ ------------ ------------ ------------ 48,787 52,584 90,639 100,557 ------------ ------------ ------------ ------------ Operating income 14,732 24,264 24,787 43,106 Other income (expense): Equity in earnings of Kaiser Aluminum Corporation 5,819 - 10,130 - Investment, interest and other income 5,627 7,709 14,103 12,107 Interest expense (23,831) (23,623) (47,650) (47,343) ------------ ------------ ------------ ------------ Income before income taxes 2,347 8,350 1,370 7,870 Credit (provision) for income taxes 1,313 (3,326) 3,164 (3,158) ------------ ------------ ------------ ------------ Net income $ 3,660 $ 5,024 $ 4,534 $ 4,712 ============ ============ ============ ============ The accompanying notes are an integral part of these financial statements.
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
SIX MONTHS ENDED JUNE 30, 1998 1997 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,534 $ 4,712 Adjustments to reconcile net income to net cash provided by operating activities: Depletion and depreciation 11,351 13,207 Equity in undistributed earnings of Kaiser Aluminum Corporation (10,130) - Amortization of deferred financing costs and discounts on long-term debt 8,922 8,126 Net gain on asset dispositions (1,902) - Net sales of marketable securities 32,373 6,941 Net gain on marketable securities (2,990) (3,196) Deferral of interest payment on note receivable from MAXXAM Inc. (875) - Increase (decrease) in cash resulting from changes in: Receivables 5,572 (1,034) Inventories, net of depletion 4,923 8,256 Prepaid expenses and other assets (1,243) (2,438) Accounts payable 1,521 440 Accrued interest (388) 5,802 Other liabilities (3,126) (34) Accrued and deferred income taxes (4,182) 3,017 Other - 108 ------------ ------------ Net cash provided by operating activities 44,360 43,907 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (5,961) (6,034) Net proceeds from sale of assets 6,561 69 ------------ ------------ Net cash provided by (used for) investing activities 600 (5,965) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt (10,821) (8,801) Dividends paid (2,500) - Restricted cash withdrawals, net 326 202 ------------ ------------ Net cash used for financing activities (12,995) (8,599) ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 31,965 29,343 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 91,753 73,595 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 123,718 $ 102,938 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest $ 39,116 $ 33,404 Income taxes paid 50 - Tax allocation payments to MAXXAM Inc. 4 169 SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING ACTIVITIES: Timber and timberlands acquired subject to long-term debt $ - $ 6,413 The accompanying notes are an integral part of these financial statements.
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS) 1. GENERAL The information contained in the following notes to the consolidated financial statements is condensed from that which would appear in the annual consolidated financial statements; accordingly, the consolidated financial statements included herein should be reviewed in conjunction with the consolidated financial statements and related notes thereto contained in the Form 10-K filed by the Company. Any capitalized terms used but not defined in these Condensed Notes to Consolidated Financial Statements are defined in the "Glossary of Defined Terms" contained in Appendix A. All references to the "Company" include MAXXAM Group Holdings Inc. and its subsidiary companies unless otherwise indicated or the context indicates otherwise. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year. The consolidated financial statements included herein are unaudited; however, they include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at June 30, 1998, the consolidated results of operations for the three and six months ended June 30, 1998 and 1997 and consolidated cash flows for the six months ended June 30, 1998 and 1997. The Company is a wholly owned subsidiary of MAXXAM. SFAS No. 130 was issued in June 1997 was adopted by the Company as of January 1, 1998. SFAS No. 130 requires the presentation of an additional income measure (termed "comprehensive income"), which adjusts traditional net income for certain items that previously were only reflected as direct charges to equity (such as minimum pension liabilities). As the amount of the adjustments to arrive at comprehensive income is not significant, there is not a significant difference between "traditional" net income and comprehensive income for the three and six months ended June 30, 1998 and 1997. SFAS No. 133, issued in June 1998, requires companies to recognize all derivative instruments as assets or liabilities in the balance sheet and to measure those instruments at fair value. Kaiser, the Company's equity investee, has hedging programs which use various derivative products to "lock-in" a price (or range of prices) for products sold/used so that earnings and cash flows are subject to reduced risk of volatility. Under SFAS No. 133, Kaiser will be required to "mark-to- market" its hedging positions at the end of each period in advance of the period of recognition for the transactions to which the hedge relates. Pursuant to SFAS No. 130, Kaiser will reflect changes in the fair value of its open hedging positions as an increase or reduction in stockholders' equity through comprehensive income. Under SFAS No. 130, the impact of the changes in the fair value of financial instruments will be reversed from comprehensive income (net of any fluctuations in other "open" positions) and will be reflected in traditional net income upon occurrence of the transaction to which the hedge relates. Under the equity method of accounting which the Company follows in accounting for its investment in Kaiser, the Company will reflect its equity share of Kaiser's adjustments to stockholder's equity through comprehensive income. 2. INVENTORIES Inventories consist of the following:
JUNE 30, DECEMBER 31, 1998 1997 ------------- ------------- Lumber $ 43,235 $ 49,734 Logs 10,757 11,621 ------------- ------------- $ 53,992 $ 61,355 ============= =============
3. RESTRICTED CASH Restricted cash represents the amount held by the trustee under the indenture governing the Old Timber Notes of the Company's indirect wholly owned subsidiary, Scotia Pacific. 4. INVESTMENT IN KAISER Subsequent to its formation, the Company received, as a capital contribution from MAXXAM, 27,938,250 Pledged Kaiser Shares. Kaiser is an integrated producer and marketer of alumina, primary aluminum and fabricated aluminum products. Kaiser's common stock is publicly traded on the New York Stock Exchange under the trading symbol "KLU." The Pledged Kaiser Shares represent a 35.3% equity interest in Kaiser at June 30, 1998. The Company follows the equity method of accounting for its investment in Kaiser. The Company and MAXXAM are entities under common control; accordingly, the Company has recorded its investment in Kaiser at MAXXAM's historical cost. During the first quarter of 1993, losses exhausted Kaiser's equity with respect to its common stockholders. The Company recorded its equity share of such losses in January 1993 up to the amount of its investment in the Pledged Kaiser Shares. From January 1993 until August 1997, cumulative losses with respect to the results of operations attributable to Kaiser's common stockholders exceeded cumulative earnings. However, this was no longer the case when equity attributable to Kaiser's common stockholders increased upon conversion of the PRIDES into Kaiser common stock. As a result, the Company recorded a $33,400 adjustment to reduce the stockholder's deficit reflecting the Company's 35.4% equity interest in the impact of the PRIDES conversion on the common stockholders. In addition, the Company began recording its equity in Kaiser's results of operations. The market value for the Pledged Kaiser Shares based on the price per share quoted at the close of business on July 30, 1998 was $256,697. There can be no assurance that such value would be realized should the Company dispose of its investment in the Pledged Kaiser Shares. The following table contains summarized financial information of Kaiser. For more information regarding Kaiser's financial condition and operations, reference is made to Kaiser's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, both filed with the SEC.
JUNE 30, DECEMBER 31, 1998 1997 ------------- ------------- Current assets $ 1,060,400 $ 1,045,600 Property, plant and equipment, net 1,159,500 1,171,800 Other assets 792,000 796,500 ------------- ------------- Total assets $ 3,011,900 $ 3,013,900 ============= ============= Current liabilities $ 565,200 $ 594,100 Long-term debt, less current maturities 962,500 962,900 Other liabilities 1,216,200 1,212,200 Minority interests 120,700 127,700 Stockholders' equity 147,300 117,000 ------------- ------------- Total liabilities and stockholders' equity $ 3,011,900 $ 3,013,900 ============= =============
Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Net sales $ 614,800 $ 597,100 $ 1,211,800 $ 1,144,500 Costs and expenses (559,500) (542,100) (1,111,700) (1,058,200) Restructuring of operations - (19,700) - (19,700) Other expenses (29,600) (31,300) (56,800) (56,200) ------------ ------------ ------------ ------------ Income before income taxes and minority interests 25,700 4,000 43,300 10,400 Credit (provision) for income taxes (9,000) 11,000 (15,200) 8,600 Minority interests - (1,300) 600 (2,700) ------------ ------------ ------------ ------------ Net income 16,700 13,700 28,700 16,300 Dividends on preferred stock - (2,100) - (4,200) ------------ ------------ ------------ ------------ Net income available to common $ 16,700 $ 11,600 $ 28,700 $ 12,100 stockholders ============ ============ ============ ============ Equity in earnings of Kaiser $ 5,819 $ - $ 10,130 $ - ============ ============ ============ ============
5. LONG-TERM DEBT Long-term debt consists of the following:
JUNE 30, DECEMBER 31, 1998 1997 ------------ ------------ 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015 $ 309,191 $ 319,965 10-1/2% Pacific Lumber Senior Notes due March 1, 2003 235,000 235,000 Pacific Lumber Credit Agreement 9,445 9,445 11-1/4% MGI Senior Secured Notes due August 1, 2003 100,000 100,000 12-1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount 124,511 117,325 12% MGHI Senior Secured Notes due August 1, 2003 130,000 130,000 Other 543 590 ------------ ------------ 908,690 912,325 Less: current maturities (20,607) (19,429) ------------ ------------ $ 888,083 $ 892,896 ============ ============
See Note 7 for discussion of (i) the issuance of the Timber Notes on July 20, 1998, (ii) the prepayment of the Old Timber Notes and outstanding borrowings under the Pacific Lumber Credit Agreement and (iii) the redemption of the Pacific Lumber Senior Notes and MGI Notes. 6. CONTINGENCIES Pacific Lumber's business is subject to a variety of California and federal laws and regulations dealing with timber harvesting, threatened and endangered species and habitat for such species, and air and water quality. Compliance with such laws and regulations plays a significant role in Pacific Lumber's business. While 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 costs of Pacific Lumber, they have not had a significant adverse effect on the Company's financial position, results of operations or liquidity. However, these laws and related administrative actions and legal challenges have severely restricted the ability of Pacific Lumber to harvest virgin old growth timber, and to a lesser extent, residual old growth timber on its timberlands. On September 28, 1996, the Pacific Lumber Parties entered into the Headwaters Agreement with the United States and California which provides the framework for the acquisition by the United States and California of the Headwaters Timberlands. A substantial portion of the Headwaters Timberlands contains virgin old growth timber. Approximately 4,900 of these acres are owned by Salmon Creek, with the remaining acreage being owned by Scotia LLC (Pacific Lumber owning the timber and related timber harvesting rights on this acreage). The Headwaters Timberlands would be transferred in exchange for (a) cash or other consideration from the United States and California having an aggregate fair market value of $300 million, and (b) approximately 7,700 acres of timberlands to be acquired by the government from a third party. As part of the Headwaters Agreement, the Pacific Lumber Parties agreed not to enter the Headwaters Timberlands to conduct any logging or salvage operations. Closing of the Headwaters Agreement is subject to various conditions, including federal and California funding, approval of an SYP, approval of a Multi-Species HCP, issuance of the Permits, acquisitions of the third party timberlands and the issuance of certain tax agreements satisfactory to the Pacific Lumber Parties. In November 1997, President Clinton signed an appropriations bill which contains authorization for the expenditure of $250 million of federal funds towards consummation of the Headwaters Agreement. These funds remain available until March 1, 1999 and their availability is subject to, among other things, contribution by California of its $130 million portion of funding for the Headwaters Agreement. While the State of California has not enacted legislation providing funds for its portion of the acquisition contemplated by the Headwaters Agreement, on May 11, 1998, California Governor Wilson announced that he would request that funding of California's portion be included as part of the Budget Bill. The Budget Bill is subject to approval by the California Senate and Assembly and signature by the Governor. As of the date of this Report, funding of California's portion of the purchase price under the Headwaters Agreement had not yet been included in the Budget Bill. While a separate bill has been introduced in the California Senate which would fund California's portion of the purchase price, this bill would impose additional restrictions on Pacific Lumber, including more restrictions on harvesting in streamside buffers. While Pacific Lumber is working diligently toward approval of funding (without such restrictions) for California's portion of the purchase price as part of the Budget Bill prior to the March 1, 1999 expiration of the federal funding, there can be no assurance that Pacific Lumber will be successful or that the terms of any legislation which may be enacted will be acceptable to Pacific Lumber. On July 14, 1998, the proposed SYP and Multi-Species HCP were made available to the public for review and comment. The proposed Multi- Species HCP and related Permits would have a term of 50 years, and would limit the activities which could be conducted by Pacific Lumber in eleven forest groves to those which would not be detrimental to marbled murrelet habitat. These groves aggregate approximately 7,600 acres and consist of substantial quantities of virgin and residual old growth redwood and Douglas-fir timber. The Company believes that submission of the proposed SYP and Multi-Species HCP for public review and comment is a favorable development that enhances its position in connection with legal and regulatory challenges to Pacific Lumber's THPs as well as the prospects for consummation of the Headwaters Agreement, the approval of the Multi-Species HCP and SYP and the issuance of the Permits. Several species, including the northern spotted owl, the marbled murrelet and the coho salmon, have been listed as endangered or threatened under the ESA and/or the CESA. Pacific Lumber has developed federal and state northern spotted owl management plans which permit harvesting activities to be conducted so long as Pacific Lumber adheres to certain measures designed to protect the northern spotted owl. The potential impact of the listings of the marbled murrelet and the coho salmon is more uncertain. If the Multi-Species HCP is approved, Pacific Lumber would be issued the Permits, which would allow limited incidental "take" of listed species so long as there was no "jeopardy" to the continued existence of such species, and the Multi-Species HCP would identify the measures to be instituted in order to minimize and mitigate the anticipated level of take to the greatest extent possible. The Multi-Species HCP would not only provide for Pacific Lumber's compliance with habitat requirements for currently listed species, it would also provide greater certainty and protection for Pacific Lumber with regard to identified species that may be listed in the future. Lawsuits are pending or threatened which seek to prevent Pacific Lumber from implementing certain of its approved THPs or other operations. While challenges with respect to Pacific Lumber's young growth timber have historically been limited, a lawsuit relating to the coho salmon was recently filed under the ESA which relates to a significant number of THPs covering young growth timber of Pacific Lumber. While the Company expects these environmentally focused objections and lawsuits to continue, it believes that the proposed Multi-Species HCP will enhance Pacific Lumber's position in connection with these challenges. The Company also believes that the Multi-Species HCP would expedite the preparation and facilitate approval of its THPs. With respect to the SYP, Pacific Lumber has proposed an LTSY which is approximately 10% less than Pacific Lumber's average timber harvest over the last three years. If the SYP is approved by the CDF, Pacific Lumber will have complied with certain BOF regulations requiring timber companies to project timber growth and harvest on their timberlands over a 100-year planning period and establish an LTSY harvest level. The 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. The SYP is expected to be valid for ten years, although it would be subject to review after five years. Thereafter, revised SYPs would be prepared every decade that address the LTSY harvest level based upon reassessment of changes in the resource base and other factors. After the public review and comment process is completed, the regulatory agencies will determine whether to approve or disapprove the SYP and Multi-Species HCP. While the parties are working diligently to complete the closing conditions contained in the Headwaters Agreement, there can be no assurance that the Headwaters Agreement will be consummated or that the SYP, Multi-Species HCP or Permits acceptable to Pacific Lumber will be approved. If the Headwaters Agreement is not consummated and Pacific Lumber is unable to harvest or is severely limited in harvesting on various of its timberlands, it intends to continue and/or expand its takings litigation seeking just compensation from the appropriate government agencies on the grounds that such restrictions constitute an uncompensated governmental taking of private property for public use. In the event that the Multi-Species HCP is not approved, Pacific Lumber will not enjoy the benefits of a more streamlined THP preparation and review process. Furthermore, it is impossible for the Company to determine the potential adverse effect of (i) the listings of the marbled murrelet and coho salmon if the Multi-Species HCP as approved is not acceptable to Pacific Lumber or (ii) the EPA's potential regulations regarding water quality on the Company's financial position, results of operations or liquidity until such time as the various regulatory and legal issues are resolved; however, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on significant amounts of its timberlands, such effect could be materially adverse to the Company. 7. SUBSEQUENT EVENT On July 20, 1998, Scotia LLC, a recently formed limited liability company wholly owned by Pacific Lumber, issued the Timber Notes which consist of an aggregate of $867.2 million of Class A-1, Class A-2 and Class A-3 timber collateralized notes which are due on July 20, 2028 and have an overall effective interest rate of 7.43% per annum. Net proceeds from the offering were used primarily to prepay the Old Timber Notes and to redeem the Pacific Lumber Senior Notes and the MGI Notes effective August 19, 1998. The Company expects to recognize an extraordinary loss of $41.8 million, net of the related income tax benefit of $23.6 million, in the quarter ended September 30, 1998 for the early extinguishment of the Old Timber Notes, Pacific Lumber Senior Notes and MGI Notes. Concurrently with the issuance of the Timber Notes, (i) Scotia Pacific was merged into Scotia LLC, (ii) Pacific Lumber transferred to Scotia LLC approximately 13,500 acres of timberlands and the timber and timber harvesting rights with respect to an additional 19,700 acres of timberlands, and (iii) Scotia LLC transferred to Pacific Lumber the timber and timber harvesting rights related to approximately 1,400 acres of timberlands. Under the Timber Notes Indenture, the business activities of Scotia LLC are generally limited to the ownership and operation of its timber and timberlands. The Timber Notes are senior secured obligations of Scotia LLC and are not obligations of, or guaranteed by, Pacific Lumber or any other person. The Timber Notes are secured by a lien on (i) Scotia LLC's timber and timberlands (representing $246.2 million of the Company's consolidated balance at June 30, 1998), and (ii) substantially all of Scotia LLC's other property. Interest on the Timber Notes is further secured by the $63.5 million Timber Notes Line of Credit. The Timber Notes Indenture permits Scotia LLC to have outstanding up to $75.0 million of non-recourse indebtedness to acquire additional timberlands, to issue additional timber notes provided certain conditions are met (including repayment or redemption of the $160.7 million Class A-1 Timber Notes) and to incur indebtedness under the Timber Notes Line of Credit. The Timber Notes are structured to link, to the extent of cash available, the deemed depletion of Scotia LLC's timber (through the harvest and sale of logs) to the required amortization of the Timber Notes. The required amount of amortization on any Timber Note payment date is determined by various mathematical formulas set forth in the Timber Notes Indenture. The minimum amount of principal which Scotia LLC must pay (on a cumulative basis and subject to available cash) through any Timber Note payment date in order to avoid an Event of Default is referred to as Minimum Principal Amortization. If the Timber Notes were amortized in accordance with Minimum Principal Amortization, the final installment of principal would be paid on July 20, 2028. The minimum amount of principal which Scotia LLC must pay (on a cumulative basis) through any Timber Note payment date in order to avoid payment of prepayment or deficiency premiums is referred to as Scheduled Amortization. If all payments of principal are made in accordance with Scheduled Amortization, the payment date on which Scotia LLC will pay the final installment of principal is January 20, 2014. Such final installment would include a single bullet principal payment of $463.3 million related to the Class A-3 Timber Notes. Principal and interest on the Timber Notes are payable semi annually on January 20 and July 20. The Timber Notes are redeemable at the option of Scotia LLC at any time. The redemption price of the Timber Notes is equal to the sum of the principal amount, accrued interest and a prepayment premium calculated based upon the yield of like-term Treasury securities plus 50 basis points. The indenture for the MGHI Notes provided that in the event the 27,938,250 shares of Kaiser common stock which it owns were released from the pledge securing the MGI Notes, the Company would pledge 16,055,000 of such shares. In connection with the redemption of the MGI Notes and the issuance of the Timber Notes, the Company agreed to amend the indenture for the MGHI Notes to, among other things, pledge all of the 27,938,250 shares of Kaiser common stock which it owns. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the response to Part I, Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any capitalized terms used but not defined in this Item are defined in the "Glossary of Defined Terms" contained in Appendix A. This section contains statements which constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in several places in this Form 10-Q. Such statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors include the effectiveness of management's strategies and decisions, general economic and business conditions, developments in technology, new or modified statutory or regulatory requirements and changing prices and market conditions. This section and the Form 10-K identify other factors that could cause such differences. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. RESULTS OF OPERATIONS The Company engages in forest products operations principally through its subsidiaries, Pacific Lumber and Britt. The Company's business is seasonal in that the forest products business generally experiences lower first quarter sales due largely to the general decline in construction-related activity during the winter months. Accordingly, the Company's results for any one quarter are not necessarily indicative of results to be expected for the full year. The following table presents selected operational and financial information for the three and six months ended June 30, 1998 and 1997.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ (IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES) Shipments: Lumber: (1) Redwood upper grades 11.9 13.3 22.1 26.3 Redwood common grades 59.6 67.6 113.5 124.8 Douglas-fir upper grades 1.6 2.5 3.5 5.0 Douglas-fir common grades 12.1 17.1 21.3 36.5 Other 3.2 4.9 5.7 8.8 ------------ ------------ ------------ ------------ Total lumber 88.4 105.4 166.1 201.4 ============ ============ ============ ============ Logs (2) 1.3 4.1 1.3 6.6 ============ ============ ============ ============ Wood chips (3) 48.6 62.1 80.8 122.3 ============ ============ ============ ============ Average sales price: Lumber: (4) Redwood upper grades $ 1,513 $ 1,423 $ 1,503 $ 1,373 Redwood common grades 550 546 529 527 Douglas-fir upper grades 1,296 1,153 1,281 1,181 Douglas-fir common grades 331 497 340 491 Logs (4) 414 359 414 404 Wood chips (5) 75 76 70 76 Net sales: Lumber, net of discount $ 57.3 $ 68.6 $ 105.8 $ 127.7 Logs .5 1.5 .5 2.7 Wood chips 3.7 4.7 5.7 9.2 Cogeneration power 1.2 1.2 1.8 2.2 Other .8 .8 1.6 1.9 ------------ ------------ ------------ ------------ Total net sales $ 63.5 $ 76.8 $ 115.4 $ 143.7 ============ ============ ============ ============ Operating income $ 14.7 $ 24.3 $ 24.8 $ 43.1 ============ ============ ============ ============ Operating cash flow (6) $ 20.5 $ 31.0 $ 36.2 $ 56.3 ============ ============ ============ ============ Income before income taxes $ 2.4 $ 8.4 $ 1.4 $ 7.9 ============ ============ ============ ============ Net income $ 3.6 $ 5.0 $ 4.5 $ 4.7 ============ ============ ============ ============ Capital expenditures $ 3.2 $ 10.2 $ 6.0 $ 12.4 ============ ============ ============ ============ - --------------- (1) Lumber shipments are expressed in millions of board feet. (2) Log shipments are expressed in millions of feet, net Scribner scale. (3) Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds. (4) Dollars per thousand board feet. (5) Dollars per bone dry unit. (6) Operating income before depletion and depreciation, also referred to as "EBITDA."
Net sales Net sales declined from $76.9 million and $143.7 million in the second quarter and first half of 1997, respectively, to $63.5 million and $115.4 million for the second quarter and first half of 1998, respectively, primarily due to lower shipments of lumber, logs and wood chips. This decrease was principally due to the inclement weather during the 1998 periods, combined with wet weather operating restrictions and the applicability of logging restrictions during the nesting seasons for the northern spotted owl and the marbled murrelet, which factors have restricted the Company's harvesting and transporting of logs to its mills. These difficulties in harvesting and transporting logs affected the types of logs available for the mills and the Company's ability to produce a desirable mix of lumber products which in turn adversely affected sales. The poor weather conditions also had an unfavorable impact on demand for the Company's lumber products and its ability to ship its products using rail transportation. The Company expects that its revenues in the third quarter of 1998 will increase materially over the second quarter of 1998, as it will, assuming normal rainfall patterns during such quarter, be able to conduct operations in areas where it has been restricted due to inclement weather, wet weather operating restrictions and the nesting seasons which end during the third quarter of 1998, and therefore be able to achieve normal levels of lumber production as well as a more desirable mix of lumber products. Operating income Operating income for the three and six months ended June 30, 1998 decreased from the comparable prior year periods primarily due to the decrease in net sales discussed above. Income before income taxes Income before income taxes for the three and six months ended June 30, 1998 decreased from the comparable 1997 periods, primarily due to the decrease in operating income discussed above. This impact was partially offset by equity in earnings from Kaiser. As discussed in Note 4 to the Consolidated Financial Statements, the Company began reflecting its equity share of earnings in Kaiser in September 1997. Results for the second quarter of 1998 were also affected by a decrease in investment income from marketable securities. 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 above for cautionary information with respect to such forward-looking statements. As discussed further in Note 7 to the Consolidated Financial Statements, on July 20, 1998, Scotia LLC issued $867.2 million of Timber Notes. Proceeds from the offering were used primarily to prepay the Old Timber Notes and to redeem the Pacific Lumber Senior Notes and the MGI Notes effective August 19, 1998. The Pacific Lumber Credit Agreement and the indenture governing the Timber Notes contain various covenants which, among other things, limit the ability of Pacific Lumber and Scotia LLC to incur additional indebtedness and liens, to engage in transactions with affiliates, to pay dividends and to make investments. As of June 30, 1998, under the most restrictive of these covenants, approximately $24.6 million of dividends could be paid by Pacific Lumber to its parent. As of June 30, 1998, $31.1 million of borrowings was available under the Pacific Lumber Credit Agreement, of which $5.6 million was available for letters of credit and $20.5 million was restricted to timberland acquisitions. As of June 30, 1998, $9.4 million of borrowings were outstanding and letters of credit outstanding amounted to $14.4 million. All of the $9.4 million of borrowings were repaid on July 20, 1998 in connection with the issuance of the Timber Notes. The indenture governing the MGHI Notes, among other things, restricts the ability of the Company to incur additional indebtedness and liens, engage in transactions with affiliates, pay dividends and make investments. During the six months ended June 30, 1998, $2.5 million of dividends were paid by the Company. As of June 30, 1998, the Company had consolidated long-term debt of $860.0 million (net of current maturities and restricted cash deposited in the Liquidity Account) as compared to $864.5 million at December 31, 1997. The decrease in long-term debt was primarily due to $10.8 million in principal payments on the Old Timber Notes offset by $7.2 million in accretion of discount on the MGI Discount Notes. The Company anticipates that cash flow from operations, together with existing cash, cash equivalents, marketable securities and available sources of financing, will be sufficient to fund its working capital and capital expenditure requirements for the next year. With respect to its long-term liquidity, the Company believes that its existing cash and cash equivalents, together with its ability to generate sufficient levels of cash from operations and its ability to obtain both short- and long-term financing, should provide sufficient funds to meet its working capital and capital expenditure requirements. However, due to its highly leveraged condition, the Company is more sensitive than less leveraged companies to factors affecting its operations, including governmental regulation and litigation affecting timber harvesting practices (see "--Trends" below), increased competition from other lumber producers or alternative building products and general economic conditions. TRENDS This section contains statements which constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See above for cautionary information with respect to such forward-looking statements. The Company's forest products operations are conducted by Pacific Lumber and Britt. Pacific Lumber's operations are subject to a variety of California and federal laws and regulations dealing with timber harvesting, threatened and endangered species and habitat for such species, 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. There can be no assurance that certain pending regulatory and environmental matters or future governmental regulations, legislation or judicial or administrative decisions would not have a material adverse effect on the Company's financial position, results of operations or liquidity. See Part II. Item 1. "Legal Proceedings" and Note 6 to the Condensed Consolidated Financial Statements for further information regarding regulatory and legal proceedings affecting the Company's operations. Judicial or regulatory actions adverse to Pacific Lumber, increased regulatory delays and inclement weather in northern California, independently or collectively, could impair Pacific Lumber's ability to maintain adequate log inventories and force Pacific Lumber to temporarily idle or curtail operations at certain lumber mills from time to time. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 27, 1998, an action entitled Mateel Environmental Justice Foundation v. Pacific Lumber, et. al. (No. 995329) was filed against MGI, Scotia Pacific, Pacific Lumber and Salmon Creek in the California Superior Court, San Francisco County. This action alleges, among other things, violations of California's unfair competition law of the business and professions code based on citations and violations (primarily water quality related) issued against certain defendants since 1994 in connection with a substantial number of THPs. The plaintiff seeks, among other things, an injunction prohibiting alleged unlawful actions and requiring corrective action, disgorgement of profits, appointment of a receiver to ensure compliance with the law and any judgment, and financial security with respect to future THPs to ensure full compliance with the Forest Practice Act. The Company does not believe that this matter will have a material adverse effect upon its business or financial condition. Reference is made to Item 3 of the Form 10-K for information concerning material legal proceedings with respect to the Company. No material developments have occurred with respect to such legal proceedings. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS: 4.1 Indenture between Scotia LLC and State Street Bank and Trust Company ("State Street"), as Trustee, regarding the Timber Notes (incorporated herein by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of MAXXAM for the quarter ended June 30, 1998, File No. 1-3924; the "MAXXAM June 30, 1998 10-Q") 4.2 Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Proceeds among Scotia LLC, Fidelity National Title Insurance Company, as Trustee, and State Street, as Collateral Agent (incorporated herein by reference to Exhibit 4.2 to the MAXXAM June 30, 1998 10-Q) 4.3 Credit Agreement among Scotia LLC, Bank of America National Trust and Savings Association and other financial institutions party thereto (incorporated herein by reference to Exhibit 4.3 to the MAXXAM June 30, 1998 10-Q) *10.1 New Master Purchase Agreement between Pacific Lumber and Scotia LLC *10.2 New Services Agreement between Pacific Lumber and Scotia LLC *10.3 New Additional Services Agreement between Pacific Lumber and Scotia LLC *10.4 New Reciprocal Rights Agreement among Pacific Lumber, Scotia LLC and Salmon Creek *10.5 New Environmental Indemnification Agreement between Pacific Lumber and Scotia LLC *27 Financial Data Schedule * Included with this filing. B. REPORTS ON FORM 8-K: None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, who has signed this report on behalf of the Registrant and as the principal accounting officer of the Registrant. MAXXAM GROUP HOLDINGS INC. Date: July 31, 1998 By: /S/ PAUL N. SCHWARTZ Paul N. Schwartz Vice President, Chief Financial Officer and Director Date: July 31, 1998 By: /S/ ELIZABETH D. BRUMLEY Elizabeth D. Brumley Assistant Controller (Principal Accounting Officer) APPENDIX A GLOSSARY OF DEFINED TERMS BOF: California Board of Forestry Britt: Britt Lumber Co., Inc., an indirect, wholly owned subsidiary of MGI Budget Bill: California's 1998-99 budget bill CDF: California Department of Forestry CESA: California Endangered Species Act Company: MAXXAM Group Holdings Inc., a wholly owned subsidiary of MAXXAM EPA: Environmental Protection Agency ESA: The federal Endangered Species Act Form 10-K: The Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1997 HCP: Habitat Conservation Plan Headwaters Agreement: The September 28, 1996 agreement among the Pacific Lumber Parties, the United States and California which provides the framework for the acquisition by the United States and California of the Headwaters Timberlands Headwaters Timberlands: Approximately 5,600 acres of Pacific Lumber's timberlands consisting of two forest groves commonly referred to as the Headwaters Forest and the Elk Head Springs Forest Kaiser: Kaiser Aluminum Corporation, an equity investee of the Company engaged in aluminum operations Liquidity Account: A liquidity account maintained by Scotia Pacific with respect to the Old Timber Notes LTSY: Long-term sustained yield MAXXAM: MAXXAM Inc., including its subsidiaries unless otherwise noted or the context indicates otherwise MGHI Notes: 12% MGHI Senior Secured Notes due August 1, 2003 MGI: MAXXAM Group Inc., a wholly owned subsidiary of the Company MGI Discount Notes: 12-1/4% MGI Senior Secured Discount Notes due August 1, 2003 MGI Notes: MGI Discount Notes and MGI Senior Notes MGI Senior Notes: 11-1/4% MGI Senior Secured Notes due August 1, 2003 Minimum Principal Amortization: The minimum amount of principal on the Timber Notes which Scotia LLC must pay (on a cumulative basis and subject to available cash) through any Timber Note payment date in order to avoid an Event of Default (as defined in the Timber Note Indenture) Multi-Species HCP: The HCP covering multiple species contemplated by the Headwaters Agreement NMFS: National Marine Fisheries Service Old Timber Notes: The 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015 Pacific Lumber: The Pacific Lumber Company, an indirect, wholly owned subsidiary of MGI Pacific Lumber Credit Agreement: The revolving credit agreement between Pacific Lumber and a bank which provides for borrowings of up to $60,000,000 of which $20,000,000 may be used for standby letters of credit and $30,000,000 is restricted to timberland acquisitions. Pacific Lumber Parties: Pacific Lumber, including its subsidiaries and affiliates, and MAXXAM Pacific Lumber Senior Notes: 10-1/2% Pacific Lumber Senior Notes due March 1, 2003 Permits: The incidental take permits related to the Multi-Species HCP Pledged Kaiser Shares: The 27,938,250 shares of common stock of Kaiser pledged as security for the MGI Notes Pre-Permit Agreement: A February 27, 1998 Pre-Permit Application Agreement in Principle entered into by Pacific Lumber, MAXXAM and various government agencies regarding certain understandings that they had reached regarding the Multi-Species HCP, the Permits and the SYP PRIDES: 8,855,550 8.255% Preferred Redeemable Increased Dividend Equity Securities issued by Kaiser during the first quarter of 1994; all outstanding shares were converted into 7,227,848 shares of Kaiser common stock in August 1997 Salmon Creek: Salmon Creek Corporation, a wholly owned subsidiary of Pacific Lumber Scheduled Amortization: The minimum amount of principal on the Timber Notes which Scotia LLC must pay (on a cumulative basis) through any Timber Note payment date in order to avoid payment of prepayment or deficiency premiums. Scotia LLC: Scotia Pacific Company LLC, a limited liability company wholly owned by Pacific Lumber Scotia Pacific: Scotia Pacific Holding Company, a wholly owned subsidiary of Pacific Lumber, which was merged into Scotia LLC on July 20, 1998 SEC: Securities and Exchange Commission SFAS No. 130: Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" SFAS No. 133: Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" SYP: The sustained yield plan establishing LTSY harvest levels for Pacific Lumber's timberlands THP: Timber harvesting plan required to be filed with and approved by the CDF prior to the harvesting of timber Timber Note Indenture: The indenture dated July 20, 1998 governing the Timber Notes Timber Notes: The Scotia LLC 6.55% Class A-1, 7.11% Class A-2 and 7.71% Class A-3 Timber Collateralized Notes due July 20, 2028 Timber Notes Line of Credit: A line of credit agreement provided as security for the payment of interest on the Timber Notes USFWS: United States Fish and Wildlife Service EX-10 2 EXHIBIT 10.1 NEW MASTER PURCHASE AGREEMENT This NEW MASTER PURCHASE AGREEMENT (this "Agreement"), dated as of July 20, 1998, is entered into by and between Scotia Pacific Company LLC, a Delaware limited liability company (the "Seller"), and The Pacific Lumber Company, a Delaware corporation (the "Purchaser"). WITNESSETH: The Seller and the Purchaser are parties to a Master Purchase Agreement dated as of March 23, 1993, which is being terminated effective as of the date hereof (the "Existing Master Purchase Agreement"). The Seller and the Trustee have entered into the Indenture, pursuant to which the Seller has issued the Timber Notes; and the Seller, the Collateral Agent and the Deed of Trust Trustee have entered into the Deed of Trust, securing, among other things, the Seller's obligations under the Timber Notes and the Indenture; and This Agreement is being entered into in connection with the issuance and sale of the Timber Notes. NOW, THEREFORE, in consideration of the mutual agreements contained herein and in the Operative Documents and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the Seller and the Purchaser hereby agree as follows: I DEFINITIONS 1.1 For all purposes of this Agreement, unless the context otherwise requires, all defined terms which are used but not defined herein shall have the meaning set forth in Schedule A to the Indenture, which is incorporated by reference as if fully set forth herein. II MASTER AGREEMENT 2.1 This Agreement shall govern all sales of logs from Seller to Purchaser, including the sale of any logs covered by a log purchase agreement entered into pursuant to the Existing Master Purchase Agreement to the extent the logs covered thereby have not been sold thereunder prior to the date hereof. Each sale shall be made pursuant to a Log Purchase Agreement substantially in the form of Exhibit A hereto (each, a "Log Purchase Agreement"). Each Log Purchase Agreement shall be consistent with the terms and conditions of this Agreement, and all of the terms and conditions of this Agreement shall be incorporated by reference into each Log Purchase Agreement. References to "this Agreement" shall refer to this New Master Purchase Agreement and each Log Purchase Agreement entered into pursuant hereto. 2.2 If, as of any Note Payment Date, the cumulative amount of principal on the Notes paid by the Seller (the "Amount Paid") is less than the sum of all Minimum Principal Amortization in respect of the Notes through such date (the "Target Level"), the Seller may, to the extent of the greater of (A) the amount (expressed as gross revenues from the sale of logs) necessary to reach the Target Level or (B) $500,000, sell any timber (as logs or stumpage) which is the subject of any Log Purchase Agreement to any third party, prior to the time that title to such log is transferred to the Purchaser pursuant to Section 3.5. In addition, if and for so long as the provisions of Section 4.31 of the Indenture are applicable, the Seller may sell timber (as logs or stumpage) which is the subject of any Log Purchase Agreement to any third party, prior to the time that title to such log is transferred to the Purchaser pursuant to Section 3.5, to the extent provided by Section 4.31 of the Indenture. If the Seller sells to third parties any timber which has been felled by Purchaser pursuant to a Log Purchase Agreement, the Purchaser shall receive a credit for the costs of felling such timber, based upon the Purchaser's costs incurred in connection with the felling thereof, as determined in accordance with generally accepted accounting principles. Any stumpage or logs sold by the Seller to a third party in compliance with this Section 2.2 shall be free and clear of any rights or claims of the Purchaser, and the Purchaser shall be relieved of its obligations to purchase such logs. III PRICE, QUANTITY AND PAYMENT TERMS 3.1 The price (the "Purchase Price") payable to the Seller by the Purchaser for logs purchased pursuant to this Agreement shall be the fair market value (based upon stumpage prices) for each species of timber and category thereof as determined from time to time in good faith by the Seller and the Purchaser. The Purchase Price shall be at least equal to the SBE Price (as defined below). In addition, it is generally contemplated that the Purchase Price shall be at least equal to the Structuring Price, except as provided in this Article III. 3.2 If the Purchase Price equals or exceeds (i) the price for such species and category thereof set forth on the Structuring Schedule (the "Structuring Price") and (ii) the SBE Price, then such price shall be deemed to be the fair market value of such logs. The "SBE Price", for any species and category thereof, shall be the stumpage price for such species and category thereof as set forth in the most recent Harvest Value Schedule (or any successor publication) published by the California State Board of Equalization (or any successor agency) applicable to the timber sold during the period covered by such publication. In the event that (x) such publication (or a successor publication) is no longer published or (y) such publication (or a successor publication) is prepared on a basis fundamentally different than that in effect on the date of this Agreement, the SBE Price for any six-month period subsequent to the period covered by the last such publication shall equal the product of (A) the last SBE Price so published and (B) the quotient of (I) the value of the most recently published Producer Price Index (Lumber and Wood Products Commodity Group) (Standard Industrial Classification No. 2400) as published by the United States Department of Labor, Bureau of Labor Statistics (or any successor index) (the "Index"), as of the first day of such six month period, divided by (II) the value of the Index as of the first day of the first such six month period. 3.3 If the Purchase Price (i) is less than the Structuring Price and (ii) equals or exceeds the SBE Price, then such price shall be deemed to be the fair market value of such logs if the Seller shall have delivered to the Trustee an Officer's Certificate to the effect that, after due inquiry (consisting of consultation with an independent forestry consultant), such price reflects the fair market value of such species and category thereof (based upon stumpage prices). 3.4 The Purchase Price for all logs purchased by the Purchaser during each Monthly Period shall be payable by the Purchaser not later than 11:00 a.m., New York City time, on the Monthly Deposit Date with respect to such Monthly Period by deposit of immediately available funds to the Collection Account on such date. 3.5 The title to all logs harvested by the Purchaser pursuant to this Agreement shall remain in the Seller until such time as each log is scaled. At such time, title shall pass to the Purchaser and the Purchaser shall become obligated to make payment as provided in Section 3.4. IV TIMBER HARVESTING PLANS, RELATED MATTERS 4.1 All harvesting of timber hereunder shall be conducted on Company Timber Property with respect to which a valid Timber Harvesting Plan is in effect. 4.2 All harvesting of timber and other related activities conducted by the Purchaser under this Agreement shall be conducted in all material respects in accordance with all applicable Environmental Laws, Timber Laws and General Laws, including, without limitation, those relating to streams, waterways, wildlife habitat and endangered species, and shall be conducted in all material respects in accordance with the terms, provisions, restrictions and conditions of each applicable Timber Harvesting Plan, sustained yield plan, habitat conservation plan, other similar plan or permit and all federal, state and local laws, rules and regulations relating to or incorporated into any Timber Harvesting Plan, including laws relating to streams, waterways, wildlife habitat and endangered species. V REPRESENTATIONS AND WARRANTIES 5.1 The Purchaser hereby represents and warrants to the Seller as follows: (a) The Purchaser has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with full corporate power and authority to own its properties and conduct its business as presently conducted, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction material to the performance of its obligations under this Agreement. (b) This Agreement has been duly authorized, executed and delivered by the Purchaser and constitutes the valid and legally binding agreement of the Purchaser enforceable against the Purchaser in accordance with its terms, except to the extent such enforceability may be limited by Bankruptcy Law or general principles of equity; and the Purchaser has full corporate power and authority to enter into and perform its obligations under this Agreement. (c) No consent, approval, authorization or order of any Governmental Authority is required for the execution and delivery by the Purchaser of this Agreement. (d) The execution, delivery and performance by the Purchaser of this Agreement does not violate, conflict with, result in a breach of, or constitute a default (or an event which with the giving of notice or the lapse of time or both would be reasonably likely to constitute a default) under the charter or by-laws of the Purchaser, or any General Law, Timber Law or Environmental Law applicable to the Purchaser and in effect on the date hereof, or the terms of any bond, debenture, note or any other evidence of indebtedness or any agreement, indenture, lease or other similar instrument to which the Purchaser is a party or by which it or any of its properties is subject. (e) Except as disclosed in the Offering Memorandum, there is not pending or, to the knowledge of the Purchaser, threatened, any action, suit, proceeding or investigation involving the Purchaser (and, to the knowledge of the Purchaser, no basis for any such action, suit, proceeding or investigation exists) before any Governmental Authority which could reasonably be expected to have a material adverse effect upon this Agreement or the ability of the Purchaser to perform its obligations hereunder. (f) Except as disclosed in the Offering Memorandum, during the term of the Existing Master Purchase Agreement, Pacific Lumber complied in all material respects with (A) the terms and conditions of each approved Timber Harvesting Plan in connection with timber harvested by Pacific Lumber from the Company Timber Property and (B) all other material Timber Laws applicable to such operations, as then in effect. VI SCALING, RELATED MATTERS 6.1 The Purchaser shall be responsible for all scaling and measuring of logs purchased pursuant to this Agreement. The Purchaser shall, at its own expense, furnish one or more qualified scalers acceptable to the Seller. Such scalers may be employees of the Purchaser. 6.2 Scaling shall be done as soon as practicable upon delivery of logs to the Purchaser's log deck according to the Net Short Log Scribner Scale methodology of scaling. Notwithstanding the foregoing, and subject to Section 4.12 of the Indenture, the Purchaser may, at its option, utilize the weight equivalency methodology of scaling. In such event, the Purchaser shall scale in accordance with the requirements of the California State Board of Equalization (or any successor agency) for the weight equivalency methodology of scaling, as in effect from time to time. In accordance therewith, the Purchaser shall scale truckloads of logs from time to time upon request of the Seller according to the Net Short Log Scribner Scale methodology, and shall appropriately adjust the assumptions used in its weight equivalency methodology on an ongoing basis to reflect the results of such scaling. 6.3 The Seller may, upon reasonable notice to the Purchaser, at its option and cost, at any time or from time to time utilize independent scalers from the Northern California Log Scaling and Grading Bureau (or any successor organization) or any other recognized third party log scaling and grading bureau to verify the scaling by the Purchaser. The Purchaser shall cooperate fully in any such verification by the Seller. The Seller shall utilize independent scalers for at least two consecutive Business Days in each six month period, upon reasonable notice to the Purchaser. The Purchaser shall appropriately adjust the results of its scaling on a prospective basis to reflect the results of such third party scaling. 6.4 Not later than each Monthly Certificate Delivery Date, the Purchaser shall prepare and deliver to the Seller a report (the "Monthly Production Report") substantially in the form of Exhibit B hereto, to be included in summary form in the Monthly Trustee Certificate. VII HARVESTING 7.1 The Purchaser, at its own expense, agrees to cut and remove the timber described in each Log Purchase Agreement in a manner consistent in all material respects with prudent business practices which, in the reasonable judgment of the Purchaser, (i) are consistent with then current applicable industry standards and (ii) are in compliance in all material respects with Section 4.2 and all applicable Timber Laws, Environmental Laws and General Laws. 7.2 Provided that the Purchaser is the Services Provider under the New Services Agreement, the Purchaser shall be entitled, at its option and at no additional cost to the Purchaser, (a) to harvest and retain for its own use, any and all hardwood trees which are permitted to be harvested pursuant to any Timber Harvesting Plan subject to a Log Purchase Agreement, (b) to remove for its own use, any and all residual parts of trees harvested pursuant to any Timber Harvesting Plan subject to a Log Purchase Agreement, including, but not limited to, breaks, limbs and tops, and (c) to remove for its own use or to sell, gravel and rock from the Company Timber Property. 7.3 The Purchaser shall complete harvesting of any timber covered by a Timber Harvesting Plan within the applicable time period set forth in such Timber Harvesting Plan (inclusive of any extensions thereof). VIII INDEMNIFICATION; INSURANCE 8.1 The Purchaser shall be liable for, and shall indemnify, protect, defend and hold harmless the Seller, the Trustee and the Collateral Agent, their respective subsidiary and affiliate companies and their respective agents, employees, managers, directors, partners, officers, servants and representatives against, any and all claims, demands, causes of action, expenses or liabilities (including reasonable attorneys' fees and disbursements) of every kind and character (whether known or unknown, fixed or contingent, liquidated or unliquidated, secured or unsecured, choate or inchoate, accrued, absolute or otherwise), suffered or sustained, arising from (i) the breach by the Purchaser of any of its representations, warranties, covenants and agreements set forth in this Agreement, (ii) actions or omissions of the Purchaser in connection with its obligations hereunder and (iii) failure of the Purchaser to have complied with the terms and conditions of approved Timber Harvesting Plans in connection with Timber harvested from its property or any other Timber Laws, Environmental Laws and General Laws applicable to such operations, as then in effect. The Seller shall notify the Purchaser promptly of any claim for which it may seek indemnity. The Purchaser shall have the right to defend the claim, and the Seller shall cooperate in the defense. If the Purchaser does not defend such claim, the Seller may have separate counsel and the Purchaser shall pay the reasonable fees and expenses of such counsel. 8.2 The Purchaser shall at all times maintain comprehensive general and automobile liability insurance against claims for personal injury, death or property damage with limits of liability of not less than $10,000,000 per occurrence and deductibles of up to $3,000,000 per occurrence and (ii) all such worker's compensation or similar insurance as may be required by applicable laws, provided that the Purchaser may self-insure any or all worker's compensation liabilities. To the extent that any of the insurance required by this Section 8.2 ceases to be available at commercially reasonable rates, the Purchaser may maintain insurance coverage in accordance with the prudent standards then being followed by other companies engaged in the same or similar lines of business or having comparable properties. IX INDEPENDENT CONTRACTOR STATUS 9.1 The Purchaser shall harvest the timber and perform its other obligations hereunder as an independent contractor. The number of employees, the selection and retention of such employees, the hours of labor and the compensation for services to be paid to any and all such employees of the Purchaser shall be determined by the Purchaser. All employees, agents, contractors and subcontractors hired by the Purchaser to perform any obligations of the Purchaser hereunder shall not be deemed to be the employees, agents, contractors and subcontractors of the Seller, and all salaries and compensation payable to them shall be the exclusive responsibility of the Purchaser. X MISCELLANEOUS 10.1 Term. This Agreement shall become effective upon the date first noted above and shall continue in effect until all amounts payable under the Timber Notes (including any Additional Timber Notes), the Indenture and the Deed of Trust shall have been paid in full. 10.2 Termination. (a) The Seller or the Trustee, in each case to the extent provided in Section 4.21(a) of the Indenture, shall have the right to terminate this Agreement if a Purchase Agreement Default has occurred and is continuing. The Seller or the Trustee may also terminate this Agreement upon the giving of any notice of acceleration under Section 7.2(b) of the Indenture. The Purchaser shall promptly notify the Seller and the Trustee in writing of any Purchase Agreement Default. (b) In the event that this Agreement is terminated as provided in Section 10.2(a) hereof, (i) the Seller shall in good faith seek to enter into one or more agreements for the sale of logs or stumpage consistent with Section 7.1(f)(6) of the Deed of Trust and (ii) the Seller shall be relieved of all obligations to sell, and the Purchaser shall be relieved of obligations to purchase, timber under any Log Purchase Agreement. (c) The provisions of Sections 8.1, 10.4 and 10.5 shall survive the expiration or termination of this Agreement; provided, however, that Section 8.1 shall survive only with respect to matters occurring prior to such expiration or termination. 10.3 Amendments. (a) This Agreement may be amended by an agreement in writing signed by the Seller and the Purchaser in accordance with Section 4.12 of the Indenture. (b) Promptly following the execution of any amendment to this Agreement, the Seller will furnish to the Trustee and each Rating Agency a true, correct and complete copy of such amendment. 10.4 No Bankruptcy Petition. The Purchaser hereby covenants and agrees that, prior to the date which is one year and one day after the payment in full of all outstanding Notes, it will not institute against, or join any other Persons in instituting against, the Seller, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding or other similar proceeding under any Bankruptcy Law. 10.5 Subordination. This Agreement and all rights of the Purchaser hereunder are junior and subordinate to the lien of the Deed of Trust. 10.6 Notices. All notices and other communications required or permitted hereunder shall be in writing and, unless otherwise provided in this Agreement, shall be deemed to have been duly given when delivered in person or by mail or when dispatched by telegram or electronic facsimile transfer (confirmed in writing by mail simultaneously dispatched) to the addressee at the address specified below: If to the Purchaser: The Pacific Lumber Company P.O. Box 37 Scotia, California 95565 Fax: (707) 764-4269 Attention: Vice President, Finance and Administration If to the Seller: Scotia Pacific Company LLC P.O. Box 712 Scotia, California 95565 Fax: (707) 764-5001 Attention: Vice President, Finance and Administration If to any Rating Agency: Standard & Poor's, a division of The McGraw Hill Companies 26 Broadway - 10th Floor New York, NY 10004-1010 Fax: (212) 208-8208 Attention: Asset-Backed Surveillance Group Moody's Investors Service, Inc. 99 Church Street - 4th Floor New York, NY 10007 Fax: (212) 553-4948 Attention: ABS Monitoring Department or such other address as either party may from time to time designate by like notice. 10.7 Limitations on Assignment. Neither the Purchaser nor the Seller shall assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the other (except for the lien of the Deed of Trust and any transfer of the rights and obligations of the Seller hereunder by virtue of the exercise of remedies provided for in the Deed of Trust); provided that the Purchaser shall not transfer any of its obligations under this Agreement unless (i) no Default or Event of Default shall have occurred and be continuing and (ii) either (A) the prior written consent of the Majority Holders and Rating Agency Confirmation shall have been obtained or (B) the prior written consent of the Supermajority Holders (after prior notice of the Rating Agency Evaluation) and Rating Agency Evaluation shall have been obtained. Notwithstanding the foregoing, (x) nothing herein shall prohibit the Purchaser from hiring any subcontractors or agents; provided that such hiring shall not relieve the Purchaser of any of its obligations hereunder and (y) nothing herein shall prohibit any assignment occurring as a result of a transaction permitted by Section 4.2 of the New Services Agreement. 10.8 Effect of Provisions of the Other Operative Documents. Notwithstanding any provision of the Indenture or the Deed of Trust requiring the Seller to pay an expense or perform an obligation, the Purchaser shall not be relieved from any of its obligations under this Agreement to pay expenses or perform obligations as expressly provided in this Agreement. Nothing in this Agreement shall be interpreted so as to limit or construe any of the obligations of the Servicer under the Services Agreement. 10.9 Governing Law. This Agreement shall be governed by the internal laws of the State of California without regard to principles of conflict of laws. 10.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument. 10.11 Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof. 10.12 Headings. The section headings of this Agreement are only for the purpose of reference and shall not effect the meaning hereof. [REST OF PAGE INTENTIONALLY LEFT BLANK.] IN WITNESS WHEREOF, the parties hereto have executed this New Master Agreement as of the date first above written. PURCHASER: THE PACIFIC LUMBER COMPANY By: /S/ JOHN A. CAMPBELL Name: John A. Campbell Title: President SELLER: SCOTIA PACIFIC COMPANY LLC By: /S/ GARY L. CLARK Name: Gary L. Clark Title: Vice President-Finance and Administration Exhibit A Form of Log Purchase Agreement Log Purchase Agreement This Agreement is entered into between Scotia Pacific Company LLC (the "Seller") and The Pacific Lumber Company (the "Purchaser") as of ____________, ____. Timber Harvesting Plan No. ______ (the "THP") _______________ Estimated Mbfe covered by the THP _______________ Estimated Starting Date _______________ Contact person at Purchaser _______________ . Seller agrees to sell, and Purchaser agrees to purchase, the timber covered by the THP, at prices that comply with Article III of the New Master Purchase Agreement. . The Seller and the Purchaser agree that the terms and conditions of the New Master Purchase Agreement are incorporated by reference as if fully set forth herein. SCOTIA PACIFIC COMPANY LLC, Seller By:____________________________ Name: Title: THE PACIFIC LUMBER COMPANY, Purchaser By:____________________________ Name: Title: Exhibit B to New Master Purchase Agreement Form of Monthly Production Report The undersigned, the _____________ of The Pacific Lumber Company (the "Purchaser"), DOES HEREBY CERTIFY: 1. This Monthly Production Report is delivered pursuant to Section 6.4 of the New Master Purchase Agreement dated as of July __, 1998 between the Purchaser and Scotia Pacific Company LLC. 2. The undersigned has made such examination or investigation as is necessary to enable him or her to express an informed opinion on the matters referred to herein. 3. To the best of the undersigned's knowledge, the attached calculations are in accordance with the books and records of the Purchaser. Delivered this ____ day of ___, _____. ______________________________ Name: Exhibit B To New Master Purchase Agreement Monthly Production Report for month of:
Purchases Purchases Type (net scribner scale) Factor (Mbfe) Old Growth Redwood _____ 1.0000 Mbfe Old Growth Douglas Fir _____ 0.723757 Mbfe Young Growth Redwood _____ 0.751381 Mbfe Young Growth Douglas Fir _____ 0.488950 Mbfe Other _____ 0.309392 Mbfe Total: Mbfe
EX-10 3 EXHIBIT 10.2 NEW SERVICES AGREEMENT THIS NEW SERVICES AGREEMENT (this "Agreement"), dated as of July 20, 1998, is entered into by and between The Pacific Lumber Company, a Delaware corporation ("Pacific Lumber" and, in its capacity as the initial Services Provider hereunder, the "Services Provider"), and Scotia Pacific Company LLC, a Delaware limited liability company (the "Issuer"). WITNESSETH: The Issuer and Pacific Lumber are parties to a Services Agreement dated as of March 23, 1993, which is being terminated effective as of the date hereof (the "Existing Services Agreement"); The Issuer and the Trustee have entered into the Indenture, pursuant to which the Issuer has issued the Timber Notes; and the Issuer, the Collateral Agent and the Deed of Trust Trustee have entered into the Deed of Trust, securing, among other things, the Issuer's obligations under the Timber Notes and the Indenture; This Agreement is being entered into in connection with the issuance and sale of the Timber Notes; and Pacific Lumber is capable of rendering the services described in Schedule 1 hereto (the "Services") and supplying the equipment, personnel and expertise necessary to perform the Services as contemplated by this Agreement. NOW, THEREFORE, in consideration of the mutual agreements contained herein and in the Operative Documents and other good and valuable consideration, the sufficiency of which is hereby acknowledged, Pacific Lumber and the Issuer hereby agree as follows: I DEFINITIONS 1.1 For all purposes of this Agreement, unless the context otherwise requires, all defined terms shall have the meaning set forth in Schedule A to the Indenture, which is incorporated by reference as if fully set forth herein. II SERVICES 2.1 Services. Subject to the terms and provisions set forth in this Agreement, the Services Provider shall provide to the Issuer the Services. 2.2 Personnel Matters. Without limiting the generality of Section 2.1 of this Agreement, the Services Provider shall provide all labor and professional and supervisory persons necessary to perform the Services which are not provided by the Issuer, including, but not limited to, biologists, fire protection personnel, foresters, technicians, accountants, lawyers and office, field and other employees; provided that the Services Provider shall have the right at its own expense to use independent contractors, outside legal counsel or other outside specialists or other persons in performing the Services as it shall deem advisable in its reasonable judgment. 2.3 Performance of Services. The Services Provider shall perform or cause to be performed its duties under this Agreement in a manner consistent in all material respects with prudent business practices which, in the reasonable judgment of the Services Provider, (i) are consistent with then current applicable industry standards, and (ii) are in compliance in all material respects with applicable laws. The Services Provider shall, in connection with the performance of the Services hereunder, apply for, and use its best efforts to obtain, all permits, licenses, certificates or other administrative or regulatory authorizations as may be required by any Governmental Authority from time to time as may be necessary or appropriate for the Services Provider's performance of its obligations under this Agreement, except for such permits, licenses, certificates or other authorizations as the Issuer is specifically required to procure pursuant to the terms of the Indenture or by reason of applicable law. The Issuer shall use all reasonable efforts to assist the Services Provider in obtaining such authorizations as the Services Provider is required to obtain, and the Services Provider shall use all reasonable efforts to assist the Issuer in obtaining such authorizations as the Issuer is required to obtain. In connection with the performance of the Services, the Services Provider shall comply with all laws, rules and regulations applicable to it, and with all agreements applicable to it that now pertain, or in the future may pertain, to the Services, other than such events of non-compliance which would not, individually or in the aggregate, have a Material Adverse Effect. In addition, the Services Provider shall, in the performance of its obligations under this Agreement, abide by any applicable restrictions contained in any agreement to which the Issuer is a party, including, without limitation, the Operative Documents. 2.4 Independent Contractor Status. The Services Provider shall perform the Services as an independent contractor. The number of employees, the selection and retention of such employees, the hours of labor and the compensation for services to be paid to any and all such employees of the Services Provider shall be determined by the Services Provider. The Services Provider or a foreman, supervisor, manager or officer of the Services Provider with whom the Issuer may consult concerning the Services shall be available to the Issuer at all reasonable times. All employees, agents, contractors and subcontractors hired by the Services Provider to perform services hereunder shall not be deemed to be the employees, agents, contractors and subcontractors of the Issuer, and all salaries and compensation payable to them shall be the exclusive responsibility of the Services Provider. 2.5 Necessary Information. The Issuer shall furnish the Services Provider with all information, programs, know-how, methods or methodology within the Issuer's control as may be necessary or appropriate for the performance of the Services by the Services Provider. III REPRESENTATIONS AND WARRANTIES 3.1 Pacific Lumber hereby represents and warrants to the Issuer as follows: (a) Pacific Lumber has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with full corporate power and authority to own its properties and conduct its business as presently conducted, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction material to the performance of its obligations under this Agreement. (b) This Agreement has been duly authorized, executed and delivered by Pacific Lumber and constitutes the valid and legally binding agreement of Pacific Lumber enforceable against Pacific Lumber in accordance with its terms, except to the extent such enforceability may be limited by Bankruptcy Law or general principles of equity; and Pacific Lumber has full corporate power and authority to enter into and perform its obligations under this Agreement. (c) No consent, approval, authorization or order of any Governmental Authority or Tribunal is required for the execution and delivery by Pacific Lumber of this Agreement. (d) The execution, delivery and performance by Pacific Lumber of this Agreement does not violate, conflict with, result in a breach of, or constitute a default (or an event which with the giving of notice or the lapse of time or both would be reasonably likely to constitute a default) under the charter or by-laws of Pacific Lumber, or any General Law, Timber Law or Environmental Law applicable to Pacific Lumber and in effect on the date hereof, or the terms of any bond, debenture, note or any other evidence of indebtedness or any agreement, indenture, lease or other similar instrument to which Pacific Lumber is a party or by which it or any of its properties is subject. (e) Except as disclosed in the Offering Memorandum, there is not pending or, to the knowledge of Pacific Lumber, threatened, any action, suit, proceeding or investigation involving Pacific Lumber (and, to the knowledge of Pacific Lumber, no basis for any such action, suit, proceeding or investigation exists) before any Tribunal or Governmental Authority which could reasonably be expected to have a material adverse effect upon this Agreement or the ability of Pacific Lumber to perform its obligations hereunder. (f) Except as disclosed in the Offering Memorandum, during the term of the Existing Services Agreement, Pacific Lumber complied in all material respects with (A) the terms and conditions of its approved Timber Harvesting Plans in connection with timber harvested by Pacific Lumber from its property and (B) the material Timber Laws, Environmental Laws and General Laws applicable to such operations, as then in effect. (g) Pacific Lumber has such properties and equipment, and such experience, information and know-how as are necessary, when taken together with the properties, equipment, personnel, experience, information and know-how of the Issuer, to perform the Services. IV COVENANTS 4.1 No Bankruptcy Petition. The Services Provider hereby covenants and agrees that, prior to the date which is one year and one day after the payment in full of all outstanding Timber Notes, it will not institute against, or join any other Persons in instituting against, the Issuer, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding or other similar proceeding under any Bankruptcy Law. 4.2 Maintenance of Existence. The Services Provider shall maintain its separate existence as a legal entity; provided that this provision shall not prevent the Services Provider from merging with or into, consolidating with or transferring all or substantially all of its assets or substantially all of its assets excluding its interest in Salmon Creek to a successor corporation or other entity, provided that (i) no Default or Event of Default shall have occurred and be continuing, (ii) the surviving corporation or other entity shall, consistent with the provisions of Section 2.3 hereof, remain qualified to perform the Services, (iii) the surviving corporation or other entity (if not the Services Provider) shall be duly and validly existing under the laws of the United States, any State thereof or the District of Columbia and shall assume by written instrument the performance and observance of each covenant in this New Services Agreement to be performed by the Services Provider, (iv)(A) the long-term unsecured debt obligations of the corporation or other entity with which the Services Provider proposes to merge or consolidate, or to which the Services Provider proposes to transfer all or substantially all of its assets or substantially all of its assets excluding its interest in Salmon Creek, immediately prior to (and without giving effect to) such transaction, shall be rated at least equal to the then current long-term unsecured debt obligations of the Services Provider, (B) Rating Agency Confirmation shall have been obtained and evidence thereof delivered to the Trustee or (C) the entity which survives such merger or consolidation or to which such assets are transferred is a newly formed wholly-owned subsidiary of Pacific Lumber with no material assets or liabilities immediately prior to such merger, consolidation or transfer and (v) an Officer's Certificate to the effect of Clauses (i), (ii), (iii) (if applicable) and (iv)(A) or (C) (if applicable) shall have been delivered to the Trustee and each Rating Agency. Any Person into which the Services Provider may be merged or consolidated or any Person resulting from any merger or consolidation to which the Services Provider is a party, or any Person succeeding to the business of all or substantially all of the assets of the Services Provider or substantially all of the assets of the Services Provider excluding its interest in Salmon Creek will be the successor to the Services Provider under this Agreement. 4.3 Separate Existence and Formalities. The Services Provider hereby covenants and agrees that: (a) The Services Provider's funds and other assets will not be commingled with those of the Issuer; (b) The Services Provider will maintain records and books of account separate from those of the Issuer in accordance with generally accepted accounting principles; (c) The Services Provider will conduct its business at an office or offices that are identifiably segregated from the offices of the Issuer and will have telephone numbers, a mailing address, stationery and other business forms separate from the Issuer; (d) The Services Provider will conduct its business solely in its own name and will not knowingly or negligently mislead any other Person as to the identity or authority of the Services Provider; (e) all oral and written communications of the Services Provider, including, without limitation, letters, invoices, purchase orders, contracts, statements and applications, will be made solely in the name of the Services Provider; (f) The Services Provider will provide for all of its operating expenses and liabilities from its own separate funds; (g) The Services Provider will maintain correct minutes of the meetings and other corporate proceedings of the owners of its capital stock and its Board of Directors and otherwise comply with requisite corporate formalities required by law; and (h) Except as provided in the Purchase Agreement, the Services Provider will not hold itself out or knowingly permit itself to be held out as having agreed to pay or as being liable for any indebtedness of the Issuer. 4.4 Purchase of Section 6.1 Timber Notes. Pacific Lumber agrees to purchase Section 6.1 Notes from the Issuer to the extent required by Section 5.3(c)(x) of the Indenture. V COMPENSATION 5.1 Compensation for Services. (a) As compensation for the Services provided by the Services Provider pursuant to this Agreement, the Issuer shall (i) pay to the Services Provider on each Monthly Deposit Date during the term of this Agreement, a fee, in cash (the "Services Fees"), in an amount equal to $1,284,000 per year, payable in 12 equal installments, which amount shall be adjusted for each 12 month period, commencing with the 12 month period beginning January 1, 1999 (each, an "Adjustment Period"), by multiplying such amount by a fraction, the numerator of which shall be the then most recent Producer Price Index (Lumber and Wood Products Commodity Groups) (Standard Industrial Classification No. 2400), as published by the United States Department of Labor, Bureau of Labor Statistics (the "PPI Index"), in effect with respect to the first day of such Adjustment Period, and the denominator of which shall be the PPI Index in effect with respect to January 1, 1998 and (ii) reimburse the Services Provider on each Monthly Deposit Date during the term of this Agreement (the "Reimbursable Amounts"), in cash (the "Reimbursable Amounts") for the cost incurred by the Services Provider in connection with constructing, rehabilitating and maintaining roads, and performing reforestation services on, the Company Timber Property in respect of Monthly Periods prior to such Monthly Deposit Date, in each case as determined in accordance with generally accepted accounting principles. (b) The parties hereto acknowledge and agree that the Services Provider's right to be compensated pursuant to this Agreement shall be limited to its right to receive the Services Fees and the Reimbursable Amounts and that the Services Provider shall not be entitled to any further payment pursuant to this Agreement, whether by way of reimbursement of its expenses in performing the Services or otherwise. If this New Services Agreement is terminated and any accrued compensation through the date of such termination shall remain unpaid, the Services Provider shall be entitled to receive such accrued and unpaid compensation. VI INDEMNIFICATION 6.1 Indemnity by the Services Provider. The Services Provider shall be liable for, and shall indemnify, protect, defend and hold harmless the Issuer, the Trustee and the Collateral Agent, their respective subsidiary and affiliate companies and their respective agents, employees, managers, directors, partners, officers, servants and representatives against, any and all claims, demands, causes of action, expenses or liabilities (including reasonable attorneys' fees and disbursements) of every kind and character (whether known or unknown, fixed or contingent, liquidated or unliquidated, secured or unsecured, choate or inchoate, accrued, absolute or otherwise), suffered or sustained, arising from (i) the breach by the Services Provider of any of its representations, warranties, covenants and agreements set forth in this Agreement, (ii) actions or omissions of the Services Provider in connection with its obligations hereunder, (iii) any claim, demand or cause of action asserted against the Services Provider as of the date of this Agreement and (iv) failure of the Services Provider to have complied with the terms and conditions of approved Timber Harvesting Plans in connection with timber harvested from the Company Timber Property or any other Timber Laws applicable to such operations, as then in effect. The Issuer shall notify the Services Provider promptly of any claim for which it may seek indemnity. The Services Provider shall have the right to defend the claim, and the Issuer shall cooperate in the defense. If the Services Provider does not defend such claim, the Issuer may have separate counsel and the Services Provider shall pay the reasonable fees and expenses of such counsel. The Services Provider shall have no obligation to pay for any settlement of any such claim made without its consent. VII MISCELLANEOUS 7.1 Term. This Agreement shall become effective upon the date first noted above and shall continue in effect until all amounts payable under the Timber Notes (including any Additional Timber Notes), the Indenture and the Deed of Trust shall have been paid in full. 7.2 Termination. (a) The Services Provider may terminate this Agreement if the Issuer shall have failed to pay any amount payable to the Services Provider pursuant to Section 5.1(a) hereof and such failure shall be continuing for more than ninety (90) days after notice thereof from Pacific Lumber; provided that no such termination shall become effective until a successor to the Services Provider has agreed by written instrument to perform the Services provided by the Services Provider under this Agreement. (b) The Issuer or the Trustee, in each case to the extent provided in Section 4.20(a) of the Indenture, shall have the right to terminate this Agreement and replace Pacific Lumber as the Services Provider if an Operating Default has occurred and is continuing; provided, however, that termination of this Agreement shall not become effective, and Pacific Lumber shall not be relieved of its obligations as the Services Provider hereunder and shall continue (so long as the Services Provider continues to perform the Services contemplated by this Agreement with the same standard of care and diligence as were observed during the term of this Agreement before such Operating Default) to be entitled to receive compensation for its services hereunder, unless and until a new Services Provider has been obtained by the Issuer, and such successor Services Provider has agreed by written instrument to perform the Services provided by the Services Provider under this Agreement. The Issuer or the Trustee may also terminate this Agreement upon the giving of any notice of acceleration under Section 7.2(b) of the Indenture. The Services Provider shall promptly notify the Issuer and the Trustee in writing of any Operating Default. (c) In the event that this Agreement is terminated as provided in Sections 7.2(a) or 7.2(b) hereof, the Issuer shall in good faith solicit bids for a new Services Provider from at least three parties that are engaged in the forestry industry and have sufficient capability to provide the Services. In conducting its solicitation, the Issuer shall endeavor to obtain a Services Provider willing to provide the Services for compensation not in excess of the Services Fee and Reimbursable Amounts payable hereunder to the Services Provider and otherwise on substantially the same terms hereof. The selection of a new Services Provider shall be based upon, among other factors, the capacity of the bidding parties to provide the Services, the quality of services the bidding parties can provide and the amount of compensation sought by such bidding parties. Any replacement Services Provider or Services Providers shall require Rating Agency Confirmation. (d) The outgoing Services Provider shall fully cooperate in good faith in any transition to a new Services Provider, including, without limitation, producing all relevant books, records and documentation, participating in meetings and discussions, responding to questions of the successor Services Provider and the Trustee, and assisting in obtaining any necessary Rating Agency Confirmation; provided, however, that the obligations of the outgoing Services Provider pursuant to this Section 7.2(d) shall be limited to six months from the date of termination if this Agreement was terminated by the Services Provider pursuant to Section 7.2(a). (e) Any successor Services Provider may contract with one or more sub-Services Providers, provided that (i) if such subcontractors, individually or in the aggregate, are to provide all or substantially all of the Services hereunder, such successor Services Provider shall provide an Officer's Certificate to the Trustee to the effect that such successor Services Provider reasonably believes that each subcontractor is qualified to perform its obligations under such subcontract and (ii) in any event, such subcontracting shall not relieve the successor Services Provider from any of its obligations hereunder. (f) Any material amendment to this Agreement required in connection with the appointing of a successor Services Provider shall require Rating Agency Confirmation. (g) The provisions of Sections 4.1, 4.3 and 6.1 shall survive any expiration or termination of this Agreement; provided, however, that Section 6.1 shall survive only with respect to matters occurring prior to such expiration or termination. 7.3 Amendments. (a) This Agreement may be amended by an agreement in writing signed by the Services Provider and the Issuer in accordance with Section 4.12 of the Indenture. (b) Promptly following the execution of any amendment to this Agreement, the Issuer will furnish to the Trustee and each Rating Agency a true, correct and complete copy of such amendment. 7.4 Indenture. The Issuer agrees that while this Agreement is in effect it shall not, without the written consent of the Services Provider, amend, or consent to any amendment of, the Indenture that would (a) in any way change the priority of payment of the Services Fees and the Reimbursable Amounts from the Collection Account or the Expense Reserve or (b) otherwise subordinate the payment of the Services Fees or the Reimbursable Amounts hereunder to the payment of other amounts from the Collection Account or the Expense Reserve pursuant to the Indenture. 7.5 Notices. All notices and other communications required or permitted hereunder shall be in writing and, unless otherwise provided in this Agreement, shall be deemed to have been duly given when delivered in person or by mail or when dispatched by telegram or electronic facsimile transfer (confirmed in writing by mail simultaneously dispatched) to the addressee at the address specified below: If to the Services Provider: The Pacific Lumber Company P.O. Box 37 Scotia, California 95565 Fax: (707) 764-4269 Attention: Vice President, Finance and Administration If to the Issuer: Scotia Pacific Company LLC P.O. Box 712 Scotia, California 95565 Fax: (707) 764-5001 Attention: Vice President, Finance and Administration If to any Rating Agency: Standard & Poor's, a division of The McGraw Hill Company 26 Broadway - 10th Floor New York, New York 10004-1010 Fax: (212) 208-8208 Attention: Asset-Backed Surveillance Group Moody's Investors Service, Inc. 99 Church Street - 4th Floor New York, New York 10007 Fax: (212) 553-4948 Attention: ABS Monitoring Department or such other address as either party may from time to time designate by like notice. 7.6 Limitations on Assignment. Subject to the provisions of this Agreement, neither the Services Provider nor the Issuer shall assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the other (except for the lien of the Deed of Trust and any transfer of the rights and obligations of the Issuer hereunder by virtue of the exercise of remedies provided for in the Deed of Trust); provided that, subject to the provisions of this Agreement, the Services Provider shall not transfer any of its obligations under this Agreement unless (i) no Default or Event of Default shall have occurred and be continuing and (ii) either (A) the prior written consent of the Majority Holders and Rating Agency Confirmation shall have been obtained or (B) the prior written consent of the Supermajority Holders (after prior notice of the Rating Agency Evaluation) and Rating Agency Evaluation shall have been obtained. Notwithstanding the foregoing, (x) nothing herein shall prohibit the Services Provider from hiring any subcontractors or agents; provided that such hiring shall not relieve the Services Provider of any of its obligations hereunder and (y) nothing herein shall prohibit any assignment occurring as a result of a transaction permitted by Section 4.2. 7.7 Effect of Provisions of the Indenture and the Deed of Trust. Notwithstanding any provision of the Indenture or the Deed of Trust requiring the Issuer to pay an expense or perform an obligation, the Services Provider shall not be relieved from any of its obligations under this Agreement to pay expenses or perform obligations as expressly provided in this Agreement. 7.8 Governing Law. This Agreement shall be governed by the internal laws of the State of California without regard to principles of conflicts of laws. 7.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument. 7.10 Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof. 7.11 Headings. The section headings of this Agreement are only for the purpose of reference and shall not affect the meaning hereof. [REST OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have executed this New Services Agreement as of the date first above written. SERVICES PROVIDER: THE PACIFIC LUMBER COMPANY By: /S/ JOHN A. CAMPBELL Name: John A. Campbell Title: President ISSUER: SCOTIA PACIFIC COMPANY LLC By: /S/ GARY L. CLARK Name: Gary L. Clark Title: Vice President-Finance and Administration SCHEDULE 1 Services The Services Provider shall perform the following Services consistent with the standards in Section 2.3 of the Agreement. 1. Provide necessary supervisory and oversight services to the Issuer in connection with the operation and maintenance of the Company Timber Property. 2. Furnish all equipment, personnel and expertise not within the possession of the Issuer and reasonably necessary for the operation and maintenance of the Company Timber Property and the provision of the Services. 3. Operate the Company Timber Property as commercial timberlands, having due regard to soil conditions, stand arrangements and other factors relevant to the conduct of silvicultural and harvesting practices, including: (a) Fire Protection. Taking measures to protect the Timber and the Company Timber Property from loss by fire, which measures shall be equal in all material respects to fire-control practices generally followed on timber- producing property of the same nature in the same general area, including the adoption of prevention and control measures, the maintenance of fire-fighting equipment, disposal of slash and slabs, and cooperation with local, state and federal agencies on matters of fire prevention and control. The Services Provider shall continue to observe all arrangements, agreements and other understandings with respect to fire prevention from time to time in effect with the California Department of Forestry. (b) Maintenance, Rehabilitation and Construction of Roads. Maintaining and rehabilitating the existing road system and any newly constructed roads on the Company Timber Property and constructing new roads to permit the harvesting of timber as contemplated by the Operative Documents and access of mobile fire-fighting equipment to the Company Timber Property. (c) Reforestation. Taking measures to replant and otherwise regenerate commercial timber stands on the Company Timber Property. (d) Salvage. Salvaging and harvesting trees which are dead, diseased, fallen or otherwise damaged by casualty. (e) Environmental. Providing measures to comply with federal, state or local Environmental Laws, and continuing measures to effect compliance with such laws, including, without limitation, measures with respect to waterways, habitat, hatcheries, endangered species and the like. 4. Provide necessary personnel and technical assistance to the Issuer to enable the Issuer to manage the harvesting of timber in a manner reasonably calculated to produce growth, consistent with the production of the quality and quantity of the Issuer's current merchantable timber. 5. Provide advice to, be available for consultation with, and provide required assistance to, the Issuer in respect of all matters relating to the preparation, filing and prosecution of Timber Harvesting Plans, sustained yield plans, habitat conservation plans or similar plans and permits by the Issuer, as required by the Indenture (it being understood that the filing of such Timber Harvesting Plans, sustained yield plans, habitat conservation plans or similar plans and permits shall be the responsibility of the Issuer), and matters relating to compliance with all federal, state and local laws, rules and regulations relating to or incorporated therein, including laws relating to streams, waterways, wildlife habitat and endangered species. 6. Provide advice to and be available for consultation with the Issuer in respect of federal, state or local legislative matters affecting or relating to the Company Timber Property or the operation, management or harvesting thereof. 7. Provide advice to and be available for consultation with the Issuer in respect of the entering into by the Issuer of any Purchase Agreement (other than the Master Purchase Agreement), consistent with the terms of the Indenture. 8. Prepare and file on behalf of the Issuer, all pleadings and motions, and otherwise diligently pursue, appeals of any denial of any Timber Harvesting Plan, sustained yield plan, habitat conservation plan or similar plan or permit and related matters, and defense of any legal challenge to any approval of any Timber Harvesting Plan, sustained yield plan, habitat conservation plan or similar plan or permit and related matters. All such pleadings, motions and related documents shall be executed by a duly authorized officer of the Issuer in the Issuer's own name. 9. Provide necessary personnel and technical assistance to the Issuer to enable the Issuer to monitor compliance with each Timber Harvesting Plan, sustained yield plan, habitat conservation plan or similar plan or permit and to obtain all certificates of completion or similar certifications from the requisite Governmental Authority. 10. Provide necessary personnel and technical assistance to the Issuer to enable the Issuer to prepare and file any development or strategic plan required by any Governmental Authority to be prepared in respect of the Company Timber Property. 11. Provide necessary personnel and technical assistance to the Issuer to permit the Issuer to update, upgrade or improve Data Processing Information as required or permitted by the Indenture, and to provide estimates of Mbfe in respect of the Company Timber Property as required by the Indenture. Provide information in its possession to the Issuer relating to updating the Issuer's geographical information system. 12. Assist the Issuer in preparing reports required pursuant to the terms of the Indenture. 13. Provide the Issuer with access to such of its data processing equipment and information as necessary in order for the Issuer to store, collect and gather information necessary to the conduct of its business. 14. Provide advice to and be available for consultation with the Issuer in respect of any updates, upgrades or improvements to, or replacement of, the Data Processing Equipment. 15. Provide advice to and be available for consultation with the Issuer in respect of any governmental or regulatory filings or reports required by the Issuer (other than as specifically addressed elsewhere in this Schedule 1). 16. Provide necessary personnel and technical assistance to assist the Issuer's efforts to maintain in force and effect each permit, license, franchise, right of way, license or easement necessary to the harvesting, cutting, severing, sale, marketing or disposition of the Company Timber (other than as specifically addressed elsewhere in this Schedule 1). 17. Maintain membership in professional, industry and trade organizations, and maintain relationships with other industry participants, community groups, environmental groups and regulators. 18. Provide to or otherwise procure on behalf of the Issuer all legal, accounting or other similar professional services necessary or appropriate in connection with the operation of the Company Timber Property as contemplated by the Operative Documents. 19. Provide such other similar services as may be necessary or appropriate to enable the Issuer to continue the management and operations of the Company Timber Property in accordance with prudent business practices. 20. In the event that Pacific Lumber and/or the Company continue or expand any existing Takings Litigation or commence other Takings Litigation, prepare and file on behalf of the Company all pleadings and motions and otherwise diligently pursue appeals in respect of any matter relating to the Takings Litigation or any such similar actions. EX-10 4 EXHIBIT 10.3 NEW ADDITIONAL SERVICES AGREEMENT THIS NEW ADDITIONAL SERVICES AGREEMENT (this "Agreement)", dated as of July 20, 1998, is entered into by and between Scotia Pacific Company LLC, a Delaware limited liability company (the "Issuer" and, in its capacity as Services Provider hereunder, the "Services Provider"), and The Pacific Lumber Company, a Delaware corporation ("Pacific Lumber"). WITNESSETH: The Issuer and the Trustee have entered into the Indenture, pursuant to which the Issuer has issued the Timber Notes; and the Issuer, the Collateral Agent and the Deed of Trust Trustee have entered into the Deed of Trust, securing, among other things, the Issuer's obligations under the Timber Notes and the Indenture; The Issuer and Pacific Lumber are parties to an Additional Services Agreement dated as of March 23, 1993, which is being terminated effective as of the date hereof (the "Existing Additional Services Agreement"); This Agreement is being entered into in connection with the issuance and sale of the Timber Notes; and The Issuer is capable of rendering the services described in Schedule 1 hereto (the "Additional Services") and supplying the equipment, personnel and expertise necessary to perform the Additional Services as contemplated by this Agreement. NOW, THEREFORE, in consideration of the mutual agreements contained herein and in the Operative Documents and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the Issuer and Pacific Lumber hereby agree as follows: I DEFINITIONS 1.1 For all purposes of this Agreement, unless the context otherwise requires, all defined terms shall have the meaning set forth in Schedule A to the Indenture, which is incorporated by reference as if fully set forth herein. II SERVICES 2.1 Services. Subject to the terms and provisions set forth in this Agreement, the Services Provider shall provide to Pacific Lumber (including any subsidiaries of Pacific Lumber) the Additional Services. 2.2 Personnel Matters. Without limiting the generality of Section 2.1 of this Agreement, the Services Provider shall provide all labor and professional and supervisory persons necessary to perform the Additional Services which are not provided by Pacific Lumber; provided that the Services Provider shall have the right to use independent contractors or other outside specialists or other persons in performing the Additional Services as it shall deem advisable in its reasonable judgment. 2.3 Independent Contractor Status. The Services Provider shall perform the Additional Services as an independent contractor. The number of employees, the selection and retention of such employees, the hours of labor and the compensation for services to be paid to any and all such employees of the Services Provider shall be determined by the Services Provider. All employees, agents, contractors and subcontractors hired by the Services Provider to perform services hereunder shall not be deemed to be the employees, agents, contractors and subcontractors of Pacific Lumber, and all salaries and compensation payable to them shall be the exclusive responsibility of the Services Provider. 2.4 Necessary Information. Pacific Lumber shall furnish the Services Provider with all information, programs, know-how, methods or methodology within Pacific Lumber's control as may be necessary or appropriate for the performance of the Additional Services by the Services Provider. III COMPENSATION 3.1 Compensation for Services. (a) As compensation for the Additional Services provided by the Services Provider pursuant to this Agreement, Pacific Lumber shall pay to the Services Provider by deposit to the Collection Account on each Monthly Deposit Date immediately preceding each Note Payment Date during the term of this Agreement a fee, in cash (the "Additional Services Fee"), which, so long as Pacific Lumber is the Services Provider under the Services Agreement, shall be in an amount equal to the Services Provider's actual costs of providing the Additional Services for the six (6) full (or portion thereof) calendar months immediately preceding each such Monthly Deposit Date, as determined in accordance with generally accepted accounting principles. The Services Provider shall notify Pacific Lumber of its costs of providing the Additional Services for such six (6) month period (or portion thereof) at least two Business Days prior to each such Monthly Deposit Date. If Pacific Lumber is not the Services Provider under the New Services Agreement, the Additional Services Fee shall be based upon a market rate for such services in the relevant area, adjusted in each subsequent year in the manner in which the Services Fee is adjusted pursuant to Section 5.1(a) of the New Services Agreement. (b) The parties hereto acknowledge and agree that the Services Provider's right to be compensated pursuant to this Agreement shall be limited to its right to receive the Additional Services Fee and that the Services Provider shall not be entitled to any further payment pursuant to this Agreement, whether by way of reimbursement of its expenses in performing the Additional Services or otherwise. If this New Additional Services Agreement is terminated and any accrued compensation through the date of such termination shall remain unpaid, the Services Provider shall be entitled to receive such accrued and unpaid compensation. IV MISCELLANEOUS 4.1 Term. This Agreement shall become effective upon the date first noted above and shall continue in effect until all amounts payable under the Timber Notes (including any Additional Timber Notes), the Indenture and the Deed of Trust shall have been paid in full. 4.2 Termination. Pacific Lumber and the Services Provider may, at any time, terminate this Agreement by mutual written consent. 4.3 Amendments. (a) This Agreement may be amended by an agreement in writing signed by the Services Provider and Pacific Lumber. No such amendment shall add to the obligations of the Services Provider or require the Services Provider to assume any obligations or liabilities other than expressly set forth herein, unless Rating Agency Confirmation shall have been obtained. (b) Promptly following the execution of any amendment to this Agreement, the Issuer will furnish to the Trustee and each Rating Agency a true, correct and complete copy of such amendment. 4.4 Notices. All notices and other communications required or permitted hereunder shall be in writing and, unless otherwise provided in this Agreement, shall be deemed to have been duly given when delivered in person or by mail or when dispatched by telegram or electronic facsimile transfer (confirmed in writing by mail simultaneously dispatched) to the addressee at the address specified below: If to Pacific Lumber: The Pacific Lumber Company P.O. Box 37 Scotia, California 95565 Fax: (707) 764-4269 Attention: Vice President, Finance and Administration If to the Services Provider: Scotia Pacific Company LLC P.O. Box 712 Scotia, California 95565 Fax: (707) 764-5001 Attention: Vice President, Finance and Administration If to any Rating Agency: Standard & Poor's, a division of The McGraw Hill Companies 26 Broadway - 10th Floor New York, New York 10004-1010 Fax: (212) 208-8208 Attention: Asset-Backed Surveillance Group Moody's Investors Service, Inc. 99 Church Street - 4th Floor New York, New York 10007 Fax: (212) 553-4948 Attention: ABS Monitoring Department or such other address as either party may from time to time designate by like notice. 4.5 Governing Law. This Agreement shall be governed by the internal laws of the State of California without regard to principles of conflicts of laws. 4.6 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument. 4.7 Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof. 4.8 Headings. The section headings of this Agreement are only for the purpose of reference and shall not affect the meaning hereof. [REST OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have executed this New Additional Services Agreement as of the date first above written. SCOTIA PACIFIC COMPANY LLC By: /S/ Gary L. Clark Name: Gary L. Clark Title: Vice President-Finance and Administration THE PACIFIC LUMBER COMPANY By: /S/ John A. Campbell Name: John A. Campbell Title: President SCHEDULE 1 Additional Services The Services Provider shall perform the following Additional Services. 1. Provide advice to and be available for consultation with Pacific Lumber in respect of all matters relating to the preparation, filing and prosecution of Timber Harvesting Plans, sustained yield plans, habitat conservation plans, similar plans or permits by Pacific Lumber (or any of its subsidiaries) in respect of any timber property and timber harvesting rights owned by Pacific Lumber (or any of its subsidiaries). 2. File, jointly on behalf of Pacific Lumber and the Issuer, all Timber Harvesting Plans in respect of any timber property owned by the Issuer with respect to which Pacific Lumber (or any of its subsidiaries) owns timber harvesting rights. 3. Provide advice to and be available for consultation with Pacific Lumber (or any of its subsidiaries) in respect of all matters relating to compliance with all federal, state and local laws, rules and regulations, including laws relating to streams, waterways, wildlife habitat and endangered species. 4. Provide supervisory and oversight services to Pacific Lumber in connection with Pacific Lumber's measures to replant and otherwise regenerate commercial timber stands in respect of any timber property owned by Pacific Lumber and timber property with respect to which Pacific Lumber (or any of its subsidiaries) has timber harvesting rights. 5. Update the Issuer's geographical information system with information provided by Pacific Lumber relating to any timber property owned by Pacific Lumber and timber property with respect to which Pacific Lumber (or any of its subsidiaries) has timber harvesting rights. Provide Pacific Lumber (or any of its subsidiaries) with access to the Issuer's geographical information system and provide necessary personnel and technical assistance to Pacific Lumber to enable Pacific Lumber to utilize the Issuer's geographical information system in connection with Pacific Lumber's (or any of its subsidiaries) operations. Provide Pacific Lumber, upon the request of Pacific Lumber, with copies of all Data Processing Information related to the Issuer's geographical information system. 6. Provide personnel and technical assistance to Pacific Lumber (or any of its subsidiaries) to enable Pacific Lumber to manage the harvesting of any timber owned by Pacific Lumber in a manner reasonably calculated to produce growth, consistent with the production of the quality and quantity of Pacific Lumber's current merchantable timber. 7. Provide advice to and be available for consultation with Pacific Lumber (or any of its subsidiaries) in respect of federal, state or local legislative matters affecting or relating to any timber property and timber harvesting rights owned by Pacific Lumber and timber property with respect to which Pacific Lumber has timber harvesting rights or the operation, management or harvesting thereof. 8. Provide personnel and technical assistance to Pacific Lumber (or any of its subsidiaries) to enable Pacific Lumber to monitor compliance with each Timber Harvesting Plan, sustained yield plan, habitat conservation plan, similar plan or permit and to obtain all certificates of completion or similar certifications from the requisite Governmental Authority. 9. Provide personnel and technical assistance to Pacific Lumber (or any of its subsidiaries) to enable Pacific Lumber to prepare and file any development or strategic plan required by any Governmental Authority to be prepared in respect of any timber, timber property or timber harvesting rights owned by Pacific Lumber. 10. Provide advice to and be available for consultation with Pacific Lumber (or any of its subsidiaries) in respect of any updates, upgrades, or improvements to, or replacement of, the Data Processing Equipment. 11. Provide advice to and be available for consultation with Pacific Lumber (or any of its subsidiaries) in respect of any governmental or regulatory filings or reports required by Pacific Lumber. 12. Provide personnel and technical assistance to assist Pacific Lumber's (or any of its subsidiaries) efforts to maintain in force and effect or to obtain each permit, license, franchise, right of way, license or easement necessary to the harvesting, cutting, severing, sale, marketing or disposition of any timber, timber property or timber harvesting rights owned by Pacific Lumber. 13. Provide such other services as may be necessary or appropriate to carry out the services described in the preceding paragraphs. EX-10 5 EXHIBIT 10.4 RECORDING REQUESTED BY: Fidelity National Title Insurance Company WHEN RECORDED, RETURN TO: Sheppard, Mullin, Richter & Hampton LLP 4 Embarcadero Center, 17th Floor San Francisco, CA 94111 Attn: Joan H. Story, Esq. NEW RECIPROCAL RIGHTS AGREEMENT THIS NEW RECIPROCAL RIGHTS AGREEMENT (the "Agreement") is made and entered into as of July 20, 1998 by and among THE PACIFIC LUMBER COMPANY, a Delaware corporation ("Pacific Lumber"), SCOTIA PACIFIC COMPANY LLC, a Delaware limited liability company ("Scotia Pacific"), and SALMON CREEK CORPORATION, a Delaware corporation ("Salmon Creek"). RECITALS A. Scotia Pacific Holding Company, a Delaware corporation ("SPH"), previously acquired from Pacific Lumber approximately 179,200 acres of commercial timberlands located in Humboldt County, California, which land is more particularly described in Exhibit A attached hereto and incorporated herein by this reference (the "SPH Property"). At that time, Pacific Lumber retained ownership of and the right in perpetuity to harvest all trees and timber now or in the future growing on approximately 7,900 acres of the SPH Property (the "Original Pacific Lumber Timber Rights"). B. Scotia Pacific is the successor by merger to SPH, and accordingly has succeeded in title to the SPH Property. C. Scotia Pacific has acquired from Pacific Lumber approximately 13,500 acres of additional commercial timberlands located in Humboldt County, California, which land is more particularly described in Exhibit B attached hereto and incorporated herein by this reference (the "New Scotia Pacific Property"), and the Original Pacific Lumber Timber Rights with respect to approximately 7,500 acres of the SPH Property. The SPH Property and the New Scotia Pacific Property are hereinafter referred to collectively as the "Scotia Pacific Property." D. Pacific Lumber retains title to certain additional real property in Humboldt County, California, near to or adjoining the Scotia Pacific Property and the Salmon Creek Property (as defined below), which land includes developed parcels, log decks, grasslands and timberlands and is more particularly described in Exhibit C attached hereto and incorporated herein by this reference (the "Pacific Lumber Property"). E. Pacific Lumber has transferred to Scotia Pacific title to and the right in perpetuity to harvest all trees and timber now or in the future growing on approximately 11,100 acres of the Pacific Lumber Property (the "Scotia Pacific/PL Timber Rights"). F. Scotia Pacific has transferred to Pacific Lumber title to and the right in perpetuity to harvest all trees and timber now or in the future growing on approximately 1,300 acres of the SPH Property (together with the Original Pacific Lumber Timber Rights to approximately 350 acres retained by Pacific Lumber, the "Pacific Lumber Timber Rights"). G. Salmon Creek previously acquired from Pacific Lumber approximately 6,000 acres of land located in Humboldt County, California, which land is more particularly described in Exhibit D attached hereto and incorporated herein by this reference (the "Salmon Creek Property"). H. Salmon Creek has transferred to Pacific Lumber, which has in turn transferred to Scotia Pacific, title to and the right in perpetuity to harvest all trees and timber now or in the future growing on approximately 1,100 acres of the Salmon Creek Property (the "Scotia Pacific/SC Timber Rights"). I. The location of the lands subject to the Scotia Pacific/SC Timber Rights, and the Pacific Lumber Timber Rights, are shown with particularity on certain maps held in trust by U.S. Bank of California ("Escrow Holder") pursuant to the terms of that certain New Escrow Agreement dated as of July 20, 1998 (the "Escrow Agreement") among Scotia Pacific, Pacific Lumber, Salmon Creek, and the Escrow Holder. The Scotia Pacific/PL Timber Rights and the Scotia Pacific/SC Timber Rights are hereinafter referred to collectively as the "Scotia Pacific Timber Rights." The land subject to the Scotia Pacific Timber Rights is hereinafter referred to as the "Scotia Pacific Timber Rights Property," and the land subject to the Pacific Lumber Timber Rights is hereinafter referred to as the "Pacific Lumber Timber Rights Property." J. Pacific Lumber and Scotia Pacific have executed, or intend to execute, a New Services Agreement pursuant to which Pacific Lumber will provide certain land and timber operational and management services with respect to the Scotia Pacific Property and the Scotia Pacific Timber Rights Property (the "New Services Agreement"), a New Master Purchase Agreement governing the sale of logs by Scotia Pacific to Pacific Lumber and the harvesting and removal by Pacific Lumber of the logs so purchased (the "New Master Purchase Agreement"), a New Additional Services Agreement pursuant to which Scotia Pacific will provide certain services to Pacific Lumber (the "New Additional Services Agreement"). K. Pacific Lumber, SPH and Salmon Creek previously entered into that certain Reciprocal Rights Agreement dated March 18, 1993 and recorded March 22, 1993 as Document No. 1993-1890-136 in the Official Records of Humboldt County, California (the "Old Reciprocal Rights Agreement"). L. Pacific Lumber, Scotia Pacific and Salmon Creek now desire to provide for reciprocal rights of access over, entry onto and use of the lands of the other parties hereto in connection with the exercise of the Scotia Pacific Timber Rights and the Pacific Lumber Timber Rights, the performance of the New Services Agreement, the New Master Purchase Agreement and related log purchase agreements, and the New Additional Services Agreement and for various other purposes related to the operation, management and utilization of the lands and the timber owned by each, and on terms differing from the Old Reciprocal Rights Agreement. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby expressly acknowledged, the parties hereto agree as follows: 1. Termination of Old Reciprocal Rights Agreement. Pacific Lumber, Scotia Pacific, as successor in interest to SPH, and Salmon Creek, the parties to the Old Reciprocal Rights Agreement and the holders of all the real property subject to the Old Reciprocal Rights Agreement, hereby terminate the Old Reciprocal Rights Agreement (except to the extent otherwise provided in Section 9(a) of this Agreement). 2. Access Rights. Pacific Lumber, Scotia Pacific and Salmon Creek hereby each grant to each of the other parties hereto, for the benefit of each party, its officers, directors, employees, agents, representatives, servants, invitees, successors and assigns (collectively, the "Related Persons"), the right to enter upon the Pacific Lumber Property, the Scotia Pacific Property and the Salmon Creek Property, respectively, for the following purposes (the "Purposes"): (i) to conduct wildlife and other studies and to gather any other data reasonably necessary, advisable or desirable to prepare timber harvesting plans and/or any other studies, reports, plans or documents in connection with the business and activities of Pacific Lumber, Scotia Pacific and/or Salmon Creek, whether or not required to be filed with any governmental departments, agencies or other entities having jurisdiction thereof; (ii) to survey or examine any portions of the Scotia Pacific Property, the Pacific Lumber Property, the Salmon Creek Property or the timber or other resources located thereon; (iii) to carry out conservation, management, operation and utilization activities with respect to timber, land and other resources, whether or not pursuant to the New Services Agreement, the New Master Purchase Agreement and related log purchase agreements and/or the New Additional Services Agreement; (iv) to implement and maintain fisheries and/or wildlife management or conservation programs, whether or not required by applicable law; (v) to conduct timber harvesting operations, including, without limitation, the removal of logs, with respect to timber owned by such party or subject to an agreement to cut or similar agreement in favor of such party; (vi) to carry out timber replanting and regeneration activities; (vii) to explore, test for and extract minerals, gas, oil and hydrocarbon substances owned by such party; (viii) to extract gravel and rock for any purpose permitted by paragraph 3 hereof; (ix) to extract water for any purpose permitted by paragraph 4 hereof; (x) to exercise hunting rights granted pursuant to paragraph 5 hereof; (xi) to conduct fire protection, fire suppression and fire control activities pursuant to paragraph 6 hereof; (xii) to provide ingress and egress from public roadways over the lands of the other parties to the Scotia Pacific Property, the Scotia Pacific Timber Rights Property, the Pacific Lumber Property, the Pacific Lumber Timber Rights Property and the Salmon Creek Property, utilizing existing and future roadways and rights-of-way on such lands; (xiii) to exercise any other rights granted by or reasonably necessary, advisable or desirable to perform such party's obligations under this Agreement, the New Services Agreement, the New Master Purchase Agreement, the New Additional Services Agreement or any of the other Operative Documents, as such term is defined in that certain Indenture dated as of even date herewith between Scotia Pacific and State Street Bank and Trust Company, as trustee, governing the Timber Notes issued by Scotia Pacific as of such date and any Additional Timber Notes subsequently issued by Scotia Pacific (the "Indenture"), or the Indenture or any other documents contemplated by the Indenture; and (xiv) to otherwise manage, operate and utilize such party's interest in the Scotia Pacific Property, the Scotia Pacific Timber Rights Property, the Pacific Lumber Property, the Pacific Lumber Timber Rights Property and the Salmon Creek Property and the assets located on or relating to any of the foregoing lands. (a) Existing Rights of Way. The foregoing grant of access shall include, without limitation, rights of way over all existing and future roads located on the Scotia Pacific Property, the Pacific Lumber Property and the Salmon Creek Property for any of the Purposes. This reciprocal grant of rights of way shall include the right of all lessees, licensees and permittees of Pacific Lumber, Scotia Pacific and Salmon Creek to use any roadways, now or hereafter existing, on the Scotia Pacific Property, the Pacific Lumber Property or the Salmon Creek Property which are reasonably necessary or advisable for ingress to and egress from that portion of the Scotia Pacific Property, the Pacific Lumber Property or the Salmon Creek Property subject to any lease, use agreement or similar agreement or arrangement. Pacific Lumber, Scotia Pacific and Salmon Creek each agree, from and after the date of this Agreement, not to enter into any lease, use agreement or similar agreement or arrangement with a third party which requires access over the lands owned by or subject to the timber rights of either of the other parties without obtaining the prior consent of such party, which consent shall not be unreasonably withheld. (b) New Roads. Pacific Lumber, Scotia Pacific and Salmon Creek, and their respective Related Persons, shall each have the right to construct such new roads over the lands of the other parties as are reasonably necessary, advisable or desirable to carry out any of the Purposes. All new roads shall be constructed so as to minimize any adverse affects on the land and otherwise in accordance with the provisions of Section 9(b) hereof. Before constructing any new road on the property of another party to this Agreement, Pacific Lumber, Scotia Pacific and Salmon Creek shall each obtain the approval of such party, which approval shall not be unreasonably withheld. If the burdened landowner objects to the proposed location of the new road, such owner shall propose an alternative location for construction of the proposed road, which alternative location shall not, in any material respect, increase the cost of constructing the road or decrease the usefulness of the road to the benefited party. (c) Road Construction and Maintenance Costs. So long as the New Services Agreement is in effect, Pacific Lumber shall be responsible for and Scotia Pacific shall bear the cost, in accordance with the provisions of the New Services Agreement, of maintaining all roads on or serving the Scotia Pacific Property or the Scotia Pacific Timber Rights Property and Pacific Lumber shall be responsible, at its own cost, for maintaining all roads on or serving the Pacific Lumber Property or the Pacific Lumber Timber Rights Property. Pacific Lumber and Scotia Pacific shall in the event of termination of the New Services Agreement, and Salmon Creek shall at all times, be responsible for maintaining all roads existing on or serving its own lands in a manner consistent in all material respects with prudent business practices, which, in the reasonable judgment of the responsible party, are (i) consistent with the current applicable industry standards, and (ii) in compliance in all material respects with applicable laws. Subject to the terms of the New Services Agreement, each party shall be responsible for construction of roads for its own benefit on its own lands. Any party desiring to construct a new road over the lands of another party shall be responsible for all costs of constructing such road, which thereafter shall be subject to the maintenance provisions of this paragraph. (d) Access Fees. No party shall charge the other parties any fees for access under the terms of this Agreement. 3. Extraction of Rock and Gravel. In addition to the rights granted to Pacific Lumber by Scotia Pacific pursuant to the New Master Purchase Agreement, Pacific Lumber, Scotia Pacific and Salmon Creek hereby each grant to the other parties hereto, for the benefit of each party, and its Related Persons, the right to extract from the Pacific Lumber Property, the Scotia Pacific Property, and the Salmon Creek Property, respectively, rock and gravel in such quantities as may be required for use in the construction and maintenance of roads or as may be reasonably necessary, advisable or desirable to carry out any of the other Purposes. All such extractions of rock and gravel shall be performed in a manner reasonably designed to minimize any adverse affects on the land and otherwise in accordance with the provisions of Section 9(b) hereof. 4. Water Rights. Pacific Lumber, Scotia Pacific and Salmon Creek hereby each grant to the other parties hereto, for the benefit of each party, and its Related Persons, the right to draw water from the creeks, streams and rivers on the Pacific Lumber Property, the Scotia Pacific Property and the Salmon Creek Property, respectively, as reasonably necessary, advisable or desirable to carry out any of the Purposes. Water shall be extracted only in amounts consistent in all material respects with the past practices of Pacific Lumber, with such modifications thereto from time to time as are reasonably necessary or advisable in light of changed circumstances or required by changes in the laws and/or governmental regulations applicable to such waterways, in a manner which does not impede, in any material respect, the legal or contractual rights of any downstream water users and otherwise in accordance with the provisions of Section 9(b) hereof. 5. Hunting and Fishing Rights. Pacific Lumber, Scotia Pacific and Salmon Creek hereby each grant to each of the other parties hereto, for the benefit of the officers, directors, employees, permittees and invitees of each party, the right to come onto the lands of the other for the purpose of hunting, at all times permitted by applicable law, all fish, game animals and birds permitted by applicable law to be hunted. Pacific Lumber shall have the sole authority and responsibility to supervise all hunting and game management activities on the Pacific Lumber Property, the Scotia Pacific Property and the Salmon Creek Property, including, without limitation, the issuance of hunting access permits and keys to locked access roads. Hunting access permits shall be issued only to persons holding valid hunting or fishing licenses and shall be issued only for use during legal hunting and/or fishing seasons established by the State of California. 6. Soil Conservation Districts; Fire Fighting. Pacific Lumber, Scotia Pacific and Salmon Creek hereby each covenant to cooperate with each of the other parties hereto in (i) the establishment of soil conservation districts, and (ii) the conduct of fire protection, fire suppression and fire control activities, benefiting the Pacific Lumber Property, the Scotia Pacific Property and/or the Salmon Creek Property. All decisions concerning the establishment of soil conservation districts or the conduct of fire protection, suppression or control activities shall be made jointly by the parties whose land is benefited thereby, and the costs thereof shall be borne as agreed by the parties. 7. Joint Plans and Permits. Pacific Lumber, Scotia Pacific and Salmon Creek hereby each covenant to cooperate with each of the other parties in preparing, filing and updating, as required by any governmental department, agency or other entity having jurisdiction thereof or as otherwise deemed necessary, advisable or desirable by the parties, joint management, habitat conservation, sustained yield or similar plans or permits, with respect to the Pacific Lumber Property, the Scotia Pacific Property and the Salmon Creek Property and the timber and other resources thereon. 8. Establishment of Agreed Boundaries. Pacific Lumber, Scotia Pacific and Salmon Creek hereby acknowledge that certain boundary lines have not been established by survey and, in many cases, section corners have not been physically located and marked to delineate the Pacific Lumber Property, the Scotia Pacific Property, the Salmon Creek Property, the Scotia Pacific Timber Rights Property, and the Pacific Lumber Timber Rights Property. Pacific Lumber, Scotia Pacific, and Salmon Creek agree that boundary determinations to delineate the land subject to the Scotia Pacific/SC Timber Rights, and the Pacific Lumber Timber Rights Property, shall be made pursuant to the New Escrow Agreement. Pacific Lumber, Scotia Pacific, and Salmon Creek agree that boundary determinations with respect to the remainder of the Scotia Pacific Timber Rights Property, and the Pacific Lumber Property, the Scotia Pacific Property, and the Salmon Creek Property reasonably made by any individual or firm selected jointly by all parties shall be binding upon Pacific Lumber, Scotia Pacific, and Salmon Creek. In the event Pacific Lumber, Scotia Pacific, and Salmon Creek are not able to agree upon an individual or firm to make the boundary determination, each party shall designate its own representative and the representatives shall work together in good faith to establish the agreed boundary. Nothing in the foregoing shall prevent any party from obtaining, at such party's cost, a survey by a licensed surveyor of any disputed boundary line. All agreed boundaries shall be blazed on trees and/or otherwise marked in accordance with then-existing standard industry practice for similar lands. In the event standing timber owned by Pacific Lumber, Scotia Pacific or Salmon Creek (or any two of them as appropriate) is harvested pursuant to a joint timber harvesting plan, the parties shall account for the timber volume harvested by each party, based on the agreed boundary established in accordance with this paragraph. 9. Indemnities and Covenants. (a) Pacific Lumber, Scotia Pacific and Salmon Creek (each, an "Indemnifying Party") hereby each agree to indemnify each of the other parties hereto, any subsidiary or affiliate companies of the other parties hereto, and their respective shareholders and members, and the Related Persons of any of the foregoing (the "Indemnified Parties") from and against any and all claims, demands, causes of action, expenses or liabilities (including reasonable attorneys fees and disbursements) of every kind and character (whether known or unknown, fixed or contingent, liquidated or unliquidated, secured or unsecured, choate or inchoate, accrued, absolute or otherwise), suffered or sustained, arising out of the activities or omissions of the Indemnifying Party under the Old Reciprocal Rights Agreement or this Agreement or the breach by the Indemnifying Party of any of the provisions of the Old Reciprocal Rights Agreement or this Agreement. Any Indemnified Party claiming a right of indemnity pursuant to this Section 9(a) shall notify the Indemnifying Party promptly of such claim after learning of the same. The Indemnifying Party shall have the right to defend the claim, and the Indemnified Party shall cooperate in the defense. If the Indemnifying Party does not defend the claim, the Indemnified Party may engage separate counsel and the Indemnifying Party shall pay the reasonable fees and expenses of such counsel. Neither Indemnifying Party shall have any obligation to pay for any settlement of a claim made without its consent. Notwithstanding the foregoing, the monetary obligations of Scotia Pacific under this Section 9(a) or any other provisions of this Agreement shall be payable solely from, and the parties acknowledge that such obligations are expressly limited to, Excess Funds as such term is defined in the Indenture) or other funds not subject to the Lien of the Deed of Trust (as those terms are defined in the Indenture). (b) Pacific Lumber, Scotia Pacific and Salmon Creek each agree to carry out all activities permitted by the terms of this Agreement on the lands of the other parties hereto in compliance with all local, state and federal laws, ordinances, rules and regulations and regulatory permits or plans, or agreements with regulatory authorities, applicable to such lands and otherwise in a manner consistent in all material respects with the prudent business practices which, in the reasonable judgment of the acting party, are (i) consistent with then current applicable industry standards, and (ii) in compliance in all material respects with applicable laws. Each party shall supervise its employees, agents, representatives, servants and invitees while on the lands of the other party in a reasonably prudent manner. 10. Covenants Running With the Land. The provisions of this Agreement shall be binding upon and shall inure to the benefit of the successors of Pacific Lumber, Scotia Pacific and Salmon Creek, and the covenants contained in this Agreement shall, except as expressly provided to the contrary herein, be appurtenant to and run with the land and shall be binding upon all successor owners of the Pacific Lumber Property, the Scotia Pacific Property and the Salmon Creek Property. In the event (i) Pacific Lumber desires to sell or otherwise transfer: (x) all or a material portion of its interest in any portion of the Pacific Lumber Property or the Pacific Lumber Timber Rights Property; or (y) a majority of the then outstanding capital stock of Salmon Creek (whether in one or in a series of transactions), or (ii) Scotia Pacific desires to sell or otherwise transfer all or a material portion of its interest in any portion of the Scotia Pacific Property or the Scotia Pacific Timber Rights Property, or (iii) Salmon Creek desires to sell or otherwise transfer all or a material portion of its interest in any portion of the Salmon Creek Property, to an unrelated third party, it shall, prior to such sale or transfer, notify the other two parties. In the event that either or both of such other two parties determine, in its (their) reasonable business judgment, that a legitimate business purpose exists to terminate all or a portion of the reciprocal rights that would be received by the prospective transferee, then, upon written request from such other party or parties, the prospective transferor shall relinquish all of the reciprocal rights granted herein requested to be relinquished, provided that and only to the extent such termination and relinquishment shall not have a material adverse effect on any portion of the operations or business to be conducted by the prospective transferee on the property to be transferred as determined by the parties hereto in their reasonable business judgment. Such relinquishment shall be binding upon successor owners of the property to be transferred, and relinquishment of rights shall not terminate the burdens imposed by this Agreement upon the property to be transferred, which burdens shall not be terminated in connection with a transfer of property except as otherwise provided below. Furthermore, if the prospective transferor determines, in its reasonable business judgment, that the transferability or marketability of the property sought to be transferred will be impaired if burdened by one or more of the rights granted to the other party by this Agreement, then, upon receipt of a written request from the transferor prior to such transfer, the other parties to this Agreement shall relinquish all of the reciprocal rights granted herein requested to be relinquished with respect to the property to be transferred, provided that and only to the extent such termination and relinquishment shall not have a Material Adverse Effect (as defined in the Indenture) on Scotia Pacific, or a material adverse effect on any portion of the operations or business of any other relinquishing party as determined by the parties hereto in their reasonable business judgment. Such relinquishment shall be binding upon successor owners of the property to be transferred, and such relinquishment of rights shall not terminate the rights granted pursuant to this Agreement benefiting property to be transferred, which rights shall not be terminated in connection with a transfer of the property, except as otherwise provided above. Pacific Lumber, Scotia Pacific and Salmon Creek each agree to cooperate with each of the other parties hereto in granting to successor owners of any portion of the Pacific Lumber Property, the Scotia Pacific Property and the Salmon Creek Property such rights of way and/or other rights as may be reasonably required to make the parcel being transferred transferrable or marketable and to execute and deliver to the other such documents as may be necessary or appropriate to evidence any such grant or any termination of any rights granted herein, provided that no such document or agreement shall have a Material Adverse Effect (as defined in the Indenture) on Scotia Pacific, or a material adverse effect on the operation or business of any other party to this Agreement or its successors as determined by the parties hereto in their reasonable business judgment. 11. Amendments. This Agreement may be amended only by an agreement in writing executed by all the parties in accordance with Section 4.12 of the Indenture. Promptly following the execution of any amendment to this Agreement, Scotia Pacific shall furnish to the Trustee and each Rating Agency (as those terms are defined in the Indenture) a true, correct and complete copy of such amendment. 12. No Bankruptcy Petition. Pacific Lumber and Salmon Creek each hereby covenant and agree that prior to the date which is one year and one day after payment in full of all outstanding Notes (as defined in the Indenture), it will not institute against or join any other Persons (as that term is defined in the Indenture) in instituting against Scotia Pacific, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding or other similar proceeding under any Bankruptcy Law (as that term is defined in the Indenture). 13. Entire Agreement. This Agreement (together with the Escrow Agreement with respect to the establishment of boundaries) contains the entire understanding between the parties with respect to the subject matter hereof and supersedes any other representations or understandings of the parties. 14. Severability. If any provision of the Agreement shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Agreement and all other such provisions shall remain in full force and effect. 15. Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered in person or by mail or when dispatched by telegram or electronic facsimile transfer (confirmed in writing by mail simultaneously dispatched) to the addressee at the address specified below: If to Pacific Lumber: The Pacific Lumber Company 125 Main Street P.O. Box 37 Scotia, California 95565 Attn: Vice President, Finance and Administration Fax: (707) 764-4269 If to Scotia Pacific: Scotia Pacific Company LLC Second Floor 125 Main Street P.O. Box 712 Scotia, California 95565 Attn: Vice President, Finance and Administration Fax: (707) 764-5001 If to Salmon Creek: Salmon Creek Corporation 125 Main Street P. O. Box 37 Scotia, California 95565 Attn: Vice President, Finance and Administration Fax: (707) 764-4269 If to any Rating Standard & Poor's, a division of the McGraw Hill Agency: Companies 26 Broadway - 10th Floor New York, New York 10004 Fax: (212) 208-8208 Attention: Asset-Backed Surveillance Group Moody's Investors Service, Inc. 99 Church Street - 4th Floor New York, New York 10007 Fax: (212) 553-4948 Attention: ABS Monitoring Department or such other address as either party may from time to time designate by like notice. 16. Limitation on Rights. Notwithstanding any other provision of this Agreement to the contrary, neither Pacific Lumber nor Salmon Creek shall exercise any of the rights granted to such party hereunder (including, without limitation, all rights granted pursuant to paragraph 3 and 4 hereof) in such a manner so as to have a Material Adverse Effect, as that term is defined in the Indenture, on Scotia Pacific. 17. Headings. The section headings in this Agreement are for the purpose of reference only and shall not affect the meaning of any of the provisions of this Agreement. 18. Governing Law. This Agreement shall be governed by the internal laws of the State of California, without regard to principles of conflicts of law. 19. Termination Upon Transfer to Governmental Entities. Notwithstanding the provisions of Section 10, in the event (i) Pacific Lumber sells or otherwise transfers any portion of the Pacific Lumber Property or the Pacific Lumber Timber Rights Property; or (ii) Scotia Pacific sells or otherwise transfers any portion of the Scotia Pacific Property or the Scotia Pacific Timber Rights Property, or (iii) Salmon Creek sells or otherwise transfers any portion of the Salmon Creek Property, to any federal, state or local governmental entity, this Agreement, including without limitation the reciprocal rights provided hereby and the burdens imposed hereby, shall automatically terminate with respect to the property being transferred. Pacific Lumber, Scotia Pacific and Salmon Creek each agree to execute and deliver to the other such documents as may be necessary or appropriate to evidence any such termination. [Rest of page intentionally left blank] IN WITNESS WHEREOF, the parties hereto have executed this Reciprocal Rights Agreement as of the date first written above. THE PACIFIC LUMBER COMPANY, a Delaware corporation By: /S/ John A. Campbell Print: John A. Campbell As Its: President and CEO SCOTIA PACIFIC COMPANY LLC, a Delaware limited liability company By: /s/ Gary L. Clark Print: Gary L. Clark As Its: Vice President SALMON CREEK CORPORATION, a Delaware corporation By: /s/ William S. Riegel Print: William S. Riegel As Its: Vice President STATE OF CALIFORNIA ) ) COUNTY OF HUMBOLDT ) On July 16, 1998, before me, Susan Pryor-Colby, a Notary Public for the State of California, personally appeared John A. Campbell, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity on behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature: /s/ Susan Pryor-Colby (Seal) STATE OF CALIFORNIA ) ) COUNTY OF HUMBOLDT ) On July 16, 1998, before me, Susan Pryor-Colby, a Notary Public for the State of California, personally appeared Gary L. Clark, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity on behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature: /s/ Susan Pryor-Colby (Seal) STATE OF CALIFORNIA ) ) COUNTY OF HUMBOLDT ) On July 16, 1998, before me, Susan Pryor-Colby, a Notary Public for the State of California, personally appeared William S. Riegel, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity on behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature: /s/ Susan Pryor-Colby (Seal) EX-10 6 EXHIBIT 10.5 NEW ENVIRONMENTAL INDEMNIFICATION AGREEMENT This NEW ENVIRONMENTAL INDEMNIFICATION AGREEMENT (the "Agreement"), dated as of July 20, 1998, is entered into between The Pacific Lumber Company ("Pacific Lumber") and Scotia Pacific Company LLC (the "Issuer"). The Issuer and the Trustee have entered into the Indenture, pursuant to which the Issuer has issued the Timber Notes and may issue Additional Timber Notes; and the Issuer, the Collateral Agent and the Deed of Trust Trustee have entered into the Deed of Trust, securing, among other things, the Issuer's obligations under the Timber Notes, the Line of Credit Agreement, any Additional Timber Notes and the Indenture; and This Agreement is being entered into in connection with the issuance and sale of the Timber Notes and any Additional Timber Notes. NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the Issuer and Pacific Lumber hereby agree as follows: I. DEFINITIONS For all purposes of this Agreement, unless the context otherwise requires, all defined terms which are used but not defined herein shall have the meaning set forth in Schedule A to the Indenture, which is incorporated by reference as if fully set forth herein. II. REPRESENTATIONS AND WARRANTIES Pacific Lumber hereby represents and warrants to the Issuer, as of the time of the transfer of each parcel of land comprising the Company Owned Timberlands by Pacific Lumber to Issuer or Issuer's predecessor, as follows: a. (i) Except as disclosed or referred to in the Offering Memorandum or in respect of matters which are not likely to have a Material Adverse Effect, or in respect of suspected or known Hazardous Materials Contamination on lands adjoining the Company Owned Timberlands, which are set forth on Schedule 1 hereto, Pacific Lumber is and has been in compliance in all material respects with all Environmental Laws in connection with its ownership and use of the Company Timber Property and the harvesting, cutting, severing and marketing of timber and the disposal or handling of any materials, products, wastes or other substances in, on, from or attributable to the Company Timber Property; (ii) except as dis- closed in or referred to in the Offering Memorandum, in respect of matters which are not likely to have a Material Adverse Effect, or in respect of suspected or known Hazardous Materials Contamination on lands adjoining the Company Owned Timberlands, which are set forth on Schedule 1 hereto, Pacific Lumber has not received (from governmental agencies or private parties) any citations, complaints, consent orders, compliance schedules or other similar enforcement orders, or any other written notice or commu- nication, that indicates or alleges that the Company Timber Property is or may be subject to any response, remedial action, penalty or fine or is not or may not be (or that Pacific Lumber or Salmon Creek is not or may not have been with respect to any such Company Timber Property) in material compliance with any such Environmental Laws; and, (iii) as of the date hereof, except for matters that have not had, and are not likely to have, a Material Adverse Effect, (including, without limitation, any Incidental Waste Disposal (as defined in Schedule A to the Deed of Trust) or in respect of suspected or known Hazardous Materials Contamination on lands adjoining the Company Owned Timberlands, which are set forth on Schedule 1 hereto) there were no current or past spills, discharges or releases of gas, liquid or gaseous hydrocarbons or products therefrom, contaminants, pollutants and/or Hazardous Materials from, affecting or in any way related to the Company Timber Property that had not been (i) remedied and cleaned up in accordance with applicable Environmental Law to the satisfaction of any Governmental Authorities requiring clean-up, (ii) disclosed in writing to the Trustee and the Issuer prior to the Closing Date and (iii) disclosed to all appropriate Governmental Authorities if required under any Environ- mental Law to be disclosed. b. Except for Hazardous Materials contained in commercial products used in the ordinary course of Pacific Lumber's business which have been stored, used and disposed of in accordance with applicable Environmental Laws, (i) there are no Hazardous Materials now located on, at, in or under any of the Company Timber Property or any part thereof which could have a Material Adverse Effect; (ii) no part of any of the Company Timber Property is being used or, to the best of Pacific Lumber's knowledge, has been used at any previous time for the disposal, storage, treatment, processing or other handling of any Hazardous Material nor is any part of any Company Timber Property affected by any Hazardous Materials Contamination, other than such as do not individually in the aggregate have a Material Adverse Effect, (including, without limitation any Incidental Waste Disposal and suspected or known Hazardous Materials Contamination on lands retained by Pacific Lumber adjoining the Company Owned Timberlands Property, which are set forth on Schedule 1 hereto); (iii) to the best of the knowledge and belief of Pacific Lumber, no property adjoining any Company Timber Property is being used, or has ever been used at any previ- ous time, for the disposal, storage, treatment, processing or other han- dling of any Hazardous Material nor is any property adjoining any Company Timber Property affected by Hazardous Materials Contamination, other than (x) such as do not individually in the aggregate have a Material Adverse Effect (including, without limitation, Incidental Waste Disposal and suspected or known Hazardous Materials Contamination on lands retained by Pacific Lumber adjoining the Company Owned Timberlands, which are set forth on Schedule 1 hereto); (iv) each Disposal Site now being used, or, to the best of Pacific Lumber's knowledge, that has been used, is or has been properly licensed to the extent required by law; and (v) no administrative order, consent order and agreement, litigation, settlement or, to the best of Pacific Lumber's knowledge, investigation, with respect to Hazardous Materials or Hazardous Materials Contamination is in existence or, to the best of Pacific Lumber's knowledge, proposed, threatened or anticipated, with respect to any of the Company Timber Property other than lands affected by the known or suspected Hazardous Materials Contamination set forth on Schedule I hereto. No part of any Company Timber Property is currently on, and to Pacific Lumber's knowledge has ever been on, CERCLA's Information System or National Priorities list, or any other Federal or State "Superfund" or "Superlien" list. Pacific Lumber has not received notice that any Disposal Site is currently on or has ever been on CERCLA's Information System or National Priorities list, or any other Federal or State "Superfund" or "Superlien" list. c. Pacific Lumber has made available to the Issuer copies of all environmental inspection reports obtained by or for the benefit of Pacific Lumber, Issuer and Salmon Creek, or otherwise in the possession of Pacific Lumber, Issuer and Salmon Creek through the date hereof. III. INDEMNIFICATION Pacific Lumber shall indemnify, protect, defend and hold harmless the Issuer, and its managers, directors, officers, employees, attorneys and agents (collectively referred to as the "Indemnified Parties" in this Agreement) from and against any and all liabilities (including, without limitation, strict liability), actions, demands, orders, penalties, losses, costs or expenses (including, without limitation, reasonable attorneys' fees and expenses and remedial costs), suits, costs of any settlement or judgment and claims of any and every kind whatsoever (including, without limitation, those arising under CERCLA or similar state statutes) that may now or in the future (whether before or after payment in full of the Secured Obligations, whether before or after any final and full release of the Deed of Trust, or whether before or after any exercise of any power of sale, any foreclosure sale, judicial or non-judicial, under the Deed of Trust or a conveyance in lieu of foreclosure) be paid, incurred or suffered by or asserted against the Indemnified Parties by any Person or entity or Tribunal for, with respect to, or as a direct or indirect result of, (i) the actual or threatened presence in, on or under, or the actual or threatened escape, seepage, leakage, spillage, discharge, emission or re- lease from, any of the Company Timber Property or any Disposal Site, of any Hazardous Materials, or any Hazardous Materials Contamination, or arising out of or relating to the applicability of any Environmental Law relating to Hazardous Materials (including, without limitation, any Federal, State or local so-called "Superfund" or "Superlien" laws, statute, law, ordinance, code, rule, regulation, order or decree), except to the extent that a court of competent jurisdiction shall have made a final determination that such liability was caused by the gross negligence or willful misconduct of such Indemnified Party or (ii) any breach of the representations and warranties in Article II hereof; provided, however, that this indemnity shall be limited to matters occurring, with respect to the various properties and assets comprising the Company Timber Property, prior to the respective dates the Issuer acquired such Company Timber Prop- erty or as a result of actions of Pacific Lumber occurring after the respective dates the Issuer acquired such Company Timber Property or as a result of migration of Hazardous Materials existing on, under or around the Company Timber Property as of the date Issuer acquired such property onto or under adjoining properties, which migration occurred or occurs after such date; provided, further, that the foregoing proviso shall not be con- strued to limit any claim arising after the date hereof in respect of the foregoing matters. An Indemnified Party shall notify Pacific Lumber promptly of any claim for which it may seek indemnity. Pacific Lumber shall have the right to defend the claim, and the Indemnified Party shall cooperate in the defense. If Pacific Lumber does not defend such claim, the Indemnified Party may have separate counsel and Pacific Lumber shall pay the reasonable fees and expenses of such counsel. Pacific Lumber shall have no obligation to pay for any settlement of any such claim made without its consent. IV. MISCELLANEOUS 4.1 Survival. The representations, warranties, covenants and indemnities contained in Articles II and III hereof shall survive the sale of the Company Timber Property, and any exercise of a power of sale or any foreclosure sale (whether judicial or nonjudicial) under the Deed of Trust or conveyance in lieu of foreclosure, and the covenants and indemnities in Article III hereof shall survive payment in full of the Secured Obligations and any final and full release of the Deed of Trust. 4.2 Term. This Agreement shall become effective upon the date first noted above and, subject to Section 4.1, shall continue in effect until all amounts payable under the Timber Notes, the Additional Timber Notes, the Line of Credit Agreement, the Indenture and the Deed of Trust shall have been paid in full. This Agreement may not be amended or terminated prior to the expiration of its term. 4.3 No Bankruptcy Petition. Pacific Lumber hereby covenants and agrees that, prior to the date which is one year and one day after the payment in full of all outstanding Timber Notes, it will not institute against, or join any other Persons in instituting against, the Issuer, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding or other similar proceeding under any Bankruptcy Law. 4.4 Notices. All notices and other communications required or permitted hereunder shall be in writing and, unless otherwise provided in this Agreement, shall be deemed to have been duly given when delivered in person or by mail or when dispatched by telegram or electronic facsimile transfer (confirmed in writing by mail simultaneously dispatched) to the addressee at the address specified below: If to Pacific Lumber: The Pacific Lumber Company P.O. Box 37 Scotia, California 95565 Fax: (707) 764-4269 Attention: Vice President, Finance and Administration If to the Issuer: Scotia Pacific Company LLC P.O. Box 712 Scotia, California 95565 Fax: (707) 764-5001 Attention: Vice President, Finance and Administration or such other address as either party may from time to time designate by like notice. 4.5 Limitations on Assignment. Neither Pacific Lumber nor the Issuer shall assign or transfer any of its rights or obligations under this Agreement (except for the lien of the Deed of Trust and any transfer of the rights of the Issuer hereunder by virtue of the exercise of remedies provided for in the Deed of Trust). Notwithstanding the foregoing, nothing herein shall prohibit any assignment occurring as a result of a transaction permitted by Section 4.2 of the Services Agreement. 4.6 Effect of Provisions of the Other Operative Documents. Notwithstanding any provision of the Indenture or the Deed of Trust requiring the Issuer to pay an expense or perform an obligation, Pacific Lumber shall not be relieved from any of its obligations under this Agreement to pay expenses or perform obligations as expressly provided in this Agreement. 4.7 Governing Law. This Agreement shall be governed by the internal laws of the State of California without regard to principles of conflict of laws. 4.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument. 4.9 Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof. 4.10 Headings. The section headings of this Agreement are only for the purpose of reference and shall not effect the meaning hereof. [REST OF PAGE INTENTIONALLY LEFT BLANK.] IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. THE PACIFIC LUMBER COMPANY By: /S/ JOHN A. CAMPBELL John A. Campbell President SCOTIA PACIFIC COMPANY LLC By: /S/ GARY L. CLARK Gary L. Clark Vice-President, Finance & Administration EX-27 7 FINANCIAL DATA SCHEDULE MGHI 2ND QTR.
5 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. 1,000 U.S. DOLLARS 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 123,718 21,996 13,522 0 53,992 229,737 183,361 81,079 925,966 78,446 908,690 0 0 1 (69,158) 925,966 115,426 115,426 72,590 72,590 18,049 0 47,650 1,370 (3,164) 4,534 0 0 0 4,534 0 0
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