-----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, JeRhCS/m3hgebujCZnoxpdlz3C0Zgb2PSWiXWL4Sii6Ry+5+OKPljxWZw32CqvGV Ufgg6ffZ6MKLN27G4kJWxA== 0000900421-98-000043.txt : 19980804 0000900421-98-000043.hdr.sgml : 19980804 ACCESSION NUMBER: 0000900421-98-000043 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980803 SROS: AMEX SROS: PHLX SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXXAM INC CENTRAL INDEX KEY: 0000063814 STANDARD INDUSTRIAL CLASSIFICATION: PRIMARY PRODUCTION OF ALUMINUM [3334] IRS NUMBER: 952078752 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03924 FILM NUMBER: 98675833 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 FORMER COMPANY: FORMER CONFORMED NAME: MCO HOLDINGS INC DATE OF NAME CHANGE: 19881115 FORMER COMPANY: FORMER CONFORMED NAME: MCCULLOCH OIL CORP DATE OF NAME CHANGE: 19800630 FORMER COMPANY: FORMER CONFORMED NAME: MCCULLOCH OIL CORP OF CALIFORNIA DATE OF NAME CHANGE: 19691118 10-Q 1 MAXXAM INC. 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 1-3924 MAXXAM INC. (Exact name of Registrant as specified in its charter) DELAWARE 95-2078752 (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 30, 1998: 7,000,597 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 13 PART II. - OTHER INFORMATION Item 1. Legal Proceedings 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 6. Exhibits and Reports on Form 8-K 23 Signatures S-1 Appendix A - Glossary of Defined Terms A-1 MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 1998 1997 ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 277.3 $ 164.6 Marketable securities 35.4 84.6 Receivables: Trade, net of allowance for doubtful accounts of $6.4 and $5.9, respectively 243.9 255.9 Other 74.5 126.3 Inventories 560.8 629.6 Prepaid expenses and other current assets 189.9 175.1 ------------ ------------ Total current assets 1,381.8 1,436.1 Property, plant and equipment, net of accumulated depreciation of $882.4 and $845.6, respectively 1,318.4 1,320.9 Timber and timberlands, net of accumulated depletion of $173.2 and $169.2, respectively 297.6 299.1 Investments in and advances to unconsolidated affiliates 153.5 159.5 Deferred income taxes 473.1 479.9 Long-term receivables and other assets 434.6 418.7 ------------ ------------ $ 4,059.0 $ 4,114.2 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 169.4 $ 187.3 Accrued interest 68.0 68.7 Accrued compensation and related benefits 99.2 159.3 Other accrued liabilities 231.0 174.9 Payable to affiliates 79.2 82.9 Short-term borrowings and current maturities of long-term debt 30.5 69.0 ------------ ------------ Total current liabilities 677.3 742.1 Long-term debt, less current maturities 1,883.2 1,888.0 Accrued postretirement medical benefits 719.4 730.1 Other noncurrent liabilities 592.0 586.3 ------------ ------------ Total liabilities 3,871.9 3,946.5 ------------ ------------ Commitments and contingencies Minority interests 175.7 170.6 Stockholders' equity (deficit): Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A $.05 Non-Cumulative Participating .3 .3 Convertible Preferred Stock; shares issued: 669,701 Common stock, $.50 par value; 28,000,000 shares authorized; 10,063,359 shares issued 5.0 5.0 Additional capital 222.8 222.8 Accumulated deficit (104.2) (118.5) Pension liability adjustment (3.3) (3.3) Treasury stock, at cost (shares held: preferred - 845; common: 3,062,762) (109.2) (109.2) ------------ ------------ Total stockholders' equity (deficit) 11.4 (2.9) ------------ ------------ $ 4,059.0 $ 4,114.2 ============ ============ The accompanying notes are an integral part of these financial statements.
MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ (UNAUDITED) Net sales: Aluminum operations $ 614.8 $ 597.1 $ 1,211.8 $ 1,144.5 Forest products operations 63.5 76.9 115.4 143.7 Real estate and other operations 21.3 15.1 36.4 32.5 ------------ ------------ ------------ ------------ 699.6 689.1 1,363.6 1,320.7 ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales and operations: Aluminum operations 506.1 489.3 1,005.7 950.0 Forest products operations 39.5 42.1 72.6 80.1 Real estate and other operations 11.7 8.9 21.4 18.9 Selling, general and administrative expenses 43.8 47.2 86.0 91.7 Depreciation and depletion 27.5 29.2 55.6 58.6 Restructuring of aluminum operations - 19.7 - 19.7 ------------ ------------ ------------ ------------ 628.6 636.4 1,241.3 1,219.0 ------------ ------------ ------------ ------------ Operating income 71.0 52.7 122.3 101.7 Other income (expense): Investment, interest and other income 10.2 5.3 21.8 16.2 Interest expense (52.5) (52.9) (106.4) (106.0) ------------- ------------- ------------- ------------- Income before income taxes and minority interests 28.7 5.1 37.7 11.9 Credit (provision) for income taxes (10.2) 30.2 (13.4) 27.5 Minority interests (6.1) (3.4) (10.0) (6.8) ------------ ------------ ------------ ------------ Net income $ 12.4 $ 31.9 $ 14.3 $ 32.6 ============ ============ ============ ============ Basic earnings per common share $ 1.76 $ 3.72 $ 2.04 $ 3.80 ============ ============ ============ ============ Diluted earnings per common and common equivalent share $ 1.57 $ 3.42 $ 1.83 $ 3.49 ============ ============ ============ ============ The accompanying notes are an integral part of these financial statements.
MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS OF DOLLARS)
SIX MONTHS ENDED JUNE 30, -------------------------- 1998 1997 ------------ ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 14.3 $ 32.6 Adjustments to reconcile net income to net cash used for operating activities: Depreciation and depletion 55.6 58.6 Restructuring of aluminum operations - 19.7 Net sales of marketable securities 56.1 5.3 Minority interests 10.0 6.8 Amortization of deferred financing costs and discounts on long-term debt 12.1 12.4 Amortization of excess of investment over equity in net assets of unconsolidated affiliates 5.1 5.8 Equity in loss of unconsolidated affiliates, net of dividends received .2 10.5 Increase (decrease) in cash resulting from changes in: Receivables 42.3 (37.0) Payable to affiliates and other liabilities (45.8) (48.5) Inventories 66.3 2.8 Accrued interest (.4) 8.0 Prepaid expenses and other assets 15.8 (20.8) Accounts payable (17.9) (43.1) Accrued and deferred income taxes 3.3 (6.2) Other (10.9) (9.3) ------------ ------------ Net cash provided by (used for) operating activities 206.1 (2.4) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from disposition of property and investments 14.8 26.5 Capital expenditures (53.5) (83.7) Investment in subsidiaries and joint ventures (1.6) (7.1) Other 3.1 (2.6) ------------ ------------ Net cash used for investing activities (37.2) (66.9) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving credit agreements - 30.0 Proceeds from issuance of long-term debt 4.8 19.0 Redemptions, repurchases and principal payments on long-term debt (19.0) (65.3) Dividends paid to Kaiser's minority preferred stockholders - (4.2) Redemption of preference stock (8.5) (2.0) Restricted cash deposits - (10.1) Treasury stock repurchases (35.1) (9.9) Other 1.6 (.4) ------------ ------------ Net cash used for financing activities (56.2) (42.9) ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 112.7 (112.2) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 164.6 336.6 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 277.3 $ 224.4 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest $ 94.9 $ 85.6 Income taxes paid 9.0 9.3 Capital spending excluded from investing activities - 9.7 The accompanying notes are an integral part of these financial statements.
MAXXAM INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 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. 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 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. Certain reclassifications of prior period information have been made to conform to the current presentation. SFAS No. 130 was issued in June 1997 and 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). 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. SFAS No. 133 must be adopted by the Company no later than January 1, 2000, although earlier application is permitted. The Company is currently evaluating how and when to implement SFAS No. 133. The amount of the Company's comprehensive income adjustments is not significant so there is not a significant difference between "traditional" net income and comprehensive income for the three and six month periods ended June 30, 1998 and 1997. However, differences between comprehensive income and traditional net income may become significant in future periods as a result of SFAS No. 133. As discussed more fully in Note 7, the intent of Kaiser's hedging programs is 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, the Company 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 transaction to which the hedge relates. Pursuant to SFAS No. 130, the Company 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. The combined impact of implementing SFAS No. 130 and SFAS No. 133 will result in fluctuations in comprehensive income and stockholders' equity in periods of price volatility, despite the fact that the Company's cash flow and earnings will be "fixed" to the extent hedged. The amount of such fluctuations could be significant. 2. INVENTORIES Inventories consist of the following:
JUNE 30, DECEMBER 31, 1998 1997 ------------- ------------- Aluminum Operations: Bauxite and alumina $ 111.6 $ 108.4 Primary aluminum and work in process 181.4 226.6 Finished fabricated aluminum products 89.6 103.9 Operating supplies and repair and maintenance parts 124.2 129.4 ------------- ------------- 506.8 568.3 ------------- ------------- Forest Products Operations: Lumber 43.2 49.7 Logs 10.8 11.6 ------------- ------------- 54.0 61.3 ------------- ------------- $ 560.8 $ 629.6 ============= =============
3. RESTRICTED CASH Long-term receivables and other assets include restricted cash in the amount of $32.2 and $33.7 at June 30, 1998 and December 31, 1997, respectively. Such restricted cash primarily represents the amount held by the trustee under the indenture governing the Old Timber Notes. 4. LONG-TERM DEBT Long-term debt consists of the following:
JUNE 30, DECEMBER 31, 1998 1997 ------------ ------------ 12% MGHI Senior Secured Notes due August 1, 2003 $ 130.0 $ 130.0 11-1/4% MGI Senior Secured Notes due August 1, 2003 100.0 100.0 12-1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount 124.5 117.3 10-1/2% Pacific Lumber Senior Notes due March 1, 2003 235.0 235.0 Pacific Lumber Credit Agreement 9.4 9.4 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015 309.2 320.0 KACC Credit Agreement - - 10-7/8% KACC Senior Notes due October 15, 2006, including premium 225.7 225.8 9-7/8% KACC Senior Notes due February 15, 2002, net of discount 224.3 224.2 12-3/4% KACC Senior Subordinated Notes due February 1, 2003 400.0 400.0 Alpart CARIFA Loans 60.0 60.0 Other aluminum operations debt 54.5 61.6 Other notes and contracts, primarily secured by receivables, buildings, real estate and equipment 38.6 36.1 ------------ ------------ 1,911.2 1,919.4 Less: current maturities (28.0) (31.4) ------------ ------------ $ 1,883.2 $ 1,888.0 ============ ============
See Note 8 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. 5. PER SHARE INFORMATION Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period including the weighted average impact of the shares of common stock issued and treasury stock acquired during the year from the date of issuance or repurchase. The weighted average common shares outstanding were 7,000,597 shares and 8,593,857 shares for the six months ended June 30, 1998 and 1997, respectively. Diluted earnings per share calculations also include the dilutive effect of the Class A Preferred Stock (which is convertible into Common Stock) as well as common and preferred stock options. The weighted average number of common and common equivalent shares was 7,813,317 shares and 9,363,195 shares for the six months ended June 30, 1998 and 1997, respectively. 6. CONTINGENCIES Environmental Contingencies Kaiser and KACC are subject to a number of environmental laws and regulations, to fines or penalties assessed for alleged breaches of the environmental laws and regulations, and to claims and litigation based upon such laws. KACC is currently subject to a number of lawsuits under CERCLA and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based on Kaiser's evaluation of these and other environmental matters, Kaiser has established environmental accruals primarily related to potential solid waste disposal and soil and groundwater remediation matters. At June 30, 1998, the balance of such accruals, which are primarily included in noncurrent liabilities, was $28.6. These environmental accruals represent Kaiser's estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology and Kaiser's assessment of the likely remedial action to be taken. Kaiser expects that these remedial actions will be taken over the next several years and estimates that annual expenditures to be charged to these environmental accruals will be approximately $2.0 to $9.0 for the years 1998 through 2002 and an aggregate of approximately $7.0 thereafter. As additional facts are developed and definitive remedial plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. Kaiser believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $18.0. As the resolution of these matters is subject to further regulatory review and approval, no specific assurances can be given as to when the factors upon which a substantial portion of this estimate is based can be expected to be resolved. However, Kaiser is working to resolve these matters. Kaiser believes that it has insurance coverage available to recover certain incurred and future environmental costs and is actively pursuing claims in this regard. However, no accruals have been made for any such insurance recoveries, and no assurances can be given that Kaiser will be successful in its attempt to recover incurred or future costs. While uncertainties are inherent in the final outcome of these environmental matters, and it is impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Asbestos Contingencies KACC is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 20 years. At June 30, 1998, the number of claims pending was approximately 83,900 compared to 77,400 at December 31, 1997. During 1997, approximately 15,600 of such claims were received and approximately 9,300 were settled or dismissed. During the quarter and six months ended June 30, 1998, approximately 5,100 and 10,500 of such claims were received and 2,700 and 4,000 of such claims were settled or dismissed, respectively. However, the foregoing claim and settlement figures as of June 30, 1998 do not reflect the fact that KACC reached agreements under which it will settle approximately 22,000 of the pending asbestos-related claims over an extended period. Based on past experience and reasonably anticipated future activity, Kaiser has established an accrual for estimated asbestos-related costs for claims filed and estimated to be filed through 2008. There are inherent uncertainties involved in estimating asbestos-related costs and KACC's actual costs could exceed these estimates. Kaiser's accrual was calculated based on the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, and the advice of Wharton, Levin, Ehrmantraut, Klein & Nash, P.A. with respect to the current state of the law related to asbestos claims. Accordingly, an asbestos-related cost accrual of $167.5, before consideration of insurance recoveries, is included primarily in other noncurrent liabilities at June 30, 1998. While Kaiser does not believe there is a reasonable basis for estimating such costs beyond 2008 and, accordingly, no accrual has been recorded for such costs which may be incurred beyond 2008, there is a reasonable possibility that such costs may continue beyond 2008, and such costs may be substantial. Kaiser estimates that annual future cash payments in connection with such litigation will be approximately $15.0 to $22.0 for each of the years 1998 through 2002, and an aggregate of approximately $83.0 thereafter. Kaiser believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. While active coverage litigation has been resolved, the timing and amount of future recoveries from the insurance carriers that remain at risk will depend on the pace of claims review and processing by such carriers, and on the resolution of any disputes which may arise in the course of discussions regarding coverage under their policies. Kaiser believes, based on prior insurance-related recoveries with respect to asbestos-related claims, existing insurance policies, and the advice of Thelen, Reid & Priest LLP (formerly Thelen, Marrin, Johnson & Bridges LLP) with respect to applicable insurance coverage law relating to the terms and conditions of these policies, that substantial recoveries from the insurance carriers are probable. Accordingly, an estimated aggregate insurance recovery of $128.1, determined on the same basis as the asbestos-related cost accrual, is recorded primarily in long-term receivables and other assets at June 30, 1998. Kaiser continues to monitor claims activity, the status of lawsuits (including settlement initiatives), legislative progress, and costs incurred in order to ascertain whether an adjustment to the existing accruals should be made to the extent that historical experience may differ significantly from Kaiser's underlying assumptions. While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and insurance recoveries that will be received, Kaiser believes that, based on the factors discussed in the preceding paragraphs, the resolution of asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. OTS Contingency and Related Matters On December 26, 1995, the OTS initiated a formal administrative proceeding against the Company and others by filing the Notice. The Notice alleges, among other things, misconduct by the Company, Federated, Mr. Charles Hurwitz and others (the "respondents") with respect to the failure of USAT, a wholly owned subsidiary of UFG. The Notice claims that the Company was a savings and loan holding company, that with others it controlled USAT, and that it was therefore obligated to maintain the net worth of USAT. The Notice makes numerous other allegations against the Company and the other respondents, including, among other things, allegations that through USAT it was involved in prohibited transactions with Drexel, Burnham, Lambert Inc. The OTS, among other things, seeks unspecified damages in excess of $560.0 from the Company and Federated, civil money penalties and the removal from, and prohibition against the Company and the other respondents engaging in, the banking industry. The hearing on the merits of this matter commenced on September 22, 1997, adjourned on December 19, 1997, recommenced on June 16, 1998 and is expected to continue until at least October 1998. On August 2, 1995, the FDIC filed the FDIC action in the U.S. District Court for the Southern District of Texas. The original complaint against Mr. Hurwitz alleged damages in excess of $250.0 based on the allegation that Mr. Hurwitz was a controlling shareholder, de facto senior officer and director of USAT, and was involved in certain decisions which contributed to the insolvency of USAT. The original complaint further alleged, among other things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and the Company maintained the net worth of USAT. On January 15, 1997, the FDIC filed an amended complaint which seeks, conditioned on the OTS prevailing in its administrative proceeding, unspecified damages from Mr. Hurwitz relating to amounts the OTS does not collect from the Company and Federated with respect to their alleged obligations to maintain USAT's net worth. The Company's bylaws provide for indemnification of its officers and directors to the fullest extent permitted by Delaware law. The Company is obligated to advance defense costs to its officers and directors, subject to the individual's obligation to repay such amount if it is ultimately determined that the individual was not entitled to indemnification. In addition, the Company's indemnity obligation can, under certain circumstances, include amounts other than defense costs, including judgments and settlements. The Company has concluded that it is unable to determine a reasonable estimate of the loss (or range of loss), if any, that could result from this contingency. Accordingly, it is impossible to assess the ultimate outcome of the foregoing matters or their potential impact on the Company; however, any adverse outcome of these matters could have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Other Matters The Company is involved in various other claims, lawsuits and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 7. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS At June 30, 1998, the net unrealized gain on KACC's position in aluminum forward sales and option contracts (based on an average contract price of $.74 per pound of primary aluminum), natural gas, fuel oil and diesel fuel forward purchase and option contracts, and forward foreign exchange contracts, was approximately $28.3. Any gain or losses on the derivative contracts utilized in KACC's hedging activities are offset by losses or gains, respectively, on the transactions being hedged. See Note 1 for a discussion of SFAS No. 133, a new accounting pronouncement which requires the Company to "mark-to-market" its hedging positions at each period end in advance of the period of recognition for the transaction to which the hedge relates. Alumina and Aluminum Kaiser's earnings are sensitive to changes in the prices of alumina, primary aluminum and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold. Primary aluminum prices have historically been subject to significant cyclical fluctuations. Since 1993, the AMT Price for primary aluminum has ranged from approximately $.50 to $1.00 per pound. Alumina prices as well as fabricated aluminum product prices (which vary considerably among products) are significantly influenced by changes in the price of primary aluminum but generally lag behind primary aluminum price changes by up to three months. From time to time in the ordinary course of business, KACC enters into hedging transactions to provide price risk management of the net exposure of earnings resulting from (i) anticipated sales of alumina, primary aluminum and fabricated aluminum products, less (ii) expected purchases of certain items, such as aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with the price of primary aluminum. Forward sales contracts are used by KACC to effectively fix the price that KACC will receive for its shipments. KACC also uses option contracts (i) to establish a minimum price for its product shipments, (ii) to establish a "collar" or range of prices for KACC's anticipated sales, and/or (iii) to permit KACC to realize possible upside price movements. As of June 30, 1998, KACC had sold forward, at fixed prices, approximately 47,300 and 24,000 tons of primary aluminum with respect to 1998 and 1999, respectively. As of June 30, 1998, KACC had also purchased put options to establish a minimum price for approximately 22,500 tons of primary aluminum with respect to 1998 and had entered into option contracts that established a price range for an additional 115,800 and 124,500 tons with respect to 1998 and 1999, respectively. Additionally, at June 30, 1998, KACC also held fixed price purchase contracts for 42,100 tons of primary aluminum with respect to 1998. As of June 30, 1998, KACC had sold forward virtually all of the alumina available to it in excess of its projected internal smelting requirements for 1998, 1999 and 2000 at prices indexed to future prices of primary aluminum. Energy KACC is exposed to energy price risk from fluctuating prices for fuel oil and natural gas consumed in the production process. Accordingly, KACC from time to time in the ordinary course of business enters into hedging transactions with major suppliers of energy and energy related financial instruments. As of June 30, 1998, KACC had a combination of fixed price purchase and option contracts for the purchase of approximately 45,000 MMBtu of natural gas per day during the remainder of 1998. As of June 30, 1998, KACC also held a combination of fixed price purchase and option contracts for an average of 232,000 and 138,800 barrels per month of fuel oil and diesel fuel for 1998 and 1999, respectively. Foreign Currency KACC enters into forward exchange contracts to hedge material cash commitments to foreign subsidiaries or affiliates. At June 30, 1998, KACC had net forward foreign exchange contracts totaling approximately $198.6 for the purchase of 285.6 Australian dollars from July 1998 through December 2000, in respect of its commitments for 1998 through 2000 expenditures denominated in Australian dollars. 8. 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 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 approximately $42.5, net of the related income tax benefit of $22.9, 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 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 Timber Notes Line of Credit. The Timber Notes Indenture permits Scotia LLC to have outstanding up to $75.0 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 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 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. 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 operates in three principal industries: aluminum, through its majority owned subsidiary, Kaiser, an integrated aluminum producer; forest products, through MGI and its wholly owned subsidiaries, principally Pacific Lumber and Britt; real estate investment and development, managed through MAXXAM Property Company; and other commercial operations through various other wholly owned subsidiaries. MGHI owns 100% of MGI and is a wholly owned subsidiary of the Company. All references to the "Company," "Kaiser," "MGHI," "MGI" and "Pacific Lumber" refer to the respective companies and their subsidiaries, unless otherwise indicated or the context indicates otherwise. ALUMINUM OPERATIONS Aluminum operations account for a substantial portion of the Company's revenues and operating results. Kaiser, through its principal subsidiary KACC, operates in two business segments: bauxite and alumina, and aluminum processing. As an integrated aluminum producer, Kaiser uses a portion of its bauxite, alumina and primary aluminum production for additional processing at certain of its facilities. Recent Events and Developments Substantially all of KACC's hourly workforce at the Gramercy, Louisiana, alumina reduction facility, Mead and Tacoma, Washington, aluminum smelters, Trentwood, Washington, rolling mill, and Newark, Ohio, extrusion facility is covered by a master agreement ("the Labor Contract") with the United Steelworkers of America which expires on September 30, 1998. Negotiations concerning the Labor Contract are expected to commence during the third quarter of 1998. During April 1998, Kaiser's 90%-owned Valco smelter in Ghana reached an agreement with the VRA to receive compensation in lieu of the power necessary to run an additional potline that was curtailed on April 6, 1998. The compensation is expected to substantially mitigate the financial impact of the curtailment. Valco is now operating only one if its five potlines, as compared to 1997, when Valco operated four potlines. Valco had previously curtailed two of its potlines in 1998, one in January, for which it received no compensation, and one in February, for which it will be compensated. As previously announced, Kaiser has notified the VRA that it believes it had the contractual rights at the beginning of 1998 to sufficient energy to run four and one-half potlines for the balance of the year. Valco continues to seek compensation from the VRA with respect to the January 1998 reduction of its power allocation. Valco and the VRA also are in continuing discussions concerning other matters, including steps that might be taken to reduce the likelihood of power curtailments beyond 1998. No assurances can be given as to the success of these discussions, the possibility of requests from the VRA for additional curtailments, or as to the operating level of Valco for the remainder of 1998 or beyond. Summary The following table presents selected operational and financial information for the three and six months ended June 30, 1998 and 1997. The information presented in the table is in millions of dollars, except shipments and prices, and intracompany shipments have been excluded.
Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Shipments: (1) Alumina 652.5 492.3 1,077.1 877.8 Aluminum products: Primary aluminum 68.3 82.0 148.8 160.5 Fabricated aluminum products 107.8 100.4 213.3 194.3 ------------- ------------- ------------- ------------- Total aluminum products 176.1 182.4 362.1 354.8 ============= ============= ============= ============= Average realized sales price: Alumina (per ton) $ 197 $ 196 $ 198 $ 193 Primary aluminum (per pound) .70 .75 .71 .75 Net sales: Bauxite and alumina: Alumina $ 128.3 $ 96.5 $ 213.8 $ 169.7 Other (2) (3) 26.8 26.5 52.5 53.1 ------------- ------------- ------------- ------------- Total bauxite and alumina 155.1 123.0 266.3 222.8 ------------- ------------- ------------- ------------- Aluminum processing: Primary aluminum 105.8 135.3 232.0 264.5 Fabricated aluminum products 353.0 334.5 709.9 648.9 Other (3) .9 4.3 3.6 8.3 ------------- ------------- ------------- ------------- Total aluminum processing 459.7 474.1 945.5 921.7 ------------- ------------- ------------- ------------- Total net sales $ 614.8 $ 597.1 $ 1,211.8 $ 1,144.5 ============= ============= ============= ============= Operating income (4) $ 56.8 $ 36.7 $ 103.1 $ 69.5 ============= ============= ============= ============= Income before income taxes and minority interests $ 27.3 $ 5.4 $ 46.3 $ 13.3 ============= ============= ============= ============= Capital expenditures $ 23.0 $ 47.0 $ 36.7 $ 68.8 ============= ============= ============= ============= - --------------- (1) Shipments are expressed in thousands of metric tons. A metric ton is equivalent to 2,204.6 pounds. (2) Includes net sales of bauxite. (3) Includes the portion of net sales attributable to minority interests in consolidated subsidiaries. (4) Includes a pre-tax charge of $19.7 million related to restructuring of the aluminum operations for both the three and six months ended June 30, 1997.
Overview Kaiser's operating results are sensitive to changes in the prices of alumina, primary aluminum and fabricated aluminum products, and also depend to a significant degree on the volume and mix of all products sold and on KACC's hedging strategies. Primary aluminum prices have historically been subject to significant cyclical fluctuations. Alumina prices as well as fabricated aluminum product prices (which vary considerably among products) are significantly influenced by changes in the price of primary aluminum but generally lag behind primary aluminum price changes by up to three months. During 1997, the AMT Price for primary aluminum remained relatively stable in the $.75 to $.80 per pound range through November and then declined during December to the $.70 to $.75 per pound range. After beginning 1998 at approximately $.73, the AMT Price for primary aluminum declined to approximately $.69 at the end of March 1998 and further declined to approximately $.63 at the end of June 1998. The AMT Price for primary aluminum for the week ended July 24, 1998, was approximately $.66 per pound. Net Sales - Bauxite and Alumina Net sales of alumina increased by 33% for the quarter ended June 30, 1998, from the comparable period in the prior year, as a result of a 33% increase in alumina shipments, resulting from the timing of shipments as well as reduced intercompany shipments to Valco. For the six month period ended June 30, 1998, net sales of alumina increased by 26% from the comparable period in the prior year due to a 23% increase in shipments and a 3% increase in average realized prices between periods. Net Sales - Aluminum Processing Net sales of primary aluminum for the quarter ended June 30, 1998, decreased by 22% from the comparable prior year period as a result of a 17% decrease in shipments, primarily as a result of the aforementioned Valco potline curtailments, as well as a 6% decrease in average realized prices. Net sales of fabricated aluminum products for the quarter ended June 30, 1998, were up 6% as compared to the prior year period as a result of an 7% increase in shipments offset by a 2% decrease in average realized prices. The increase in fabricated aluminum product shipments over the second quarter of 1997 was the result of Kaiser's June 1997 acquisition of the Bellwood extrusion facility, as well as increased shipments of heat- treat products, offset by reduced volumes in the engineered products business unit, in part due to the formation of the AKW wheel manufacturing joint venture. For the six month period ended June 30, 1998, net sales for the aluminum processing segment increased by approximately 3% as a 9% increase in net sales of fabricated aluminum products more than offset a 12% decline in net sales of primary aluminum. The increase in fabricated aluminum product net sales and decrease in primary aluminum net sales resulted from the same shipment and price factors discussed in the preceding paragraph. Operating Income Despite a significant decline in the average realized price for primary aluminum, operating income for the three and six month periods ended June 30, 1998, increased by 1% and 16%, respectively, as compared to the comparable prior year periods and after adjusting 1997 results for the impact of the non-recurring $19.7 million restructuring charge. Kaiser's ability to sustain its operating earnings reflects increased alumina production, the continued demand for heat-treat products, improvements in performance at Kaiser's Trentwood, Washington, rolling mill, as well as compensation recorded by Kaiser (which will be received over a 18-month period beginning in July 1998) for two of the three Valco potlines curtailed during 1998. Reduced power and raw material costs in the primary aluminum operations also contributed to Kaiser's ability to maintain the prior year earnings level. Operating income for the quarter and six-month period ended June 30, 1997, included approximately $2.3 million and $5.2 million, respectively, of operating income related to the settlement of certain issues related to energy service contracts. FOREST PRODUCTS OPERATIONS The Company's forest products operations are conducted by MGI through its principal operating subsidiaries. MGI'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, MGI'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. The information presented in the table is in millions of dollars except shipments and prices.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ 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 $ 68.7 $ 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 $ 76.9 $ 115.4 $ 143.7 ============ ============ ============ ============ Operating income $ 14.7 $ 24.5 $ 24.8 $ 43.3 ============ ============ ============ ============ Operating cash flow (6) $ 20.5 $ 31.1 $ 36.2 $ 56.5 ============ ============ ============ ============ Income (loss) before income taxes $ (2.7) $ 9.5 $ (6.9) $ 9.8 ============ ============ ============ ============ 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 products. Operating income Operating income for the three and six months ended June 30, 1998 decreased from the comparable prior periods primarily due to the decrease in net sales discussed above. Income (loss) before income taxes and minority interests 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. Results for the second quarter of 1998 were also affected by a decrease in investment income from marketable securities. REAL ESTATE AND OTHER OPERATIONS The Company, principally through its wholly owned subsidiaries, invests in and develops residential and commercial real estate primarily in Arizona, California, Texas and Puerto Rico. The Company, through its subsidiaries, also has majority ownership in SHRP, Ltd., a Texas limited partnership, which owns and operates a Class 1 horse racing facility in Houston, Texas.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ (IN MILLIONS OF DOLLARS) Net sales: Real estate $ 17.3 $ 10.6 $ 25.8 $ 22.0 SHRP, Ltd. 4.0 4.5 10.6 10.5 ------------ ------------ ------------ ------------ Total net sales $ 21.3 $ 15.1 $ 36.4 $ 32.5 ============ ============ ============ ============ Operating income (loss): Real estate $ 2.7 $ (1.3) $ 0.2 $ (1.3) SHRP, Ltd. (0.3) (.5) 0.6 (.1) ------------ ------------ ------------ ------------ Total operating income (loss) $ 2.4 $ (1.8) $ 0.8 $ (1.4) ============ ============ ============ ============ Income (loss) before income taxes and minority interests: Real estate $ 10.8 $ (.2) $ 10.6 $ 3.2 SHRP, Ltd. (1.0) (1.1) (0.8) (1.4) ------------ ------------ ------------ ------------ Total income (loss) before income taxes and minority interests $ 9.8 $ (1.3) $ 9.8 $ 1.8 ============ ============ ============ ============
Net sales Net sales for the quarter and six months ended June 30, 1998 increased from the same prior year periods primarily due to higher revenues from the Company's domestic U.S. real estate projects. Operating income (loss) Real estate and other operations had operating income for the quarter and six months ended June 30, 1998 as compared to operating losses for the same periods in 1997 primarily due to the higher net sales discussed above. Income (loss) before income taxes Income before income taxes and minority interests for the quarter and six months ended June 30, 1998 increased when compared to the income (loss) for the same periods in 1997 due to a gain on the sale of the resort operations of the Company's Waterwood development project and due to increases in operating income discussed above. OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ (IN MILLIONS OF DOLLARS) Operating loss $ (2.9) $ (6.7) $ (6.4) $ (9.7) Loss before income taxes and minority interests (5.7) (8.5) (11.5) (13.0)
Operating loss The operating losses represent corporate general and administrative expenses that are not allocated to the Company's industry segments. The operating loss for the second quarter and the six months ended June 30, 1998 decreased from the same periods in 1997 as 1997 results included accruals for certain legal contingencies. Loss before income taxes and minority interests The loss before income taxes and minority interests includes operating losses, investment, interest and other income (expense) and interest expense, including amortization of deferred financing costs, which are not attributable to the Company's industry segments. The losses for the second quarter and the six months ended June 30, 1998 decreased from the same periods in 1997 primarily due to lower operating losses described above. Minority interests Minority interests primarily represents the minority stockholders' interest in the Company's aluminum operations. FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES PARENT COMPANY AND MGHI 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 various credit instruments of KACC, MGHI, Pacific Lumber and Scotia LLC contain various covenants which, among other things, limit the ability of such entities to incur additional indebtedness and liens, to engage in transactions with affiliates, to pay dividends and to make investments. As of June 30, 1998, no dividends could be paid by MGHI. Pursuant to the terms of the KACC Credit Agreement, Kaiser is prohibited from paying any dividends with respect to its common stock. The most restrictive covenants governing debt of the Company's real estate and other subsidiaries would not restrict payment to the Company of all nonrestricted cash and unused borrowing availability for such subsidiaries (approximately $13.6 million could be paid as of June 30, 1998). However, on August 15, 1998, the MCOP Credit Agreement expires and the Company's real estate and other subsidiaries are currently working with a bank to replace this credit facility. On May 14, 1998, the Company repaid the $35.1 million of one-year notes issued to NL and CMRT. Kaiser has an effective shelf registration statement covering the offering of up to 10 million shares of Kaiser common stock owned by the Company. Net proceeds from any transaction initiated by the Company pursuant to this registration statement would be for the benefit of the Company rather than Kaiser. As of June 30, 1998, the Company (excluding its subsidiaries) had cash and marketable securities of approximately $42.4 million and available borrowings under the Custodial Trust Agreement and Salomon Smith Barney facility aggregating $47.5 million. The Company believes that its existing resources, together with the cash available from subsidiaries and other sources of financing, will be sufficient to fund its working capital requirements for the next year. With respect to its long-term liquidity, the Company believes that its existing cash and cash resources, together with the cash proceeds from the sale of assets and distributions from its subsidiaries should be sufficient to meet its working capital requirements. However, there can be no assurance that the Company's cash resources, together with the cash proceeds from the sale of assets, distributions from its subsidiaries and other sources of financing, will be sufficient for such purposes. Any substantially adverse outcome of the litigation described in Note 6 to the Consolidated Financial Statements could materially adversely affect the Company's consolidated financial position, results of operations or liquidity. See Note 6 to the Consolidated Financial Statements for a discussion of the Company's material contingencies. ALUMINUM OPERATIONS At June 30, 1998, Kaiser had long-term debt of $964.5 million, compared with $971.7 million at December 31, 1997. At June 30, 1998, $271.3 million (of which $71.3 million could have been used for letters of credit) was available to KACC under the KACC Credit Agreement. Loans under the KACC Credit Agreement bear interest at a spread (which varies based on the results of a financial test) over either a base rate or LIBOR, at Kaiser's option. During the six months ended June 30, 1998, the average per annum interest rates on loans outstanding under the KACC Credit Agreement were approximately 9%. Kaiser has an effective shelf registration statement covering the offering from time to time of up to $150.0 million of equity securities. Kaiser's capital expenditures during the six months ended June 30, 1998, were $36.7 million, and were used primarily to improve production efficiency, reduce operating costs, expand capacity at existing facilities, and construct new facilities. Total capital expenditures (of which approximately 8% is expected to be funded by Kaiser's minority partners in certain foreign joint ventures) are expected to be between $75.0 and $125.0 million per annum in each of 1998 through 2000. With respect to the Micromill(TM) facility, product trials for international and domestic customers are ongoing. However, the Micromill(TM) technology has not yet been fully implemented or commercialized and there can be no assurances that full implementation or commercialization will be successful. Management continues to evaluate numerous projects, including the Micromill(TM) technology, all of which require substantial capital in both the United States and overseas. Kaiser believes that its existing cash resources, together with cash flow from operations and borrowings under the KACC Credit Agreement, will be sufficient to satisfy its working capital and capital expenditure requirements for the next year. With respect to its long-term liquidity, Kaiser believes that operating cash flow, together with its ability to obtain both short- and long-term financing, should provide sufficient funds to meet its long-term working capital and capital expenditure requirements. FOREST PRODUCTS OPERATIONS As discussed further in Note 8 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 redeem the Pacific Lumber Senior Notes and the MGI Notes effective August 19, 1998. 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 $20.6 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. MGI and its subsidiaries anticipate that cash from operations, together with existing cash, cash equivalents, marketable securities and available sources of financing, will be sufficient to fund their working capital and capital expenditure requirements for the next year. With respect to their long-term liquidity, MGI and its subsidiaries believe that their existing cash and cash equivalents, together with their ability to generate sufficient levels of cash from operations and their ability to obtain both short and long-term financing, should provide sufficient funds to meet their working capital and capital expenditure requirements. However, due to their highly leveraged condition, MGI and its subsidiaries (and in turn MGHI) are more sensitive than less leveraged companies to factors affecting their operations, including litigation and governmental regulation affecting their timber harvesting practices (see "--Trends" below), increased competition from other lumber producers or alternative building products and general economic conditions. REAL ESTATE AND OTHER OPERATIONS The Company's real estate and other subsidiaries are currently working with a bank to obtain a replacement credit facility for the MCOP Credit Agreement which expires on August 15, 1998. The Company believes that the existing cash and credit facilities of its real estate and other subsidiaries are sufficient to fund the working capital and capital expenditure requirements of such subsidiaries for the next year. With respect to the long-term liquidity of such subsidiaries, the Company believes that their ability to generate cash from the sale of their existing real estate, together with their ability to obtain financing, should provide sufficient funds to meet their working capital and capital expenditure requirements. TRENDS FOREST PRODUCTS OPERATIONS 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, acquisition 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. 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 subsequent to the filing of the Form 10-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders of the Company was held on May 20, 1998, at which meeting the stockholders voted to elect Messrs. Rosenberg, Cruikshank and Schwartz, management's slate of nominees, as directors of the Company, and voted to reapprove the MAXXAM 1994 Executive Bonus Plan and approve amendments to that plan. Stockholders voted against a proposal to declassify the Company's Board of Directors and against a proposal regarding the Company's operations and forest management policies. The results of the matters voted at the meeting are shown below. NOMINEES FOR DIRECTOR The nominees for election as directors of the Company are listed below, together with voting information for each nominee. Mr. Charles E. Hurwitz and Mr. Ezra G. Levin continued as directors for the Company. NOMINEES FOR ELECTION BY HOLDERS OF COMMON STOCK Stanley D. Rosenberg - 6,093,941 votes for, 388,069 votes withheld and -0- broker non-votes. Robert J. Cruikshank - 6,094,354 votes for, 387,656 votes withheld and -0- broker non-votes. NOMINEES FOR ELECTION BY HOLDERS OF COMMON STOCK AND CLASS A PREFERRED STOCK Paul N. Schwartz - 12,673,311 votes for, 388,428 votes withheld and -0- broker non-votes. PROPOSAL TO REAPPROVE THE MAXXAM EXECUTIVE BONUS PLAN AND APPROVE AMENDMENTS TO THAT PLAN 12,373,717 votes for, 453,017 votes against, 235,005 votes abstaining and -0- broker non-votes. PROPOSAL TO DECLASSIFY THE COMPANY'S BOARD OF DIRECTORS 1,721,431 votes for, 10,219,149 votes against, 38,026 votes abstaining and -0- broker non-votes. PROPOSAL REGARDING THE COMPANY'S OPERATIONS AND FOREST MANAGEMENT POLICIES 345,537 votes for, 11,544,234 votes against, 88,835 votes abstaining and -0- broker non-votes. 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 *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 *4.3 Credit Agreement among Scotia LLC, Bank of America National Trust and Savings Association and other financial institutions party thereto *11 Computation of Net Income Per Common and Common Equivalent Share *27.1 Financial Data Schedule for the quarter ended June 30, 1998 *27.2 Restated Financial Data Schedule for the periods ended March 31, June 30, September 30, and December 31, 1997 *27.3 Restated Financial Data Schedule for the periods ended March 31, June 30, September 30, and December 31, 1996 * Included with this filing. B. REPORTS ON FORM 8-K: On June 23, 1998, the Company filed a Current Report on Form 8-K (under Item 5) concerning a private placement by Scotia LLC of the Timber Notes (which Form 8-K was subsequently amended by a Form 8-K/A dated July 30, 1998). 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 INC. Date: July 31, 1998 By: /S/ PAUL N. SCHWARTZ Paul N. Schwartz 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 AMT Price: Average Midwest United States transaction price for primary aluminum 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 CERCLA: Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 CESA: California Endangered Species Act Class A Preferred Stock: Class A $.05 Non-Cumulative Participating Convertible Preferred Stock of the Company CMRT: The Combined Master Retirement Trust Common Stock: $.50 par value common stock of the Company Company: MAXXAM Inc., including its subsidiaries unless otherwise noted or the context indicates otherwise Custodial Trust Agreement: A loan and pledge agreement between the Company and the Custodial Trust Company providing for up to $25.0 million in borrowings EPA: Environmental Protection Agency ESA: The federal Endangered Species Act FDIC: Federal Deposit Insurance Corporation FDIC action: A civil action filed by the FDIC on August 2, 1995 entitled Federal Deposit Insurance Corporation, as manager of the FSLIC Resolution Fund v. Charles E. Hurwitz Federated: Federated Development Company, a principal stockholder of the Company 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 KACC: Kaiser Aluminum & Chemical Corporation, Kaiser's principal operating subsidiary KACC Credit Agreement: The revolving credit facility with KACC and a bank under which KACC is able to borrow by means of revolving credit advances and letters of credit (up to $125.0 million) in an aggregate amount equal to the lesser of $325.0 million or a borrowing base relating to eligible accounts receivable plus eligible inventory Kaiser: Kaiser Aluminum Corporation, a subsidiary of the Company engaged in aluminum operations LTSY: Long-term sustained yield MCOP Credit Agreement: $14.0 million revolving credit facility between the Company's real estate and other subsidiaries and a bank MGHI: MAXXAM Group Holdings Inc. MGI: MAXXAM Group Inc. 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 NL: NL Industries, Inc. Notice: A Notice of Charges filed on December 26, 1995 by the OTS against the Company and others with respect to the failure of USAT Old Timber Notes: The 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015 OTS: The United States Department of Treasury's Office of Thrift Supervision 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 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 RTC Portfolio: A portfolio originally consisting of 27 parcels of income producing real property and 28 loans purchased from the Resolution Trust Corporation in June 1991 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 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" SHRP, Ltd.: Sam Houston Race Park, Ltd., a 90.5%-owned subsidiary of MAXXAM 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 UFG: United Financial Group, Inc. USAT: United Savings Association of Texas USFWS: United States Fish and Wildlife Service Valco: Volta Aluminium Company Limited, Kaiser's 90%-owned smelter facility in Ghana VRA: Volta River Authority, an electric power supplier to Valco EX-4 2 EXHIBIT 4.1 TO MAXXAM 2ND QTR 10-Q SCOTIA PACIFIC COMPANY LLC AND STATE STREET BANK AND TRUST COMPANY, as Trustee _______________ INDENTURE Dated as of July 20, 1998 _______________ 6.55% CLASS A-1 TIMBER COLLATERALIZED NOTES 7.11% CLASS A-2 TIMBER COLLATERALIZED NOTES 7.71% CLASS A-3 TIMBER COLLATERALIZED NOTES DUE 2028 =============== Table of Contents ARTICLE 1 DEFINITIONS; RULES OF CONSTRUCTION; INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT PROVISIONS 1 1.1 Definitions. 1 1.2 References to Instruments. 1 1.3 Incorporation by Reference of Trust Indenture Act. 1 1.4 Rules of Construction. 2 ARTICLE 2 THE NOTES 2 2.1 Form and Dating. 2 2.2 Execution and Authentication. 2 2.3 Registrar and Paying Agent. 3 2.4 Paying Agent to Hold Money in Trust. 3 2.5 Noteholder Lists. 3 2.6 Transfer and Exchange; Transfer Restrictions. 3 2.7 Replacement Notes. 11 2.8 Outstanding Timber Notes. 11 2.9 Cancellation. 11 2.10 Payments in Respect of the Notes. 11 2.11 Payments of Principal, Regular Interest and Default Interest on Notes. 11 2.12 Premiums on Timber Notes. 12 2.13 Source and Manner of Payments on Notes. 12 2.14 Additional Timber Notes. 13 ARTICLE 3 OPTIONAL REDEMPTION AND OPTIONAL PREPAYMENT 14 3.1 Notices to Trustee. 14 3.2 No Partial Redemption of a Class. 14 3.3 Notice of Redemption. 14 3.4 Effect of Notice of Redemption. 15 3.5 Deposit of Redemption Price. 15 3.6 Redemption Price. 15 3.7 Optional Prepayment. 15 ARTICLE 4 COVENANTS 15 4.1 Payment of Notes. 15 4.2 Money for Timber Note Payments to Be Held in Trust. 15 4.3 SEC Reports. 15 4.4 Maintenance of Office or Agency; Existence; Payment of Taxes and Other Claims, Etc. 16 4.5 Separate Existence and Formalities. 17 4.6 Reports, Notices and Certificates. 17 4.7 Access to Records. 18 4.8 Limitation on Liens on Company Owned Timberlands or Company Timber Rights. 18 4.9 Limitation on Indebtedness. 18 4.10 Investments, Loans and Advances. 18 4.11 Limitation on Restricted Payments. 19 4.12 Certain Consents. 19 4.13 Restrictions on Consolidation, Etc. 19 4.14 No Other Business. 20 4.15 Transactions with Affiliates. 20 4.16 Insurance. 21 4.17 Company Timber Sales. 21 4.18 Opinion as to Mortgaged Property. 21 4.19 Performance of Obligations. 21 4.20 New Services Agreement; Operating Default; Termination of New Services Agreement. 21 4.21 New Master Purchase Agreement; Purchase Agreement Default; Termination of New Master Purchase Agreement. 22 4.22 Distributions from Accounts. 22 4.23 Status of the Deed of Trust. 22 4.24 No Other Agreements. 22 4.25 Relocation of Chief Executive Office, Etc. 22 4.26 Timber Harvesting Plans, Etc. 23 4.27 [Intentionally Omitted] 23 4.28 Sale of Company Timber or Logs. 23 4.29 GIS 23 4.30 [Intentionally Omitted] 23 4.31 Liquidity Reserve. 23 4.32 Deed of Trust Covenants. 23 ARTICLE 5 ACCOUNTS 24 5.1 Establishment of Accounts. 24 5.2 Initial Deposits. 24 5.3 Collection Account. 24 5.4 Expense Reserve; Payment of Expenses. 28 5.5 Deemed Production. 28 5.6 Investment of Accounts, Etc. 29 5.7 Withdrawals and Deposits on Note Payment Dates. 29 5.8 Title Insurance Policy Proceeds. 32 5.9 Release of Liquidity Account. 32 5.10 Releases from Prefunding Account. 33 5.11 Releases from Indebtedness Reserve Account. 34 ARTICLE 6 SALE OF COMPANY OWNED TIMBERLANDS OR COMPANY TIMBER RIGHTS; CERTAIN TIMBER SALES; SUBSTITUTIONS 34 6.1 Release of Company Owned Timberlands or Company Timber Rights. 34 6.2 Sale of Company Timber. 37 6.3 Sale of Pacific Lumber Timber Rights Property. 37 6.4 Release of Company Owned Timberlands or Company Timber Rights Upon Substitution of Property. 38 6.5 Trust Indenture Act Requirements. 42 ARTICLE 7 DEFAULTS AND REMEDIES 42 7.1 Events of Default. 42 7.2 Acceleration of Maturity; Rescission and Annulment. 43 7.3 Collection of Indebtedness and Suits for Enforcement by Trustee. 44 7.4 Trustee May File Proofs of Claim. 45 7.5 Trustee May Enforce Claims Without Possession of Notes.45 7.6 Remedies. 45 7.7 Application of Money Collected. 46 7.8 Limitation of Suits. 46 7.9 Unconditional Rights of Noteholders To Receive Principal and Interest. 46 7.10 Restoration of Rights and Remedies. 47 7.11 Rights and Remedies Cumulative. 47 7.12 Delay or Omission Not a Waiver. 47 7.13 Control by Majority Holders. 47 7.14 Course of Dealing Not a Waiver. 47 7.15 Waiver of Stay or Extension Laws. 48 7.16 Action on Notes. 48 7.17 Waiver of Past Defaults. 48 7.18 Certain Limitations on Exercise of Remedies under Deed of Trust. 48 ARTICLE 8 DEFEASANCE AND COVENANT DEFEASANCE 48 8.1 Issuer's Option to Effect Defeasance or Covenant Defeasance. 48 8.2 Defeasance and Discharge. 48 8.3 Covenant Defeasance. 49 8.4 Conditions to Defeasance or Covenant Defeasance. 49 8.5 Deposited Money and U.S. Government Obligations to be Held in Trust; Other Miscellaneous Provisions. 51 8.6 Reinstatement. 51 ARTICLE 9 THE TRUSTEE AND THE COLLATERAL AGENT 51 9.1 Duties of Trustee and Collateral Agent. 51 9.2 Rights of Trustee and Collateral Agent. 52 9.3 Individual Rights of Trustee and Collateral Agent. 53 9.4 Trustee's and Collateral Agent's Disclaimer. 53 9.5 Notice of Defaults. 53 9.6 Reports by Trustee to Noteholders. 53 9.7 Compensation and Indemnity. 53 9.8 Replacement of Trustee and Collateral Agent. 54 9.9 Successor Trustee or Collateral Agent by Merger. 54 9.10 Eligibility; Disqualification. 55 9.11 Preferential Collection of Claims Against Issuer. 55 9.12 Trustee and Collateral Agent. 55 9.13 Escrow Agreement. 55 ARTICLE 10 AMENDMENTS 55 10.1 Without Consent of Noteholders. 55 10.2 With Consent of Noteholders. 56 10.3 Compliance with Trust Indenture Act. 57 10.4 Effect of Consents and Waivers; No Revocation of Consents. 57 10.5 Notation on or Exchange of Notes. 57 10.6 Trustee to Sign Amendments, Etc. 57 ARTICLE 11 LINE OF CREDIT 57 11.1 Line of Credit Agreement. 57 11.2 Advances Under Line of Credit Agreement. 58 11.3 Amendments to Line of Credit Agreement. 59 11.4 Replacement of Line of Credit Agreement. 59 ARTICLE 12 MISCELLANEOUS 60 12.1 Trust Indenture Act Controls. 60 12.2 Notices. 60 12.3 Communication by Holders with Other Noteholders. 62 12.4 Certificate and Opinion as to Conditions Precedent. 62 12.5 Statements Required in Certificate or Opinion. 62 12.6 When Timber Notes Disregarded. 63 12.7 Rules by Trustee, Paying Agent and Registrar. 63 12.8 Business Days. 63 12.9 GOVERNING LAW. 63 12.10 No Recourse Against Others. 63 12.11 Successors. 63 12.12 Severability. 63 12.13 Multiple Originals. 64 12.15 Benefits of Indenture. 64 12.16 Limitations on Bankruptcy Petition Against Issuer. 64 12.17 Entire Agreement. 64 12.18 Concerning Paying Agents, Registrars, Securities Intermediaries and Collateral Agents 64 ARTICLE 13 DISCHARGE 64 13.1 Discharge. 64 Schedule A - Definitions Schedule B - Scheduled Amortization and Minimum Principal Amortization Schedule C - Structuring Schedule Exhibit A-1-1 - Form of Class A-1 Unrestricted Global Note Exhibit A-1-2 - Form of Class A-1 Restricted Global Note Exhibit A-1-3 - Form of Class A-1 Definitive Note Exhibit A-2-1 - Form of Class A-2 Unrestricted Global Note Exhibit A-2-2 - Form of Class A-2 Restricted Global Note Exhibit A-2-3 - Form of Class A-2 Definitive Note Exhibit A-3-1 - Form of Class A-3 Unrestricted Global Note Exhibit A-3-2 - Form of Class A-3 Restricted Global Note Exhibit A-3-3 - Form of Class A-3 Definitive Note Exhibit B-1 - Form of Accountant's Letter Re: Compliance Exhibit B-2 - Form of Accountant's Letter Re: No Defaults Exhibit C - Form of Monthly Trustee Certificate Exhibit D - Form of Monthly Noteholder Certificate Exhibit E - Form of Note Payment Trustee Certificate Exhibit F - Form of Note Payment Noteholder Certificate Exhibit G - Form of Rule 144A Transfer Certificate Exhibit H - Form of Regulation S Transfer Certificate Exhibit I - Form of Regulation S Exchange Certificate Exhibit J - Form of Rule 144A Exchange Certificate Exhibit K - Form of Transferee Letter Exhibit L - Form of Clearing System Certificate Exhibit M -Form of Participant Certificate INDENTURE dated as of July 20, 1998 between SCOTIA PACIFIC COMPANY LLC, a Delaware limited liability company, having its principal office at 125 Main Street, Second Floor, Scotia, California 95565 (the "Issuer"); and State Street Bank and Trust Company, a Massachusetts trust company, as trustee, having its Corporate Trust Office at Two International Place, 4th Floor, Boston, Massachusetts 02110 (the "Trustee"). WHEREAS, the Issuer, the Collateral Agent and the Deed of Trust Trustee have entered into the Deed of Trust to grant a lien on, and a security interest in, the Mortgaged Property, as security for the obligations of the Issuer under its 6.55% Class A-1 Timber Collateralized Notes, 7.11% Class A-2 Timber Collateralized Notes and 7.71% Class A-3 Timber Collateralized Notes due 2028 (the "Timber Notes"), this Indenture and the other Secured Obligations; and WHEREAS, the Issuer has satisfied all conditions and taken all actions necessary or appropriate for the issuance of the Notes; NOW, THEREFORE, each party agrees, for the benefit of the other parties and the equal and ratable benefit of the holders of the Notes, as follows: ARTICLE 1 DEFINITIONS; RULES OF CONSTRUCTION; INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT PROVISIONS 1.1 Definitions. For all purposes of this Indenture, unless the context otherwise requires, all defined terms not defined herein shall have the meaning set forth in Schedule A hereto, which is incorporated by reference as if fully set forth herein. 1.2 References to Instruments. In the event that any Operative Document is amended, modified or supplemented in accordance with the provisions hereof, the provisions thereof and the provisions of the Deed of Trust, as the case may be, reference herein to such Operative Document shall be to such Operative Document as so amended, modified or supplemented. 1.3 Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "Commission" means the SEC. "indenture notes" means the Timber Notes and any Additional Timber Notes. "indenture security holder" means a Noteholder or Holder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture notes means the Issuer and any other obligor on the indenture notes. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings assigned to them by such definitions. 1.4 Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles as in effect on the date hereof; (3) "or" is not exclusive; (4) "including" means including, without limitation; (5) words in the singular include the plural and words in the plural include the singular; (6) reference herein to "this Indenture" are to this instrument as originally executed and delivered by the Issuer and the Trustee unless an amendment shall have been entered into, in which event references herein to "this Indenture" are to this instrument as so amended; and (7) the words "herein," "hereof," "hereunder" and other words of similar import refer to this Indenture as a whole (including, without limitation, the Exhibits and Schedules to this Indenture) and not to any particular Section or other subdivision, and the terms "Section," "Exhibit" and "Schedule," unless otherwise specified or indicated by the context, mean the corresponding Section of, or the corresponding Exhibit or Schedule to, this Indenture. ARTICLE 2 THE NOTES 2.1 Form and Dating. The Class A-1, A-2 and A-3 Timber Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibits A-1-1, A-1-2, A-1-3, A-2-1, A-2-2, A-2-3, A-3-1, A-3-2 and A-3-3, respectively, which are hereby incorporated into this Indenture. The Timber Notes may have notations, legends or endorsements required by law, stock exchange rule, the Issuer's limited liability company agreement or other agreements to which the Issuer is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Issuer). Each Timber Note shall be dated the date of its authentication. The terms of the Timber Notes set forth in Exhibits A-1-1, A-1-2, A-1-3, A-2-1, A-2-2, A-2-3, A-3-1, A-3-2 and A-3-3, respectively, are part of the terms of this Indenture. The Timber Notes shall be evidenced by one or more typewritten or printed notes representing the entire aggregate original principal balance of the Timber Notes. The Timber Notes sold within the United States to U.S. person(s) will be issued in fully registered form without interest coupons (i) to qualified institutional buyers meeting the requirements of Rule 144A under the Securities Act, in the form of the beneficial interests in one or more restricted global Notes (the "Restricted Global Notes"), deposited with the Trustee as custodian for DTC (in such capacity the "DTC Custodian") or any successor or (ii) to certain "institutional accredited investors" (for purposes hereof, entities meeting the requirements of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act), in certificated form in minimum denominations of U.S. $100,000 or any integral multiple of $1,000 in excess thereof (the "Definitive Notes"). The Timber Notes sold in offshore transactions in reliance on Regulation S under the Securities Act will be in the form of beneficial interests held by the DTC participants for Euroclear and Cedel, in one or more unrestricted Global Notes (the "Unrestricted Global Notes") deposited with the Custodian (the Unrestricted Global Notes, together with the Restricted Global Notes, shall collectively be hereafter referred to as the "Global Notes"). The Timber Notes will not be issued in bearer form. Beneficial interest in the Global Notes may be held in minimum denominations of U.S. $100,000 or any integral multiple of $1,000 in excess thereof. 2.2 Execution and Authentication. Two officers shall sign the Timber Notes for the Issuer by manual or facsimile signature. If an officer whose signature is on a Timber Note no longer holds that office at the time the Trustee authenticates the Timber Note, the Timber Note shall be valid nevertheless. A Timber Note shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Timber Note. The signature shall be conclusive evidence that the Timber Note has been authenticated under this Indenture. The Trustee shall authenticate and deliver Class A-1, Class A-2 and Class A-3 Timber Notes for original issue in an aggregate principal amount of up to $160,700,000, $243,200,000 and $463,348,000, respectively, upon a written order of the Issuer signed by an Officer of the Issuer. Such order shall specify the amount of the Timber Notes of each Class to be authenticated and the date on which the original issue of Timber Notes is to be authenticated. The aggregate principal amount of Timber Notes of each Class outstanding at any time shall not exceed the amount set forth in this paragraph except as provided in Sections 2.7 and 2.8. The Trustee may appoint an authenticating agent acceptable to the Issuer to authenticate the Timber Notes (the "Authenticating Agent"). Unless limited by the terms of such appointment, an authenticating agent may authenticate Timber Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as any Registrar, Paying Agent or agent for service of notices and demands. 2.3 Registrar and Paying Agent. The Issuer shall maintain an office or agency where Timber Notes may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Timber Notes may be presented for payment (the "Paying Agent"). The Registrar shall keep a register (the "Register") of the Timber Notes and of their transfer and exchange. The Issuer may have one or more co-registrars. The term "Registrar" includes any co-registrar. The Issuer hereby initially appoints the Trustee and its affiliate, State Street Bank and Trust Company N.A., in New York, New York, as sole Paying Agents in respect of the Timber Notes and hereby initially appoints the Trustee as Registrar in connection with the Timber Notes. The Issuer shall enter into an appropriate agency agreement with any subsequent Registrar which is not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such agent. The Issuer shall notify the Trustee of the name and address of any such agent. If the Issuer fails to maintain a Registrar, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 9.7. The Issuer or any Affiliate of the Issuer may act as Registrar or transfer agent. 2.4 Paying Agent to Hold Money in Trust. All amounts withdrawn from the Payment Account on each Note Payment Date for application pursuant to clauses (i), (ii), (iv), (v), (vi), (vii), (viii) or (ix) of Section 5.7(b) shall, pending application in the order provided in Section 5.7(b), be held by the Paying Agent in trust for the benefit of Noteholders and, to the extent applicable, the Liquidity Providers. 2.5 Noteholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of the Noteholders. If the Trustee is not the Registrar, the Issuer shall furnish to the Trustee, in writing at least seven Business Days before each Note Payment Date as set forth in the Timber Notes and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Noteholders. 2.6 Transfer and Exchange; Transfer Restrictions. (a) The Timber Notes shall be issued in the form of (i) one or more Unrestricted Global Notes evidencing Class A-1, Class A-2 and Class A- 3 Timber Notes, which Unrestricted Global Notes shall be substantially in the forms of Exhibits A-1-1, A-2-1 and A-3-1, respectively, hereto, (ii) one or more Restricted Global Notes evidencing Class A-1, Class A-2 and Class A-3 Timber Notes, which Restricted Global Notes shall be substantially in the forms of Exhibits A-1-2, A-2-2 and A-3-2, respectively, hereto, and/or (iii) one or more Definitive Notes evidencing Class A-1, Class A-2 and Class A-3 Timber Notes, which Definitive Notes shall be substantially in the forms of Exhibits A-1-3, A-2-3 and A-3-3, respectively, hereto, all in an aggregate original principal amount that shall equal the aggregate original principal amount of the related Class of Notes that are to be issued on the Closing Date. The Global Notes (i) shall be delivered by the Registrar to DTC acting as the Depository or, pursuant to DTC's instructions, shall be delivered by the Registrar on behalf of DTC to and deposited with the DTC Custodian, and in each case shall be registered in the name of Cede & Co. and (ii) shall bear a legend substantially to the following effect: "Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to the Registrar or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein." The Global Notes may be deposited with such other Depository as the Registrar may from time to time designate, and shall bear such legend as may be appropriate; provided that such successor Depository maintains a book-entry system that qualifies to be treated as "registered form" under Section 163(f)(3) of the Code. (b) The Restricted Global Note, and Legended Definitive Notes shall bear the following legend: THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES OR BLUE SKY LAW OF ANY STATE OF THE UNITED STATES OR ANY FOREIGN SECURITIES LAW. THE HOLDER HEREOF, BY PURCHASING THIS NOTE, AGREES FOR THE BENEFIT OF THE TRUSTEE AND THE ISSUER THAT THIS NOTE MAY BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS AND ONLY (1) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO AN INSTITUTIONAL INVESTOR THAT THE HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER, WITHIN THE MEANING OF RULE 144A ("QUALIFIED INSTITUTIONAL BUYER"), PURCHASING FOR ITS OWN ACCOUNT OR A QUALIFIED INSTITUTIONAL BUYER, WHOM THE HOLDER HAS INFORMED, IN EACH CASE, THAT THE REOFFER, RESALE, PLEDGE, OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (2) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144A UNDER THE SECURITIES ACT (IF AVAILABLE), OR (4) IN CERTIFICATED FORM TO AN "INSTITUTIONAL ACCREDITED INVESTOR" WITHIN THE MEANING THEREOF IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT PURSUANT TO ANY OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT, IN THE CASE OF TRANSFERS PURSUANT TO THIS CLAUSE (4), TO THE RECEIPT BY THE REGISTRAR OF SUCH OTHER EVIDENCE ACCEPTABLE TO THE REGISTRAR THAT SUCH REOFFER, RESALE, PLEDGE OR TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS OR (5) TO THE ISSUER OR ITS AFFILIATES. (c) The Unrestricted Global Note shall bear the following legend: PRIOR TO THE EXPIRATION OF THE RESTRICTED PERIOD AND UPON RECEIPT OF CERTIFICATION OF NON-U.S. OWNERSHIP FROM EUROCLEAR AND CEDEL ON BEHALF OF THEIR MEMBER ORGANIZATIONS ONLY THE DTC PARTICIPANTS FOR EUROCLEAR AND CEDEL MAY HOLD POSITIONS IN THIS NOTE AT DTC. NO INTEREST WILL BE PAID ON THIS NOTE UNTIL THE EXPIRATION OF THE RESTRICTED PERIOD AND UNTIL RECEIPT BY THE REGISTRAR OF CERTIFICATION OF NON-U.S. OWNERSHIP AS SET FORTH IN SECTION 2.6 OF THE INDENTURE. (d) If the Trustee has instituted or has been directed to institute any judicial proceeding in a court to enforce the rights of the Holders of the Class A-1, Class A-2 or Class A-3 Timber Notes, as the case may be, and the Trustee has been advised by counsel that in connection with such proceeding it is necessary or appropriate for the Trustee to obtain possession of the Class A-1, Class A-2 or Class A-3 Timber Notes, the Trustee may in its sole discretion determine that the Class A-1, Class A-2 or Class A-3 Timber Notes represented by Global Notes shall no longer be represented by such Global Notes. In such event, the Trustee will execute, the Authenticating Agent will authenticate and the Registrar will deliver, in exchange for such Global Notes, Definitive Notes, of like Class and in authorized denominations, in an aggregate principal balance equal to the principal balance of such Global Notes. (e) The Global Notes shall in all respects be entitled to the same benefits under this Indenture as Definitive Notes authenticated and delivered hereunder. (f) A Timber Note may be transferred by the Holder thereof only upon presentation and surrender of such Timber Note at the Corporate Trust Office of the Registrar, duly endorsed or accompanied by an assignment duly executed by such Holder or his duly authorized attorney-in-fact in such form as shall be satisfactory to the Registrar. Upon the transfer of any Timber Note in accordance with the preceding sentence and subject to the provisions of this Section 2.6, the Trustee shall execute, the Issuer or the Authenticating Agent shall authenticate and the Registrar shall deliver to the transferee one or more new Timber Notes of like Class, in authorized denominations, evidencing, in the aggregate, the same aggregate principal balance as the Timber Notes transferred. A Timber Note may be exchanged by the Holder thereof for any number of new Timber Notes of like Class, in authorized denominations, representing in the aggregate the same Timber Note as the Timber Note surrendered, upon surrender of the Timber Note to be exchanged at the Corporate Trust Office of the Registrar subject to the provisions of this Section 2.6. Timber Notes delivered upon any such exchange will evidence the same obligations under the Timber Notes and this Indenture, and will be entitled to the same rights and privileges, as the Timber Notes surrendered. Upon the exchange of any Timber Note in accordance with the preceding sentence, the Trustee shall execute, the Issuer or Authenticating Agent shall authenticate and the Registrar shall deliver to the exchanging Holder one or more new Timber Notes of like Class, in authorized denominations, evidencing, in the aggregate, the same aggregate principal balance as the Timber Notes being exchanged. (g) Subject to Section 2.6(f), no restrictions shall apply to the transfer or registration of transfer of an Unlegended Definitive Note to a transferee that takes delivery in the form of a Definitive Note. By acceptance of a Legended Definitive Note, whether upon original issuance or subsequent transfer, each holder of such a Note acknowledges the restrictions on the transfer of such Note set forth in the Securities Legend and agrees that it will transfer such a Timber Note only as provided herein and therein. In addition to the provisions of Section 2.6(f), the following restrictions shall apply with respect to the transfer and registration of transfer of a Legended Definitive Note to a transferee that takes delivery in the form of a Definitive Note: (i) The Registrar shall register the transfer of a Legended Definitive Note if the requested transfer is (x) to the Issuer or an Affiliate of the Issuer or (y) being made by a transferor who has provided the Registrar with a Rule 144A Transfer Certificate. (ii) The Registrar shall register the transfer of a Legended Definitive Note if the transferor has provided the Registrar with a Regulation S Transfer Certificate. (iii) The Registrar shall register the transfer of a Legended Definitive Note if (x) the transferor has advised the Registrar in writing that the Note is being transferred to an Institutional Accredited Investor and (y) prior to transfer the transferor furnishes to the Registrar a Transferee Letter, provided that, (a) in lieu thereof, the transferee or proposed transferor may furnish such other certifications, legal opinions or other information as are reasonably satisfactory to the Issuer and the Registrar to confirm that the proposed transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act or (b) if based upon an Opinion of Counsel to the effect that the delivery of (x) and (y) above are not sufficient to confirm that the proposed transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, the Issuer and the Registrar may as a condition of the registration of any such transfer require the transferor to furnish other certifications, legal opinions or other information prior to registering the transfer of a Legended Definitive Note. In each case described in clause (i), (ii) and (iii) above, the Registrar shall deliver a Legended Definitive Note to the transferee unless the Company has delivered an Officers Certificate to the Registrar approving removal of the legends. (h) Subject to Section 2.6(f), so long as any of the Global Notes remains outstanding and is held by or on behalf of the Depository, transfers of beneficial interests in any of such Global Notes, or transfers by holders of Definitive Notes to transferees that take delivery in the form of beneficial interests in such Global Notes, may be made only in accordance with this Section 2.6 and in accordance with the rules of the Depository and Euroclear or Cedel. (i) Prior to the expiration of the Restricted Period, no beneficial interest in the Unrestricted Global Note may at any time be transferred to a transferee that takes delivery in the form of a Definitive Note or Notes. (ii) Prior to the expiration of the Restricted Period, a beneficial interest in the Unrestricted Global Note may, to the extent permitted by applicable law, be transferred to a person who takes delivery in the form of a beneficial interest in the Restricted Global Note upon receipt by the Registrar of a Rule 144A Transfer Certificate. After the Restricted Period, no such certification will be required with respect to such transfers. (iii) Prior to the expiration of the Restricted Period, a beneficial interest in the Unrestricted Global Note may only be held by the DTC participants for Euroclear and Cedel until receipt by the Registrar of a Clearing System Certificate from Euroclear or Cedel, as applicable which clearing system certificate evidences receipt by Euroclear and Cedel of certificates of non-U.S. ownership (substantially in the form of Exhibit L to this Indenture) from their respective member organizations for the aggregate principal amount held by Euroclear and Cedel, respectively, relating to the appropriate portion of the Unrestricted Global Note. (iv) A beneficial interest in a Restricted Global Note may be transferred to a transferee that takes delivery in the form of a beneficial interest in an Unrestricted Global Note only upon receipt by the Registrar of a Regulation S Transfer Certificate if such transfer occurs prior the expiration of the Restricted Period, the interest transferred will be held immediately thereafter through the DTC participants for Euroclear and Cedel until the certification process of (iii) above is completed. (v) In the case of a beneficial interest in a Restricted Global Note being transferred to an Institutional Accredited Investor, such transferee shall be required to take delivery in the form of a Definitive Note or Notes and the Registrar shall register such transfer only upon compliance with the provisions of Section 2.6 (f) and (g)(iii). (vi) In the case of a beneficial interest in a Restricted Global Note being transferred to a transferee that takes delivery in the form of an Definitive Note or Notes, except as set forth in clause (v) above, the Registrar shall register such transfer only upon compliance with the provisions of Section 2.6 (f) and (g)(i) or (ii). (vii) In the case of a Legended Definitive Note being transferred to a transferee that takes delivery in the form of a beneficial interest in the Restricted Global Notes, the Registrar shall register such transfer if the transferor has provided the Registrar with either (x) a Rule 144A Transfer Certificate or (y) if such transfer occurs after the expiration of the Restricted Period, a Regulation S Transfer certificate. (viii) In the case of a Legended Definitive Note being transferred to a transferee that takes delivery in the form of a beneficial interest in the Unrestricted Global Notes, the Registrar shall register such transfer if the transferor has provided the Registrar with a Regulation S Transfer Certificate. (ix) Prior to the expiration of the Restricted Period, no Unlegended Definitive Notes may be transferred for beneficial interests in the Unrestricted Global Notes. (x) No restrictions shall apply with respect to the transfer or registration of transfer of (x) a beneficial interest in a Restricted Global Note to a transferee that takes delivery in the form of a beneficial interest in the Restricted Global Note; (y) a beneficial interest in an Unrestricted Global Note to a transferee that takes delivery in the form of Definitive Notes after the expiration of the Restricted Period or in the form of a beneficial interest in the Unrestricted Global Note after the expiration of the Restricted Period; or (z) an Unlegended Definitive Note or Notes to a transferee that takes delivery in the form of a beneficial interest in the Unrestricted Global Note after the expiration of the Restricted Period. (i) Subject to Section 2.6 (f), an exchange of a beneficial interest in the Unrestricted Global Note for a beneficial interest in the Restricted Global Note may be made only after the expiration of the Restricted Period and only upon receipt by the Registrar of a Clearing System Certificate from Euroclear or Cedel, as applicable. (j) Subject to Section 2.6(h), an exchange of a beneficial interest in any of the Global Notes for a Definitive Note or Notes, an exchange of a Definitive Note or Notes for a beneficial interest in any of the Global Notes and an exchange of a Definitive Note or Notes for another Definitive Note or Notes (in each case, whether or not such exchange is made in anticipation of subsequent transfer, and in the case of either Global Note, so long as such Global Note remains outstanding and is held by or on behalf of the Depository) may be made only in accordance with this Section 2.6(h) and in accordance with the rules of the Depository and Euroclear or Cedel. (i) Prior to the expiration of the Restricted Period, no holder of a beneficial interest in the Unrestricted Global Note may exchange such beneficial interest for a Definitive Note or Notes. (ii) A holder of a beneficial interest in the Restricted Global Note may at any time exchange such beneficial interest for a Legended Definitive Note or Notes. (iii) After the expiration of the Restricted Period, a holder of a beneficial interest in the Unrestricted Global Note may at any time exchange such beneficial interest for an Unlegended Definitive Note or Notes. (iv) A holder of a Legended Definitive Note may exchange such Note for a beneficial interest in the Restricted Global Notes if such holder furnishes to the Registrar either (x) a Rule 144A Exchange Certificate or (y) on and after the Restricted Period, a Regulation S Exchange Certificate. (v) A holder of a Legended Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note, of the same class if such holder furnishes to the Registrar a Regulation S Exchange Certificate. (vi) A holder of an Unlegended Definitive Note may exchange such Timber Note for a beneficial interest in any Global Note of the same class without any certification, except that prior to the expiration of the Restricted Period in the case of a Restricted Global Note, such holder must furnish to the Issuer and to the Registrar a Rule 144A Exchange Certificate. (vii) A holder of a Definitive Note may exchange such Timber Note for an equal aggregate principal balance of Definitive Notes of the same Class and in different authorized denominations without any certification. (k) (i) Upon acceptance for exchange or transfer of a Definitive Note for a beneficial interest in any Global Note as provided herein, the Registrar shall cancel such Definitive Note and shall (or shall request the Depository to) adjust its books and records to reflect such increase, evidencing the date of such exchange or transfer and an increase in the aggregate principal amount of the applicable Global Note equal to the aggregate principal amount of such Definitive Note exchanged or transferred therefor. (ii) Upon acceptance for exchange or transfer of a beneficial interest in a Global Note for a Definitive Note as provided herein, the Registrar shall (or shall request the Depository to) adjust its books and records to reflect such decrease, evidencing the date of such exchange or transfer and a decrease in the aggregate principal amount of the applicable Global Note equal to the aggregate principal amount of such Definitive Note issued in exchange therefor or upon transfer thereof. (iii) Upon acceptance for transfer of a beneficial interest in any Global Note for a beneficial interest in another Global Note as provided herein, the Registrar shall (or shall request the Depository to) adjust its books and records to reflect such increase or decrease, evidencing the date of such transfer and (x) in the case of the Global Note from which such transfer is made, a decrease in the aggregate principal amount of such Global Note equal to the aggregate principal amount being transferred and (y) in the case of the Global Note into which such transfer is made, an increase in the aggregate principal amount of such Global Note equal to the aggregate principal amount being transferred. (l) The following provisions shall apply to the placement of the Securities Legend on any Definitive Note issued in exchange for or upon transfer of another Definitive Note or of a beneficial interest in any of the Global Notes and to the removal of the Securities Legend from any Legended Definitive Note. (i) Until the Timber Notes have been registered pursuant to an effective registration statement or the Registrar receives an opinion of counsel stating that a Securities Legend is no longer required, a Definitive Note issued upon transfer of or exchange for a beneficial interest in the Restricted Global Notes shall bear the Securities Legend. (ii) A Definitive Note issued upon transfer of or exchange for a beneficial interest in the Unrestricted Global Notes on or after the expiration of the Restricted Period shall not bear the Securities Legend. (iii) Upon the transfer, exchange or replacement of a Legended Definitive Note, or upon specific request of a holder of a Legended Definitive Note for removal of the Securities Legend therefrom, the Registrar shall deliver an Unlegended Definitive Note or Notes if there is provided to the Registrar evidence reasonably satisfactory to the Registrar and the Issuer (which may include an Opinion of Counsel) as may reasonably be required by the Registrar and the Issuer that neither the Securities Legend nor the restrictions on transfer set forth therein are required to ensure compliance with the provisions of the Securities Act. (iv) Upon the transfer, exchange or replacement of an Unlegended Definitive Note for a Definitive Note, the Registrar shall deliver an Unlegended Definitive Note or Notes, as the holder may request. (m) Subject to the restrictions on transfer and exchange set forth in this Section 2.6, the holder of any Definitive Note may transfer or exchange the same in whole or in part (in an initial aggregate principal amount equal to the minimum authorized denomination of U.S. $100,000 or any integral multiple of $1,000 in excess thereof) by surrendering such Definitive Note at the Corporate Trust Office of the Registrar or at the office of any other transfer agent, together with an executed instrument of assignment and transfer satisfactory in form and substance to the Registrar in the case of transfer and a written request for exchange in the case of exchange, together with all transfer documentation required in Section 2.6(f) hereof in form and substance satisfactory to the Registrar and the Company. The holder of a beneficial interest in a Global Note may, subject to the rules and procedures of the Depository, cause the Depository (or its nominee) to notify the Registrar in writing of a request for transfer or exchange of such beneficial interest for a Definitive Note or Notes. Following a proper request for transfer or exchange, together with the documentation required by this Section 2.6, the Registrar shall, within five Business Days of such request if made at such Corporate Trust Office, or within 10 Business Days if made at the office of another transfer agent (other than the Registrar), cause the Trustee to execute and the Authenticating Agent to authenticate, and the Registrar shall deliver at such Corporate Trust Office or such transfer agent, as the case may be, to the transferee (in the case of transfer) or holder (in the case of exchange) or send by first class mail at the risk of the transferee (in the case of transfer) or holder (in the case of exchange) to such address as the transferee or holder, as applicable, may request, a Definitive Note or Notes, as the case may require, of like Class and for a like aggregate Note Balance and in such authorized denomination or denominations as may be requested. The presentation for transfer or exchange of any Definitive Note shall not be valid unless made at the Corporate Trust Office of the Registrar or other transfer agent by the registered holder in person, or by a duly authorized attorney-in-fact. The Issuer shall not be required to make, and the Registrar need not register, transfers or exchanges of Timber Notes called for redemption or for a period of 15 days before such Timber Notes are to be redeemed or 15 days before a Note Payment Date, as set forth in the Timber Notes. (n) Transfer, registration and exchange shall be permitted as provided in this Section 2.6 without any charge to the Holder except for the expenses of delivery (if any) not made by regular mail and except, if the Registrar shall so require, the payment of a sum sufficient to cover any stamp duty, tax or governmental charge or insurance charge that may be imposed in relation thereto; provided that any Opinions of Counsel or certificates required by this Section 2.6 shall be at the expense of the Holder or its proposed transferee. Registration of the transfer of a Timber Note by the Registrar shall be deemed to be the acknowledgment of such transfer on behalf of the Issuer. (o) the Issuer and the Trustee may deal with the Clearing Agency and the Clearing Agency Participants for all purposes (including the making of distributions on the Timber Notes ) as the authorized representatives of the Note Owners: (i) to the extent that the provisions of this Section 2.6(o) conflict with any other provisions of this Indenture, the provisions of this Section 2.6(o) shall control; (ii) the rights of Note Owners shall be exercised only through the Clearing Agency and the Clearing Agency Participants and shall be limited to those established by law and agreements between such Note Owners and the Clearing Agency and/or the Clearing Agency Participants. Pursuant to the Clearing Agency Agreement, (except the Definitive Notes), the initial Clearing Agency will make book-entry transfers among the Clearing Agency Participants and receive and transmit distributions of principal of, premium, if any, and interest on the Timber Notes (except the Definitive Notes) to such Clearing Agency Participants; and (iii) whenever a notice, report or other communication to the Noteholders is required under this Indenture, the Trustee shall give all such notices and communications specified herein to be given to Noteholders (except those to be given to the holders of Definitive Notes) to the Clearing Agency. (p) In the event that: (i)(A) the Issuer or the Clearing Agency advises the Trustee in writing that the Clearing Agency is no longer willing or able to discharge properly its responsibilities as Clearing Agency, and (B) the Trustee or the Issuer is unable to locate a qualified successor within 90 days, (ii) the Issuer, at its option, with the consent of Note Owners representing not less than 51% of the aggregate principal balance of outstanding Timber Notes, advises the Trustee in writing that it elects to terminate the book-entry system through the Clearing Agency, or (iii) during the continuance of an Event of Default, Note Owners representing not less than 51% of the aggregate principal balance of outstanding Timber Notes advise the Trustee and the Clearing Agency through the Clearing Agency Participants in writing that the continuation of a book-entry system through the Clearing Agency is no longer in the best interests of the Note Owners, the Trustee shall notify all Note Owners, through the Clearing Agency, of the occurrence of any such event and of the availability of Definitive Notes to Note Owners requesting the same. Upon surrender to the Trustee of the Timber Notes by the Clearing Agency, accompanied by registration instructions from the Clearing Agency for registration, the Trustee shall issue the Definitive Notes. Neither the Issuer nor the Trustee shall be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. The Issuer shall arrange for, and will bear the costs of, printing and issuance of any Definitive Notes. Upon the issuance of Definitive Notes, all references herein to obligations imposed upon or to be performed by the Clearing Agency shall be deemed to be imposed upon and performed by the Trustee, to the extent applicable with respect to such Definitive Notes, and the Trustee shall recognize the Holders of the Definitive Notes as Holders of Timber Notes hereunder. (q) Prior to the due presentation for registration of transfer of any Timber Note, the Issuer, the Paying Agent or the Registrar may deem and treat the person in whose name a Timber Note is registered as the absolute owner of such Timber Note for the purpose of receiving payment of principal of and interest on such Timber Note and for all other purposes whatsoever, and none of the Issuer, the Trustee, the Paying Agent or the Registrar shall be affected by notice to the contrary. (r) The Timber Notes of each Class may be exchanged for Exchange Timber Notes of the corresponding Class pursuant to the terms of the Registered Exchange Offer. The Trustee shall make the exchange upon receipt of an Officer's Certificate of the Issuer certifying that (A) a registration statement filed with the SEC covering the Timber Notes has been declared effective and (B) all conditions precedent to the exchange have been complied with. Upon receipt by the Trustee of such Officer's Certificate and an Officer's Certificate requesting that the principal amount of Timber Notes of each Class accepted for exchange in the Exchange Offer that are represented by Restricted Global Notes, Unrestricted Global Notes and Definitive Notes shall be cancelled in exchange for the issuance of an equal aggregate principal amount of Exchange Timber Notes of such Class and form, the Trustee shall authenticate (A) one or more Global Notes for each Class and form of Global Note of Exchange Timber Notes in aggregate principal amount equal to the aggregate principal amount of the corresponding Class and form of Global Note of Timber Notes represented by the Global Notes which will be simultaneously cancelled as indicated in such Officer's Certificate as having been accepted for exchange and (B) Definitive Notes representing Exchange Timber Notes registered in the names of, and in the principal amounts indicated in, such Officer's Certificate. If the principal amount of the Restricted Global Notes or the Unrestricted Global Notes of the Exchange Timber Notes is less than the aggregate principal amount of the Restricted Global Notes or the Unrestricted Global Notes, respectively, of the Timber Notes for which they were exchanged, the Trustee shall adjust its books and records to reflect the reduction of the principal amounts represented thereby. The Trustee shall deliver any Definitive Notes delivered as Exchange Timber Notes to the holders thereof as indicated in such Officer's Certificate. Following the exchange of Timber Notes for Exchange Timber Notes, the Exchange Timber Notes of each Class will be treated for purposes of the Indenture as the Timber Notes of such Class. 2.7 Replacement Notes. If a mutilated Timber Note is surrendered to the Registrar or if the Holder of a Timber Note claims that the Timber Note has been lost, destroyed or wrongfully taken, the Issuer shall issue and the Trustee shall authenticate a replacement Timber Note if the Trustee's requirements are met. If required by the Trustee or the Issuer, such Noteholder shall furnish an indemnity bond sufficient in the judgment of the Issuer and the Trustee to protect the Issuer, the Trustee, the Paying Agent and the Registrar from any loss which any of them may suffer if a Timber Note is replaced. The Issuer and the Trustee may charge the Noteholder for their expenses in replacing a Timber Note. Every replacement Timber Note is an additional obligation of the Issuer. 2.8 Outstanding Timber Notes. Timber Notes outstanding at any time are all Timber Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation and those described in this Section as not outstanding. Subject to the last clause of the definition of the term "outstanding," a Timber Note does not cease to be outstanding because the Issuer or an Affiliate of the Issuer holds the Timber Note. If a Timber Note is replaced pursuant to Section 2.7, it ceases to be outstanding unless the Trustee and the Issuer receive proof satisfactory to them that the replaced Timber Note is held by a bona fide purchaser. If the Paying Agent segregates and holds in trust, in accordance with this Indenture, on a redemption date or maturity date money sufficient to pay Timber Notes payable on that date and the Paying Agent is not prohibited from paying such money to the Noteholders on that date pursuant to the terms of this Indenture, then on and after that date such Timber Notes cease to be outstanding and interest on them ceases to accrue. 2.9 Cancellation. The Issuer at any time may deliver Timber Notes to the Trustee for cancellation. The Registrar shall forward to the Trustee any Timber Notes surrendered to it for transfer, exchange or payment. The Trustee and no one else shall cancel and destroy all Timber Notes surrendered for transfer, exchange, payment or cancellation and deliver a certificate of such destruction to the Issuer unless the Issuer directs the Trustee to deliver canceled Timber Notes to the Issuer. The Issuer may not issue new Timber Notes to replace Timber Notes it has redeemed, paid or delivered to the Trustee for cancellation. 2.10 Payments in Respect of the Notes. The Issuer agrees to cause each payment in respect of each outstanding Timber Note to be made in accordance with the provisions of Section 5.7. Such payments shall be made to the Noteholders on the Record Date immediately preceding the respective Note Payment Date. 2.11 Payments of Principal, Regular Interest and Default Interest on Notes. (a) The aggregate unpaid principal amount of the outstanding Timber Notes shall become due and payable on the Final Maturity Date unless the aggregate unpaid principal amount of the outstanding Timber Notes shall have earlier become due and payable. (b) Subject to the limitation of Section 2.11(d), on each Note Payment Date that precedes the Final Maturity Date, there shall become due and payable an aggregate unpaid principal amount of the outstanding Timber Notes of each Class equal to any Minimum Principal Amortization Amount for such Class at such Note Payment Date. (c) Subject to the limitation of Section 2.11(d), on each Note Payment Date that precedes the Final Maturity Date, there shall become due and payable, in addition to any aggregate unpaid principal amount of the outstanding Timber Notes of each Class that becomes due and payable on that Note Payment Date pursuant to Section 2.11(b), an aggregate unpaid principal amount of the outstanding Timber Notes equal to any Depletion Amortization Amount at such Note Payment Date. (d) The principal amount due and payable on each Class of Timber Notes pursuant to Sections 2.11(b) and 2.11(c) shall not exceed the amount available for the payment of principal on the Timber Notes set forth in Section 5.7. (e) Accrued and unpaid Regular Interest, and accrued and unpaid Default Interest, if any, on Timber Notes shall become due and payable on each Note Payment Date. 2.12 Premiums on Timber Notes. (a) If, on any date (including any redemption date), the amount of principal paid to the holders of any Class of Timber Notes on such date exceeds the Scheduled Amortization Amount for such Class on such date, a Premium shall become payable on such date to the Holders of the Timber Notes of such Class with respect to the lesser of (i) the amount of such excess and (ii) the amount of principal paid to the Holders of such Class of Timber Notes on such date (such lesser amount, an "Excess Payment"). Such Premium shall be in an amount equal to the Prepayment Premium Amount with respect to such Excess Payment. (b) If the Scheduled Amortization Amount for any Class of Timber Notes at any Note Payment Date exceeds the aggregate principal amount of such Class of Timber Notes paid on that Note Payment Date, then (i) the amount of such excess shall constitute a "Payment Deficiency" for the period from and including that Note Payment Date to but excluding the next succeeding Note Payment Date and (ii) on the next succeeding Note Payment Date, there shall become payable to the holders of such Class of Timber Notes a Premium in an amount equal to the Deficiency Premium Amount with respect to such Payment Deficiency. For purposes of Section 2.11(e), this Section 2.12(b), Section 2.12(c) and Section 2.12(d), if any portion of the principal amount of any Timber Note remains unpaid after the Final Maturity Date, and, if the Timber Notes shall not have been accelerated pursuant to Section 7.2, the last day of each month that occurs after such Final Maturity Date and prior to the date on which the entire unpaid principal amount of such Timber Note is paid shall be deemed to constitute a Note Payment Date. (c) Upon the occurrence of any Registration Default with respect to a Class of Timber Notes or any portion thereof, a Non-Registration Premium equal to an amount of interest (computed on the basis of a 360-day year of twelve 30-day months) at a rate of 0.50% per annum on the outstanding principal amount of the Timber Notes with respect to which a Registration Default is continuing will accrue until all Registration Defaults are cured. Non-Registration Premiums, if any, will be payable on each Note Payment Date as provided in Section 5.7. (d) Any unpaid portion of Premium for the outstanding Timber Notes of any Class that has accrued shall bear interest (computed on the basis of a 360-day year of twelve 30-day months) from the date such Premium became payable until such Premium is paid at a rate per annum equal to the Note Rate for such Class. The Issuer shall cause such interest to be paid on such amount on the date or dates provided for in this Indenture. 2.13 Source and Manner of Payments on Notes. All amounts payable pursuant to Sections 2.11 and 2.12 shall be payable from funds to be withdrawn from the Payment Account pursuant to Section 5.7 in the priority set forth therein. All payments on Definitive Notes shall be made (i) by U.S. dollar checks drawn on a bank in New York City or Boston, Massachusetts mailed to the Holders at their registered addresses or (ii) upon application by a Holder of at least U.S. $5,000,000 in principal amount of Definitive Notes to a Paying Agent not later than five Business Days prior to the related Record Date, by wire transfer in immediately available funds to a U.S. dollar account maintained by such Holder with a bank in New York City or Boston, Massachusetts. All payments to any Holder of a Global Note shall be made (i) by a U.S. dollar check drawn on a bank in New York City or Boston, Massachusetts delivered to the registered owner of such Global Note at its registered address or (ii) by wire transfer in immediately available funds to a U.S. dollar account maintained by such registered owner with a bank in New York City or Boston, Massachusetts. 2.14 Additional Timber Notes. (a) Subject to satisfaction of the conditions described below, the Issuer may issue Additional Timber Notes secured by the Lien of the Deed of Trust. Such Additional Timber Notes and the Timber Notes shall be equally and ratably secured by the Mortgaged Property and other collateral for payment of the Timber Notes. Prior to or simultaneously with the issuance of Additional Timber Notes, the following conditions must be satisfied: (i) After giving effect to the issuance of such Additional Timber Notes (including any amendment or supplement to the Indenture or the other Operative Documents in connection with such issuance), the Rating Agency Condition shall be satisfied with respect to each Class of Timber Notes then outstanding (other than any Class of Timber Notes then being called for redemption or paid in full); (ii) The Scheduled Amortization Amount for each Class of Timber Notes shall be zero on the date of issuance of such Additional Timber Notes, after giving effect to any payments of principal to be made to the Holders of Timber Notes on such date and any redemption of any Timber Notes called, on or prior to such date, for redemption (including any payment of principal or redemption to be made with the proceeds of the issuance of such Additional Timber Notes); (iii) The amount available under the Line of Credit Agreement plus the funds on deposit in the Liquidity Account shall equal or exceed the Required Liquidity Amount (as such amount may be modified in connection with such issuance) after giving effect to the issuance of such Additional Timber Notes; (iv) Each issuance of Additional Timber Notes shall be in a principal amount of at least $100,000,000. (v) The Additional Timber Notes shall be rated at least as high as "Baa2" by Moody's and "BBB" by S&P; (vi) No Class A-1 Timber Notes shall be outstanding or, simultaneously with the issuance of such Additional Timber Notes, all outstanding Class A-1 Timber Notes shall be paid in full or called for redemption; and (vii) The issuance of the Additional Timber Notes shall not violate the Line of Credit Agreement. (b) If each of the conditions specified in Section 2.14(a) is satisfied,the Indenture and the other Operative Documents and the Line of Credit Agreement may be amended or supplemented, without the consent of the Noteholders, as necessary or required to effect the issuance of such Additional Timber Notes. Such amendments may, among other things, modify the Required Liquidity Amount and provide for the use of the Line of Credit Agreement (or other liquidity arrangement) to make such liquidity available to pay interest on the Additional Timber Notes or change the basis upon which the actual amortization of the Timber Notes is calculated. No such amendment or supplement, however, may, except as otherwise permitted by the provisions of Section 10.1, without the consent of Noteholders (i) effect any of the changes referred to in Section 10.2(b), (ii) extend the Minimum Principal Amortization Schedule or change the Scheduled Amortization Schedule for any Class of then outstanding Timber Notes, (iii) cause any Additional Timber Notes or other Indebtedness (except Indebtedness arising pursuant to a liquidity facility that supports the payment of interest, but not the payment of principal, premiums, or interest on premiums, on the Timber Notes and/or on any Additional Timber Notes) to have a Lien senior to the Lien securing the Timber Notes under the Deed of Trust, (iv) permit any payments of principal on any Additional Timber Notes while any Timber Notes are outstanding (unless the Timber Notes and the Additional Timber Notes have been accelerated), (v) change the Note Payment Dates or provide that the Note Payment Dates for the payment of interest on Additional Timber Notes will, so long as any Timber Notes are outstanding, be different from the Note Payment Dates for the Timber Notes, (vi) change the definition of "Cash Retention Event" in a manner adverse to the interests of the Holders of the Timber Notes, (vii) during the continuance of a Cash Retention Event, permit the release of any funds to the Company free and clear of the Lien of the Deed of Trust (except as contemplated by clauses (i), (ii) and (x) of Section 5.3(c) (as modified by Section 5.3(d)), (viii) modify any covenant contained in Sections 4.5, 4.8, 4.9, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.17, 4.18, 4.19, 4.20, 4.21, 4.23, 4.24, 4.25, 4.26, 4.28 and 4.31 of the Indenture (except for any modification that is to cure any ambiguity, omission, defect or inconsistency, or to add to the covenants of the Company for the benefit of the Holders of the Timber Notes and any Additional Timber Notes), (ix) amend the definition of Event of Default (except for any amendment that is to cure any ambiguity, omission, defect or inconsistency, or to add to the Events of Default for the benefit of the Holders of the Timber Notes and any Additional Timber Notes) under the Indenture or provide for any event of default or remedy with respect to the Additional Timber Notes that is not, while any Timber Notes are outstanding, substantially identical to the Events of Default and remedies with respect to the Timber Notes or (x) except to the extent necessary or appropriate to secure the Additional Timber Notes on a pari passu basis, or to make the Indebtedness represented by the Additional Timber Notes pari passu, with the Timber Notes, modify the provisions of any Operative Document other than the Indenture in a manner that would have a material adverse effect on the Holders of the Timber Notes. ARTICLE 3 OPTIONAL REDEMPTION AND OPTIONAL PREPAYMENT 3.1 Notices to Trustee. If the Issuer elects to redeem Timber Notes of any Class pursuant to paragraph 6 of the Timber Notes of such Class, it shall notify the Trustee in writing of the redemption date and the principal amount of Timber Notes of such Class to be redeemed. The Issuer shall give each notice to the Trustee provided for in this Section at least 15 days (or 30 days if a 30-day notice to Holders is required pursuant to Section 3.3) before the redemption date (unless a shorter notice period shall be satisfactory to the Trustee). 3.2 No Partial Redemption of a Class. The Timber Notes of any Class may be redeemed in whole, but not in part, at the option of the Issuer, on any day after the date of this Indenture. The Class A-3 Timber Notes may not be redeemed unless after giving effect to all principal payments (including payments of principal in the redemption) occurring on the redemption date, the Class A-1 and Class A-2 Timber Notes shall no longer be outstanding. The Class A-2 Timber Notes may not be redeemed unless, after giving effect to all principal payments (including payments of principal in the redemption) occurring on the redemption date, the Class A-1 Timber Notes shall no longer be outstanding. 3.3 Notice of Redemption. At least 15 days (or 30 days if legally required by DTC) but not more than 60 days before a date for redemption of any Class of Timber Notes, the Issuer shall mail a notice of redemption by first-class mail to each Holder of Timber Notes to be redeemed. The notice shall identify the Class or Classes of Timber Notes to be redeemed and shall state: (1) the redemption date; (2) the redemption price; (3) the name and address of the Paying Agent; (4) that Timber Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; and (5) that, unless the Issuer defaults in making such redemption payment, interest on Timber Notes called for redemption ceases to accrue on and after the redemption date. At the Issuer's request, the Trustee shall give the notice of redemption in the Issuer's name and at the Issuer's expense. In such event, the Issuer shall provide the Trustee with the information required by clauses (1) through (3) at least 15 days prior to the date on which such a notice of redemption is to be given by the Trustee (unless a shorter notice period shall be satisfactory to the Trustee). 3.4 Effect of Notice of Redemption. Once notice of redemption is mailed, Timber Notes called for redemption become due and payable on the redemption date and at the redemption price stated in the notice. Upon surrender to the Paying Agent, such Timber Notes shall be paid at the redemption price stated in the notice, computed as provided in Section 3.6. 3.5 Deposit of Redemption Price. On or prior to Noon, New York City time, on the redemption date, the Issuer shall deposit with the Paying Agent an amount of money which, when added to all amounts deposited on such redemption date pursuant to Section 5.7(a) and all other amounts on deposit in the Payment Account (if all outstanding Timber Notes and any Additional Timber Notes are to be redeemed on the redemption date), would be sufficient to pay the redemption price of and all other amounts payable in respect of all Timber Notes to be redeemed on that date. All money earned on such funds held in trust by the Trustee shall be remitted to the Issuer. 3.6 Redemption Price. The Timber Notes of any Class shall be redeemed at a redemption price equal to (i) all unpaid principal amounts thereof as of the redemption date, (ii) all accrued and unpaid Premium thereon as of the redemption date (prior to taking into account the redemption), (iii) all accrued and unpaid Regular Interest, Default Interest and interest on Premium thereon as of the redemption date and (iv) a redemption premium computed as provided in the definition of Prepayment Premium Amount, as if the excess of (a) the aggregate principal amount of the Timber Notes of such Class to be redeemed over (b) the Scheduled Amortization Amount for such Class of Timber Notes as of the redemption date, constituted an "Excess Payment" as set forth in such definition. 3.7 Optional Prepayment. The Issuer may, at its option, prepay the Timber Notes, in whole or in part, on any Note Payment Date as provided in Section 5.7. ARTICLE 4 COVENANTS 4.1 Payment of Notes. The Issuer shall promptly pay the principal of, Premium, if any, and interest on the Timber Notes on the dates and in the manner provided in the Timber Notes and in this Indenture. Principal and interest shall be considered paid on the date due to the extent on such date the Trustee holds in accordance with this Indenture money sufficient to pay all principal and interest then due, and the Trustee is not prohibited from paying such money to the Noteholders on that date pursuant to the terms of this Indenture or otherwise. The Issuer shall pay Default Interest on overdue principal at the Default Rate, and it shall pay interest on overdue installments of Regular Interest at the Default Rate to the extent lawful. 4.2 Money for Timber Note Payments to Be Held in Trust. The Issuer shall, on or prior to each Note Payment Date, deposit or cause to be deposited in the Payment Account such amount, if any, as is required under the terms of this Indenture to be so deposited to pay principal, Regular Interest, Default Interest, Premium or interest on Premium then owing on the Timber Notes and interest and principal then owing to the Liquidity Providers, such amount to be held in trust by the Trustee for the benefit of the Noteholders of outstanding Timber Notes and the Liquidity Providers entitled thereto. 4.3 SEC Reports. The Issuer shall file with the Trustee, and provide each Rating Agency and Noteholders, within 15 days after it files them with the SEC, copies of its annual report and of the information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which the Issuer is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. Notwithstanding that the Issuer may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Issuer shall provide the Trustee, each Rating Agency and Noteholders with information which is substantially equivalent to that which would be included in such annual reports and information which is substantially equivalent to such information, documents and other reports which are specified in Sections 13 and 15(d) of the Exchange Act. The Issuer also shall comply with the provisions of TIA Section 314(a). 4.4 Maintenance of Office or Agency; Existence; Payment of Taxes and Other Claims, Etc. (a) Maintenance of Office or Agency. The Issuer hereby irrevocably appoints the Trustee to be the agent of the Issuer and hereby irrevocably designates the Corporate Trust Office to be the office of the Issuer where notices and demands to or upon the Issuer in respect of the Timber Notes and this Indenture may be served. The Trustee shall promptly notify the Issuer of the Trustee's receipt of any notices or demands with respect to the Timber Notes or this Indenture. (b) Existence. The Issuer shall do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights and franchises as a limited liability company (except as permitted by Section 4.13) under the laws of the State of Delaware and to preserve and keep in full force and effect all other rights and franchises material to the conduct of its business or to its ability to perform its obligations under the Timber Notes and shall obtain and preserve its qualification to do business as a limited liability company (except as permitted by Section 4.13) in each jurisdiction in which such qualification is necessary to protect the validity and enforceability of, or the ability of the Issuer to perform its obligations under, this Indenture and the other Operative Documents and all certificates, agreements, documents and other writings then in effect referred to herein or therein or contemplated hereby or thereby. (c) Compliance With Laws and Regulations. The Issuer shall comply with the requirements of all applicable laws and regulations, the non-compliance with which would have a Material Adverse Effect. (d) Payment of Taxes and Other Claims. The Issuer shall pay or discharge, or cause to be paid or discharged, before the same shall become delinquent, all taxes (including, without limitation, Yield Taxes), assessments and governmental charges levied or imposed upon it or upon its income, profits or property, and all lawful claims for labor, materials and supplies that, if unpaid, would by law become a Lien upon its property; provided that the Issuer shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim so long as (i) the amount, applicability or validity thereof is being diligently contested in good faith by appropriate judicial or administrative proceedings and against which adequate reserves are being maintained or (ii) such proceedings or any bond delivered in connection therewith shall effectively suspend or stay the collection of such tax, assessment, charge or claim and against which adequate reserves are being maintained. (e) Employees. The Issuer shall at all times employ such officers and employees and have in effect such other arrangements as may be necessary to ensure the continuity of the Issuer's operations. (f) Independent Accountants. The Issuer's independent certified public accountants at all times shall be a firm of independent certified public accountants of recognized national reputation reasonably satisfactory to the Trustee for purposes of preparing and delivering the reports or certificates of such accountants required by this Indenture. Such accountants may be the independent certified public accountants for Pacific Lumber if they otherwise satisfy the criteria in this Section 4.4(f). Upon any resignation by, or change of, the Issuer's independent certified public accountants, the Issuer shall promptly appoint a successor thereto that shall also be a firm of independent certified public accountants of recognized national reputation. If the Issuer shall fail to appoint a successor to a firm of independent certified public accountants that has ceased to act as the Issuer's independent certified public accountants within 130 days after such cessation, the Trustee shall promptly appoint a successor firm of independent certified public accountants of recognized national reputation. The reasonable fees of such firm of independent certified public accountants and any successor thereto shall be payable by the Issuer. 4.5 Separate Existence and Formalities. The Issuer hereby covenants and agrees that: (1) the Issuer's funds and other assets will not be commingled with those of Pacific Lumber; (2) all actions taken by the Issuer will be taken pursuant to authority granted by the Board of Managers of the Issuer, to the extent required by law or the Issuer's Operating Agreement; (3) the Issuer will maintain records and books of account separate from those of Pacific Lumber in accordance with generally accepted accounting principles; (4) the Issuer will conduct its business at an office or offices that are identifiably segregated from the offices of Pacific Lumber and will have telephone numbers, a mailing address, stationery and other business forms separate from Pacific Lumber; (5) the Issuer will conduct its business solely in its own name (except to the extent required for federal, state or local tax purposes) and will not knowingly or negligently mislead any other Person as to the identity or authority of the Issuer; (6) all oral and written communications of the Issuer, including, without limitation, letters, invoices, purchase orders, contracts, statements and applications, will (except to the extent required for federal, state or local tax purposes) be made solely in the name of the Issuer; (7) the Issuer will provide for all of its operating expenses and liabilities from its own separate funds; (8) the Issuer will maintain correct minutes of the meetings and other proceedings of its members and the Board of Managers and otherwise comply with the formalities required by law; (9) the Issuer 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 Pacific Lumber; and (10) the Issuer shall at all times maintain at least two Independent Managers; provided, however, that the failure to maintain such Independent Managers shall not constitute a "Default" hereunder until the expiration of the applicable time period specified in Section 7.1(8). 4.6 Reports, Notices and Certificates. The Issuer will furnish to the Trustee and mail to each Rating Agency: (a) not later than April 30 of each year, commencing April 30, 1999, written statements of the Issuer's independent certified public accountants substantially in the forms of Exhibits B-1 and B-2 hereto; (b) not later than April 30 of each year, commencing April 30, 1999, an Officer's Certificate to the effect that, to such person's knowledge, (i) the Issuer has complied with all of the conditions and covenants under the Indenture (determined without regard to any period of grace or requirement of notice under this Indenture) during the preceding year and during the current year to the date of such Certificate and (ii) no Event of Default existed at any time during such preceding year or during the current year to the date of such Certificate, in each of clause (i) and (ii), except for those, if any, described in such Certificate in reasonable detail; (c) Monthly Trustee Certificates in accordance with Section 5.3(b) and Note Payment Trustee Certificates in accordance with Section 5.7(e); and (d) if a Default or Event of Default continues for 5 Business Days after a Responsible Officer of the Issuer becomes aware of the existence of such Default or Event of Default, an Officer's Certificate describing such Default or Event of Default in reasonable detail and specifying what action the Issuer has taken or proposes to take with respect to such Default or Event of Default. The Issuer will mail to each Holder of Timber Notes: (x) not later than each Monthly Deposit Date, the Monthly Noteholder Certificate; and (y) not later than each Note Payment Date, the Note Payment Noteholder Certificate. The Issuer will, to the extent provided and specified in any supplemental indenture in connection with the issuance of any Additional Timber Notes, mail to each Holder of any Additional Timber Notes: (x) not later than each Monthly Deposit Date, specified information in respect of such Monthly Deposit Date; and (y) not later than each Note Payment Date, specified information in respect of such Note Payment Date. 4.7 Access to Records. The Issuer shall, upon reasonable notice, permit the Trustee, at reasonable times: (a) to inspect and make or be provided with copies and extracts from such books and records of the Issuer as may relate to the Timber Notes and/or any of its rights or obligations under this Indenture or any other Operative Document; and (b) to visit and inspect any of the properties of the Issuer. 4.8 Limitation on Liens on Company Owned Timberlands or Company Timber Rights. The Issuer shall not create, incur, assume, suffer or permit to exist any Lien on the Company Owned Timberlands or Company Timber Rights or any portion thereof or any interest therein other than (x) the Lien of the Deed of Trust or (y) other Permitted Encumbrances. 4.9 Limitation on Indebtedness. The Issuer shall not issue, assume, incur, create, guarantee or otherwise become liable for, directly or indirectly, any Indebtedness other than (u) nonrecourse Indebtedness outstanding on the Closing Date in a principal amount not exceeding $510,000, provided that an amount equal to the principal amount of such Indebtedness from time to time outstanding is held by the Trustee in a separate cash collateral account so long as such Indebtedness is outstanding, (v) Indebtedness represented by the Timber Notes, (w) Indebtedness represented by any Additional Timber Notes, (x) Nonrecourse Timber Acquisition Indebtedness in an aggregate principal amount not exceeding $75 million outstanding at any one time, (y) Indebtedness under the Line of Credit Agreement or any other liquidity arrangement in connection with payment of interest (excluding interest on premiums) but not in connection with the payment of principal or any premiums on the Timber Notes or any Additional Timber Notes and (z) Indebtedness for capital leases; provided, however, that (i) the aggregate amount of such obligations under all such leases accruing during any consecutive 12 month period does not exceed $100,000 multiplied by the Producer Price Index Inflation Factor then applicable and (ii) the aggregate amount of such obligations under all such leases accruing over the terms of such leases does not exceed $500,000 multiplied by the Producer Price Index Inflation Factor then applicable. 4.10 Investments, Loans and Advances. Except for Permitted Investments or as otherwise contemplated by or provided in this Indenture, the Deed of Trust or any other Operative Document, the Issuer shall not make any loan or advance or extend any credit to (excluding (i) the extension of trade credit in the ordinary course of business or (ii) advances to employees or Managers, in the ordinary course of business, for reasonable business expenses or salary, not to exceed $100,000 in the aggregate at any one time), or own, purchase, repurchase or acquire (or agree contingently to do so) any stock, obligations or securities of, or any other ownership interest in, or all or substantially all of the assets of, or make any capital contribution to or any other investment in, any Affiliate or other Person. 4.11 Limitation on Restricted Payments. The Issuer shall not, directly or indirectly, declare, make or pay any distribution or other payment (whether in cash, property or obligations) in respect of any equity interest in the Issuer, or, directly or indirectly, purchase, redeem, retire or otherwise acquire for value any equity interest in the Issuer (a "Restricted Payment"), except for any such Restricted Payment made solely with funds or other assets that are free of the Lien of the Deed of Trust; provided, however, that if an Event of Default described in Section 7.1(12) (without regard to the grace period set forth therein) shall have occurred and be continuing, the Issuer shall not make any Restricted Payment. 4.12 Certain Consents. The Issuer shall not give consent to any amendment to the New Master Purchase Agreement, the New Services Agreement, any Conveyance Document, or the Escrow Agreement referred to in the definitions of Pacific Lumber Timber Rights Property and Company Timber Rights Property unless (i) such amendment has been approved by a resolution of the Board of Managers, including all Independent Managers and (ii) either (A) such amendment is to cure any ambiguity, omission, defect or inconsistency, or to add to the covenants of the other party thereto for the benefit of the Issuer, the Noteholders or the holders of Additional Timber Notes, or to surrender any right or power conferred therein on the other party thereto, or in respect of any action to be taken by the Issuer pursuant to Section 10 of the New Reciprocal Rights Agreement; provided, that no such amendment may adversely affect in any material respect the interests of the Holders of the Timber Notes or of any Additional Timber Notes or (B) such amendment has received Rating Agency Confirmation or (C) such amendment has received Rating Agency Evaluation and been approved by the Supermajority Holders (after prior notice of such Rating Agency Evaluation) or (D) such amendment is in connection with the issuance of Additional Timber Notes, subject to the limitations set forth in Section 2.14. The Issuer will exercise its rights to require Pacific Lumber to utilize the Net Short Log Scribner Scale methodology of scaling, or to utilize third party scalers, under Sections 6.2 and 6.3, respectively, of the New Master Purchase Agreement, upon receipt of notice from the Trustee, or from the Holders of 25% in aggregate outstanding principal amount of the Timber Notes and any Additional Timber Notes (to the extent specified in such notice). 4.13 Restrictions on Consolidation, Etc. Except as set forth below, the Issuer shall not consolidate with or merge with or into any other Person; or lease any of its assets to any other Person (other than leases constituting Permitted Encumbrances); or make any amendment to Section 2.5, 3.2 or 3.3 of the Operating Agreement. The Issuer shall not sell or convey all or substantially all of its assets to any other Person unless the Issuer, as a condition precedent to any such sale or conveyance, shall pay in full or defease pursuant to Article 8 all principal of, Premium, if any, interest on and other amounts payable with respect to the Timber Notes and any Additional Timber Notes or under this Indenture or the Line of Credit Agreement. Notwithstanding the foregoing, the Issuer may consolidate with or merge into any newly formed wholly-owned subsidiary of Pacific Lumber (or any successor to Pacific Lumber) that has no material assets or liabilities immediately prior to such consolidation or merger if (a) the Person formed by such consolidation or into which the Issuer is merged is a corporation, limited liability company or other entity organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by a supplemental indenture in form and substance satisfactory to the Trustee, the due and punctual payment of the principal of (and premiums, if any) and interest on all the Timber Notes and any Additional Timber Notes then outstanding and the performance of every covenant of this Indenture and the other Operative Documents on the part of the Issuer to be performed or observed; (b) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing; (c) such consolidation or merger is approved by a Board Resolution, including the affirmative vote of both Independent Managers; (d) such consolidation or merger has obtained Rating Agency Confirmation; and (e) the Issuer has delivered to the Trustee an Officer's Certificate (with the Rating Agency Confirmation attached thereto) and an Opinion of Counsel, each stating that such consolidation or merger and such supplemental indenture comply with this Indenture and the Line of Credit Agreement. 4.14 No Other Business. Except for sales of Company Owned Timberlands, Company Timber Rights or Company Timber or transfers of Company Owned Timberlands or Company Timber Rights in exchange for Substitute Timber Property in accordance with the procedures set forth in Article 6 of this Indenture, the Issuer will not engage in any business that is not related directly to (i) the operation, management, sale or maintenance of the Company Owned Timberlands, the Company Timber Rights and the Company Timber as provided by the Operative Documents, (ii) the execution, delivery and performance of the Operative Documents, the Line of Credit Agreement and the New Additional Services Agreement, (iii) issuing and selling Timber Notes and any Additional Timber Notes pursuant to this Indenture, (iv) issuing any Nonrecourse Timber Acquisition Indebtedness and acquiring property secured by such Nonrecourse Timber Acquisition Indebtedness, (v) acquiring Additional Timber Property or (vi) actions reasonably incidental to the foregoing which do not, individually or in the aggregate, have a Material Adverse Effect. 4.15 Transactions with Affiliates. Except for sales of Company Owned Timberlands, Company Timber Rights or Company Timber or transfers of Company Owned Timberlands or Company Timber Rights in exchange for Substitute Timber Property in accordance with the procedures set forth in Article 6 of this Indenture, the Issuer will not enter into any transaction, arrangement or understanding, formal or informal, written or oral (collectively, a "Transaction") with any Affiliate of the Issuer unless (a) such Transaction has received Rating Agency Confirmation if the amount involved in such Transaction and in all prior Transactions not excepted by the following proviso in any fiscal year shall exceed $2,000,000 and (b) either (x) such Transaction is on terms that are at least as favorable to the Issuer as would be available to the Issuer in a comparable Transaction with a Person that is not an Affiliate of the Issuer or (y) in the event no comparable Transaction between the Issuer and an unaffiliated third party is available, such Transaction is on terms that are fair from a financial point of view to the Issuer; provided, that this Section 4.15 shall not prohibit or otherwise restrict (i) compensation (in the form of reasonable Manager's fees and reimbursement or advancement of reasonable out-of-pocket expenses) paid to any Independent Manager of the Issuer for services rendered in such person's capacity as a Manager, (ii) indemnification of officers, Managers, and employees, and the obtaining of liability insurance for the Issuer's Managers, officers and employees, (iii) compensation and other benefits paid or made available to officers and employees of the Issuer (who are not also officers or employees of Pacific Lumber) for services actually rendered, comparable to those generally paid or made available by entities engaged in the same or similar businesses (including reimbursement or advancement of reasonable out-of-pocket expenses), (iv) participation by employees of the Issuer in employee benefit plans of Pacific Lumber or other Affiliates of the Issuer, (v) lease of office space by the Issuer from Pacific Lumber in an annual amount not to exceed $60,000 per year, (vi) coverage for the Issuer under blanket insurance policies of Affiliates of the Issuer, (vii) the leasing of vehicles or other equipment by the Issuer from Pacific Lumber in an annual amount not to exceed $250,000 per year multiplied by the Producer Price Index Inflation Factor then applicable, (viii) leases of portions of Company Owned Timberlands to Pacific Lumber, provided that (A) such leases are Permitted Encumbrances pursuant to clause (g) of the definition of such term, (B) Pacific Lumber subleases, in the ordinary course of business, the portions of Company Owned Timberlands that it leases from the Issuer and (C) the rent paid by Pacific Lumber under such leases shall not be less than 80% of the rent received by Pacific Lumber under such subleases, (ix) participation by the Issuer with one or more of its Affiliates in the Takings Litigation, provided that any recovery in such litigation shall be allocated between the Issuer and its Affiliates on a pro rata basis so that the Issuer will receive as its share of such recovery a percentage of such recovery equal to the ratio of (A) the number of acres of the Company Timber Property which is the subject of such litigation to (B) the total number of acres of timberlands of the Issuer and its Affiliates that is the subject of such litigation, or (x) any other Transaction with an Affiliate of the Issuer to the extent such Transaction with such Affiliate is contemplated by, and conducted in all material respects in accordance with the terms of, the Operative Documents; and provided, further, that in the case of clauses (i), (ii), (iii) and (v), such amounts shall be paid solely from amounts on deposit in the Expense Reserve, from Excess Funds or from other available funds of the Issuer that are free and clear of the Lien of the Deed of Trust. The Issuer shall provide each Rating Agency with a notice, on or about June 30 and December 31 of each year, of all Transactions with any Affiliate of the Issuer (other than sales of Company Timber or Transactions excepted by the first proviso in the preceding paragraph) entered into during the preceding six-month period which do not require Rating Agency Confirmation under clause (a) of the preceding paragraph. A Transaction permitted by Section 6.1, 6.3 or 6.4 between the Issuer and a Person, and a Transaction between an Affiliate of the Issuer and such Person (or an Affiliate of such Person), shall not be deemed a Transaction between the Issuer and an Affiliate of the Issuer for the purposes of this Section 4.15. 4.16 Insurance. The Issuer shall maintain or cause to be maintained with respect to the Mortgaged Property such insurance as is required by Section 7.1(i) of the Deed of Trust. 4.17 Company Timber Sales. All sales of Company Timber which are made by the Issuer to Pacific Lumber shall be made pursuant to the New Master Purchase Agreement and related log purchase agreements. All sales of Company Timber which are made by the Issuer to any other Person (other than Lump Sum Sales pursuant to Section 6.1 and 6.5) shall be made pursuant to written Purchase Agreements satisfying the criteria specified in Section 7.1(h)(1) of the Deed of Trust. 4.18 Opinion as to Mortgaged Property. Promptly after the execution and delivery of this Indenture, and on or before June 30 of each calendar year, commencing June 30, 1999, the Issuer shall furnish to the Trustee and the Rating Agencies an Opinion of Counsel stating that, in the opinion of such counsel, either (a) such action has been taken with respect to the recording, filing, rerecording and refiling of the Deed of Trust (including, without limitation, the recordation of the real property assignments referred to therein), any supplements and any other requisite documents and with respect to the execution and filing of any UCC financing statements and continuation statements as is necessary to maintain the validity and perfection of the Lien of the Deed of Trust and reciting the details of such action or (b) as of the date of such opinion, no such action is necessary to maintain the validity and perfection of the Lien of the Deed of Trust. Such Opinion of Counsel shall also describe the recording, filing, rerecording and refiling of the Deed of Trust, any supplements and any other requisite documents and the execution and filing of any UCC financing statements and continuation statements that will, in the opinion of such counsel, be required to maintain the validity and perfection of the Lien of the Deed of Trust with respect to the Mortgaged Property in existence as of the date of such opinion until September 1 in the following calendar year. 4.19 Performance of Obligations. (a) Except as expressly contemplated herein or in another Operative Document, the Issuer will not take any action, and will use all reasonable efforts not to permit any action to be taken by any other Person, that would release any Person from any of such Person's material covenants or obligations to the Issuer under any Operative Document or that would result in the amendment, modification, hypothecation, subordination, termination or discharge of, or impair the validity, enforceability or effectiveness of, any such Operative Document. (b) The Issuer shall punctually perform and observe in all material respects all of its obligations and agreements contained in the New Services Agreement and the New Master Purchase Agreement and the other Operative Documents. (c) The Issuer will make all deposits into the Collection Account that the Issuer is required to make under the Operative Documents. 4.20 New Services Agreement; Operating Default; Termination of New Services Agreement. (a) If an Operating Default shall have occurred and be continuing, the Trustee may, and, upon receipt of written instructions from the Majority Holders directing the Trustee to take such action, shall, give notice to Pacific Lumber or any other entity which is then the Services Provider of its intention to terminate the New Services Agreement in accordance with the terms thereof; provided that any such termination of the New Services Agreement will not become effective, and the Services Provider will not be relieved of its obligations under the New Services Agreement and will continue (so long as the Services Provider continues to perform in all material respects the services as contemplated by the New Services Agreement with the same standard of care and diligence as were observed before such Operating Default) to receive compensation for the services performed by the Services Provider thereunder (as provided in Section 7.2 of the New Services Agreement), unless and until a replacement Services Provider shall have entered into a New Services Agreement. (b) Upon any termination of the New Services Agreement as contemplated by Section 4.20(a), the Issuer shall promptly solicit bids from not fewer than three Persons to serve as a replacement Services Provider or Services Providers. 4.21 New Master Purchase Agreement; Purchase Agreement Default; Termination of New Master Purchase Agreement. (a) If a Purchase Agreement Default shall have occurred and be continuing, the Trustee may, and, upon receipt of written instructions from the Majority Holders directing the Trustee to take such action, shall, give notice to Pacific Lumber of its intention to terminate the New Master Purchase Agreement in accordance with the terms thereof. (b) Upon any termination of the New Master Purchase Agreement as contemplated by Section 4.21(a), the Issuer shall promptly solicit new purchasers on such terms as it deems appropriate, consistent with Section 4.17 (as provided in Section 10.2 of the New Master Purchase Agreement). 4.22 Distributions from Accounts. The Issuer shall not, directly or indirectly, instruct the Trustee to make payments or distributions from the Accounts except in accordance with this Indenture and the Deed of Trust. 4.23 Status of the Deed of Trust. At all times (a) the Deed of Trust shall be a valid and binding obligation of the Issuer; and (b) the Lien of the Deed of Trust shall be a valid and perfected mortgage lien on or a valid and perfected security interest in the Mortgaged Property, subject to no Liens other than Permitted Encumbrances. The Issuer shall cause to be delivered to the Collateral Agent a Title Insurance Policy (and such endorsements or additional policies as may from time to time be required pursuant to the terms and provisions of Sections 6.1, 6.3 and 6.4 of this Indenture or in connection with the issuance of Additional Timber Notes) insuring the Collateral Agent in the principal amount of the Timber Notes and the Commitments under the Line of Credit Agreement that the Deed of Trust is a valid Lien against the Company Owned Timberlands and Company Timber Rights, subject only to Permitted Encumbrances. 4.24 No Other Agreements. The Issuer shall not enter into any agreements other than (i) the Operative Documents, the New Additional Services Agreement, the Operating Agreement or the Line of Credit Agreement or as contemplated by the Operative Documents, the New Additional Services Agreement, the Operating Agreement or the Line of Credit Agreement, (ii) agreements for or in connection with the sale of Company Timber, Company Owned Timberlands or Company Timber Rights as permitted by this Indenture and the Deed of Trust, (iii) trade accounts payable in the ordinary course of business, (iv) agreements for expenditures expressly contemplated by the Operative Documents or the New Additional Services Agreement, the Operating Agreement or the Line of Credit Agreement, (v) agreements required by this Indenture or the Deed of Trust, (vi) if Pacific Lumber is no longer the Services Provider under the New Services Agreement, such agreements as may be necessary or appropriate to obtain the Services, (vii) agreements in the ordinary course of business related to actions permitted by Section 4.14 and not otherwise prohibited by this Indenture, (viii) agreements in respect of the issuance of Additional Timber Notes or in respect of the issuance of Nonrecourse Timber Acquisition Indebtedness, (ix) agreements in respect of the acquisition of Additional Timber Properties or property that secures Nonrecourse Timber Acquisition Indebtedness and (x) such other agreements as are not, individually or in the aggregate, material to the business, financial condition or results of operations of the Issuer. 4.25 Relocation of Chief Executive Office, Etc. The Issuer shall not (a) relocate its chief executive office or principal place of business from the address indicated in the preamble to this Indenture or (b) maintain any of its books and records with respect to the Mortgaged Property at any location other than such office or 5847 San Felipe, Suite 2610, Houston, Texas 77057 unless (i) the Trustee shall have been provided with notice 30 days prior to such relocation and (ii) the Issuer shall have delivered an Opinion of Counsel to the Trustee that any filings necessary to continue the perfection of the Lien of the Deed of Trust have been accomplished. Except in connection with a merger or consolidation permitted under Section 4.13, the Issuer shall not change its name, or the name under which it does business, from "Scotia Pacific Company LLC." 4.26 Timber Harvesting Plans, Etc. The Issuer shall (i) prepare and file, and use its best efforts to obtain approval of, Timber Harvesting Plans with respect to all Company Timber to be sold pursuant to the Purchase Agreements, (ii) not enter into any Purchase Agreement (other than the New Master Purchase Agreement) for the sale of stumpage unless the Company Timber to be cut pursuant thereto is subject to a valid and subsisting Timber Harvesting Plan or the Issuer reasonably believes that the purchaser thereunder (or the Issuer) has the capacity to obtain a Timber Harvesting Plan with respect thereto, (iii) at all times retain sufficient persons with requisite professional qualifications to prepare and file Timber Harvesting Plans, (iv) comply in all material respects with all applicable federal, state or local regulations or statutes relating to the Timber Harvesting Plans and the harvesting, cutting or severing of Timber, including laws relating to wildlife habitat and endangered species, (v) use its best efforts (consistent with prudent business practices) to maintain a number of pending applications for Timber Harvesting Plans which, if approved, would, together with Timber Harvesting Plans already approved, cover sales of Company Timber adequate to pay, on any date, an amount equal to the sum of (a) the excess, if any, of (i) the sum of (A) all amounts specified as Minimum Principal Amortization for all Classes of Timber Notes in the Structuring Schedule (Column L) (as such amount may be modified as provided in Section 2.14) from the date of this Indenture through a date which is 12 months subsequent to such date and (B) any amount as provided in respect of this Section 4.26 in any supplement to this Indenture executed in connection with the issuance of any Additional Timber Notes over (ii) the aggregate principal amount of the Timber Notes previously paid plus (b) Regular Interest to be accrued on the Timber Notes and interest (not including any interest on premiums) to be accrued on any Additional Timber Notes for such 12 month period and (vi) prepare and file any 10 year plan, master plan, or any other development or strategic plan required to be prepared in respect of the Company Timber Property by any Governmental Authority. 4.27 [Intentionally Omitted] 4.28 Sale of Company Timber or Logs. The Issuer shall use its best efforts (consistent with prudent business practices) to sell Company Timber or logs in an amount sufficient to pay, as and when due, an amount equal to (a) the excess, if any, of (i) the sum (A) of all amounts specified as Minimum Principal Amortization in the Structuring Schedule (column L) (as such amount may be modified as provided in Section 2.14) from the date of the Indenture through the next Note Payment Date and (B) any amount as provided in respect of this Section 4.28 in any supplement to this Indenture executed in connection with the issuance of any Additional Timber Notes over (ii) the aggregate principal amount of the Timber Notes previously paid plus (b) Regular Interest and Default Interest to be accrued on the Timber Notes and interest (not including any interest on premiums) to be accrued on any Additional Timber Notes to such Note Payment Date. 4.29 GIS. The Issuer shall maintain the GIS (including updates thereto) in accordance with the past practices of the Issuer and Pacific Lumber. 4.30 [Intentionally Omitted] 4.31 Liquidity Reserve. If at any time the Issuer reasonably determines that amounts will be required to be borrowed under the Line of Credit Agreement or withdrawn from the Liquidity Account pursuant to Section 5.7(a)(i) (or drawn upon or withdrawn from any similar facility or account that supports interest payable on any Additional Timber Notes) on the next succeeding Note Payment Date, and funds to be so borrowed or on deposit in the Liquidity Account (or available from any similar facility or account that supports interest on any Additional Timber Notes) are for any reason unavailable, during the continuance of such unavailability, the Issuer shall use its best efforts (consistent with prudent business practices) to obtain funds in the amount of such shortfall from third parties, by offering logs for sale to third parties or otherwise. 4.32 Deed of Trust Covenants. The Issuer shall perform each of the covenants and agreements made by the Issuer in the Deed of Trust. ARTICLE 5 ACCOUNTS 5.1 Establishment of Accounts. (a) There are hereby established with the Securities Intermediary segregated trust accounts to be maintained at the Corporate Trust Office of the Securities Intermediary (collectively, the "Accounts"), as follows: the Collection Account, the Liquidity Account, the Expense Reserve, the Prefunding Account, the Indebtedness Reserve Account and the Payment Account. The funds in each of the Accounts shall be held subject to a Lien in favor of the Collateral Agent for the benefit of the Noteholders and the Liquidity Providers. (b) Amounts on deposit in the Accounts shall be under the exclusive dominion and control of the Collateral Agent and shall be subject to withdrawal only as expressly provided herein. 5.2 Initial Deposits. (a) On the Closing Date, the Issuer shall deposit in the Prefunding Account an amount equal to $25,000,000 from the net proceeds from the sale of the Timber Notes. (b) On the Closing Date, the Issuer shall deposit in the Expense Reserve an amount equal to $1,100,000 from the net proceeds from the sale of the Timber Notes. (c) On the Closing Date, the Issuer shall deposit in the Indebtedness Reserve Account an amount equal to $510,000 from the net proceeds of the sale of the Timber Notes. 5.3 Collection Account. (a) Except for De Minimis Receipts, all payments received by the Issuer in connection with the harvesting, severing, cutting or sale of Company Timber and all other cash Proceeds received by the Issuer of or from the Mortgaged Property (including, without limitation, insurance proceeds, condemnation awards, proceeds from sales of Company Timber, including Pay-as-You-Harvest Sales, Lump Sum Sales and Unallocated Payments, whether pursuant to the New Master Purchase Agreement or otherwise, proceeds from the sales of Company Owned Timberlands or Company Timber Rights, and proceeds in respect of any Agreement Not to Cut, but excluding proceeds of any Title Insurance Policy) shall be deposited in the Collection Account, together with all other amounts required to be deposited in the Collection Account under this Indenture or the Deed of Trust. The Issuer shall forward all De Minimis Receipts to the Collection Account at least monthly. Funds from time to time in the Collection Account, including income on Eligible Investments with respect to amounts held in the Collection Account, will be withdrawn from the Collection Account on each Monthly Deposit Date as provided in Section 5.3(c). (b) Not later than each Monthly Certificate Delivery Date, the Issuer shall prepare and submit or cause to be prepared and submitted to the Collateral Agent and the Trustee (with a copy mailed to each Rating Agency), a Certificate in substantially the form of Exhibit C hereto (a "Monthly Trustee Certificate"), containing information (except as otherwise provided herein) as of the Monthly Calculation Date next preceding such Monthly Certificate Delivery Date (which certificate shall give effect, on a pro forma basis, to deposits to be made to, and interest to be earned on, the Accounts to 11:00 A.M. New York City time on the next succeeding Monthly Deposit Date) and signed by a Responsible Officer of the Issuer, setting forth (among other things): (i) the balance in the Collection Account, including interest earned on investments from the prior Monthly Deposit Date, and the balance in the Expense Reserve, indicating separately for each item (A) the actual amount as of the opening of business on such Monthly Certificate Delivery Date and (B) an estimated pro forma amount as of 11:00 A.M. New York City time on the next succeeding Monthly Deposit Date; and (ii) the amount (if any), stated separately as to each Item (and as to each applicable provision of Sections 5.3(d) and 5.3(e)), that in accordance with this Indenture is to be deposited in or withdrawn from the Collection Account, the Expense Reserve, the Prefunding Account, the Liquidity Account and the Payment Account, or borrowed under the Line of Credit Agreement or paid to the Liquidity Providers, as applicable, on such Monthly Deposit Date pursuant to each of Items (i) through (x), inclusive, of Section 5.3(c). Withdrawals from the Collection Account on a Monthly Deposit Date pursuant to Items (i) through (x), inclusive, of Section 5.3(c) (and the applicable provisions of Sections 5.3(d) and 5.3(e)) are called the "Collection Account Disbursement" for such Monthly Deposit Date, and the amounts to be deposited or withdrawn, as part of the Collection Account Disbursement for such Monthly Deposit Date, are called "Collection Account Disbursement Funds" for such Monthly Deposit Date. In preparing the Monthly Trustee Certificate to be delivered on a Monthly Certificate Delivery Date, the Issuer shall, with respect to the information referred to in Section 5.3(b)(i), be entitled to rely in good faith on information provided by the Trustee or the Collateral Agent and on reasonable estimates of interest to be earned on the Accounts. (c) On each Monthly Deposit Date, from amounts on deposit as of 11:00 A.M. New York City time on such Monthly Deposit Date (after giving effect to deposits to the Collection Account on such Monthly Deposit Date), and in accordance with the Monthly Trustee Certificate delivered in respect of such Monthly Deposit Date, on which Monthly Trustee Certificate the Trustee and the Collateral Agent may rely without inquiry, the Collateral Agent shall make deposits in and withdrawals from the Accounts as set forth below (said deposits and withdrawals to be made in the order and priority set forth below): (i) any amount necessary to cause the balance in the Expense Reserve to equal the greater of (I) the sum of (a) all accrued and unpaid Yield Taxes attributable to Company Timber which was cut, harvested, severed or sold during the month to which such Monthly Deposit Date relates and all prior Monthly Periods and (b) an amount equal to all expenses of a nature permitted to be paid from the Expense Reserve (including capital expenditures, personnel costs, the Services Fee and other amounts payable under the New Services Agreement) known or estimated by the Issuer to be payable prior to the next Monthly Deposit Date and (II) $1.1 million shall, to the extent of the balance in the Collection Account, be withdrawn from the Collection Account and deposited in the Expense Reserve; (ii) all unpaid Trustee's Expenses, Collateral Agent Expenses and Liquidity Providers' Expenses incurred during or prior to the Monthly Period to which such Monthly Deposit Date relates shall, to the extent of the balance in the Collection Account not theretofore withdrawn, be withdrawn from the Collection Account and, at the direction of the Issuer, be paid to the Trustee, the Collateral Agent, or the Liquidity Providers, as the case may be, by the Collateral Agent or, if the Issuer shall have previously paid such expenses, such amounts shall be withdrawn by the Collateral Agent from the Collection Account and disbursed at the direction of the Issuer to reimburse itself for such expenses; (iii) if there has not been a Termination Advance under a Line of Credit or there has been a Termination Advance under a Line of Credit Agreement that has been replaced in accordance with the terms of Section 11.4, an amount equal to all accrued and unpaid interest (other than any Supplemental Liquidity Provider Interest) on, plus the outstanding principal amount of, any outstanding Advances (other than Advances made on, or within three Business Days preceding, such Monthly Deposit Date) under the Line of Credit Agreement shall, to the extent of the balance in the Collection Account not theretofore withdrawn, be withdrawn by the Collateral Agent from the Collection Account and disbursed to the Liquidity Providers in payment, first, of such accrued and unpaid interest and, second, of such outstanding principal amount; (iv) the balance of funds in the Liquidity Account (if any) in excess of the Required Liquidity Amount as of such Monthly Deposit Date shall be withdrawn by the Collateral Agent from the Liquidity Account and deposited in the Collection Account and shall be included together with other funds to be withdrawn from the Collection Account on such Monthly Deposit Date; (v) an amount equal to (a) the product of (i) the Targeted Monthly Deposit Amount for such Monthly Deposit Date and (ii) the Reinvestment Factor for such Monthly Deposit Date less (b), if such Monthly Deposit Date is neither a Note Payment Date nor the first Monthly Deposit Date following a Note Payment Date, the Premium Provision Refundable Amount for such Monthly Deposit Date shall, to the extent of the balance in the Collection Account not theretofore withdrawn, be withdrawn by the Collateral Agent from the Collection Account and deposited in the Payment Account; (vi) if there has been a Termination Advance under a Line of Credit Agreement that has not been replaced in accordance with the terms of Section 11.4, an amount equal to the excess of (a) the sum of (i) all accrued and unpaid interest on all outstanding Advances (other than any Supplemental Liquidity Provider Interest) under the Line of Credit Agreement as of such Monthly Deposit Date and (ii) the product obtained by multiplying the Line of Credit Amortization Amount, if any, for the next Note Payment Date, by a fraction, the numerator of which is the number of months from the immediately preceding Note Payment Date and the denominator of which is six, over (b) the amount, if any, of all amounts deposited pursuant to this clause (vi) in the Payment Account after the immediately preceding Note Payment Date (or, if the first Note Payment Date has not yet occurred, after the Closing Date) shall, to the extent of the balance in the Collection Account not theretofore withdrawn, be withdrawn by the Collateral Agent from the Collection Account and deposited in the Payment Account; (vii) if there has been a Termination Advance under a Line of Credit Agreement that has not been replaced in accordance with the terms of Section 11.4, any amount necessary to cause the balance in the Liquidity Account to equal the Required Liquidity Amount as of such Monthly Deposit Date shall, to the extent of the balance in the Collection Account not theretofore withdrawn, be withdrawn by the Collateral Agent from the Collection Account and deposited in the Liquidity Account; (viii) an amount equal to the Premium Provision for such Monthly Deposit Date shall, to the extent of the balance in the Collection Account not theretofore withdrawn, be withdrawn by the Collateral Agent from the Collection Account and deposited in the Payment Account; (ix) if (a) the aggregate expenses of a nature permitted to be paid from the Expense Reserve known or estimated by the Issuer to be payable through any date within the following six months exceeds (b) the sum of (I) the amount in the Expense Reserve and (II) the amounts that the Issuer estimates will become available to the Issuer through such date for the payment of the expenses referred to in the preceding clause (a), an amount equal to the amount of such excess shall, to the extent of the balance in the Collection Account not theretofore withdrawn, be withdrawn from the Collection Account and deposited in the Expense Reserve; and (x) all unreserved funds in the Collection Account as of such Monthly Deposit Date, after giving effect to all deposits and withdrawals pursuant to the preceding Items (i) through (ix), inclusive, on such Monthly Deposit Date (collectively, "Excess Funds"), shall be paid, first, to the payment of any unpaid Additional Liquidity Provider Fees incurred during or prior to the Monthly Period to which such Monthly Deposit Date relates and to the payment of any accrued and unpaid Supplemental Liquidity Provider Interest as of such Monthly Date and, second, to or as directed by the Issuer in the Monthly Trustee Certificate delivered with respect to such Monthly Deposit Date, free and clear of the Lien of the Deed of Trust, except as otherwise provided in Section 5.3(d) or Section 5.3(e). (d) Notwithstanding the foregoing: (i) if a Cash Retention Event shall have occurred and be continuing on such Monthly Deposit Date, 75% of the Excess Funds (up to the amount necessary to pay in full any Timber Notes remaining outstanding) shall be deposited in the Payment Account on such Monthly Deposit Date and the remainder shall be applied as set forth in Section 5.3(c)(x); (ii) if an Event of Default described in clauses (1), (2), (3), (4), (5), (6), (7) (but, in the case of clause (7), only (A) with respect to Sections 4.5, 4.8, 4.9, 4.11, 4.13, 4.23 and 4.25 of this Indenture and Sections 7.1(c), (d) and (e) and 7.2(a) and (b) of the Deed of Trust and (B) if the default giving rise to such Event of Default has, or, with the passage of time, would have, a Material Adverse Effect) and (11) of Section 7.1 has occurred and is continuing on such Monthly Deposit Date, all Excess Funds shall be deposited in the Payment Account on such Monthly Deposit Date; (iii) if (A) the Trustee or the Noteholders shall have caused the acceleration of the Timber Notes as provided in Section 7.2(b) or 7.2(c) of this Indenture and such acceleration shall not have been rescinded pursuant to Section 7.2(d) or (B) an Event of Default under Sections 7.1(6), (7), (8), (9), (10) or (12) has occurred and is continuing, and the Trustee, within the previous 60 days, has commenced a consent solicitation for an election to accelerate the Timber Notes or any Additional Timber Notes by reason of such Event of Default, all Excess Funds shall be deposited in the Payment Account on such Monthly Deposit Date (either of the events described in the preceding clause (ii) or this clause (iii), a "Trapping Event"); and (iv) if the Collateral Agent holds any Section 6.1 Notes as of such Monthly Deposit Date, (x) if the amount of Excess Funds (computed as if such Section 6.1 Notes were cash), reduced by any amount required to be deposited in the Payment Account pursuant to Section 5.3(d)(i) or to be paid pursuant to clause "first" of Section 5.3(c)(x), equals or exceeds the amount of such Section 6.1 Notes, so long as no Trapping Event shall have occurred and be continuing, the Section 6.1 Notes shall be released to or as directed by the Issuer, free and clear of the Lien of the Deed of Trust, (y) if the amount of Excess Funds (computed as if the Section 6.1 Notes were cash), reduced by any amount required to be deposited in the Payment Account pursuant to Section 5.3(d)(i) or to be paid pursuant to clause "first" of Section 5.3(c)(x), is less than the amount of such Section 6.1 Notes, so long as no Trapping Event has occurred and is continuing, a portion of Section 6.1 Notes, in an amount up to the amount of Excess Funds (computed on such basis), reduced by any amount required to be deposited in the Payment Account pursuant to Section 5.3(d)(i) or to be paid pursuant to clause "first" of Section 5.3(c)(x), shall be released to or as directed by the Issuer, free and clear of the Lien of the Deed of Trust, and the balance of such Section 6.1 Notes shall be sold by the Issuer to Pacific Lumber for a cash purchase price equal to the aggregate principal balance thereof plus accrued interest thereon and (z) if any Trapping Event has occurred and is continuing, the Issuer shall sell to Pacific Lumber all Section 6.1 Notes then held by the Collateral Agent, for a cash purchase price equal to the aggregate principal amount of such Section 6.1 Notes plus accrued interest thereon. Section 6.1 Notes shall not be included in any calculation pursuant to Section 5.7 and, except for the calculation made pursuant to this Section 5.3(d)(iv), shall not be included in any calculation of Excess Funds. All proceeds received by the Collateral Agent from any sale of some or all of the Section 6.1 Notes to Pacific Lumber pursuant to this Section 5.3(d)(iv) shall be deposited into the Collection Account on such Monthly Deposit Date, for application as provided in Section 5.3. For purposes of this Section 5.3(d) and of Sections 5.3(e) and 5.7, the Trustee and the Collateral Agent may rely, without further inquiry, on statements contained in the Monthly Trustee Certificate in respect of any Monthly Deposit Date as to whether a Cash Retention Event, a Trapping Event or an Acceleration Event has occurred and is continuing on such Monthly Deposit Date or a Line of Credit Acceleration has occurred. (e) Notwithstanding the foregoing provisions of this Section 5.3, in the event that a Line of Credit Acceleration has occurred or an Acceleration Event shall have occurred and be continuing, all interest, principal and other amounts (other than Additional Liquidity Provider Fees and Supplemental Liquidity Provider Interest) then owing by the Issuer under the Line of Credit Agreement shall be paid on each Monthly Deposit Date, immediately after the transfers and payments pursuant to Sections 5.3(c)(i) and 5.3(c)(ii), and no amounts shall be deposited in the Payment Account on such Monthly Deposit Date until such interest, principal and other amounts are paid in full. Payments to the Liquidity Providers pursuant to this Section 5.3(e) shall be applied, first, to Liquidity Providers' Expenses, second, to interest (other than any Supplemental Liquidity Provider Interest) and, third, to principal. (f) The Issuer shall clearly indicate on each page of the Monthly Trustee Certificate that such material is to be maintained as confidential. The Trustee and the Collateral Agent shall treat any Monthly Trustee Certificate designated as confidential material as confidential, and any Monthly Trustee Certificate so designated shall not be available to Noteholders. Notwithstanding the foregoing, nothing in this Section 5.3(f) shall prohibit the Trustee and the Collateral Agent from disclosing such Monthly Trustee Certificate to bank regulatory authorities (or otherwise as required by law), auditors, attorneys or other agents of the Trustee within the scope of their engagement. (g) All payments of Liquidity Providers' Expenses and all other payments to the Liquidity Providers or the Line of Credit Agent under this Indenture or any other Operative Document shall be disbursed to the Line of Credit Agent. The Line of Credit Agent shall be solely responsible for disbursing all such payments that it receives to the Persons entitled to such payments. If, on or prior to the date that is eight Business Days prior to any Monthly Deposit Date, the Line of Credit Agent delivers written notice to the Trustee and the Collateral Agent (with a copy to the Issuer) stating that the amount set forth in the Monthly Trustee Certificate delivered in respect of the preceding Monthly Deposit Date understated the amount of Liquidity Providers' Expenses referred to in Section 5.3(c)(ii), the amount of accrued and unpaid interest (other than any Supplemental Liquidity Provider Interest) on, or the outstanding principal amount of, Advances (other than Advances made on, or within three Business Days preceding, such Monthly Deposit Date) under the Line of Credit Agreement referred to in Section 5.3(c)(iii) or the amount of unpaid Additional Liquidity Provider Fees or accrued and unpaid Supplemental Liquidity Provider Interest referred to in clause "first" of Section 5.3(c)(x), the Collateral Agent may rely on such notice and shall include the amount(s) of the understatement(s) set forth in such written notice in the amounts to be disbursed, to the extent of cash available therefor, pursuant to Section 5.3(c)(ii), 5.3(c)(iii) and/or clause "first" of Section 5.3(c)(x), as applicable, on the next Monthly Deposit Date. 5.4 Expense Reserve; Payment of Expenses. (a) The Issuer may cause the Collateral Agent to withdraw from the Expense Reserve (to the extent of amounts then on deposit in said Expense Reserve), at any time or from time to time (so long as the Timber Notes shall not have been accelerated pursuant to Section 7.2(a) of this Indenture), amounts which the Issuer certifies to the Collateral Agent are required to pay (i) capital costs or expenses, including the Services Fee and other amounts payable pursuant to the New Services Agreement, with respect to the Mortgaged Property, (ii) Taxes, (iii) Personnel Costs and (iv) other reasonable and necessary expenses related to the business operations of the Issuer or as contemplated by the Operative Documents; provided, however, that no withdrawals from the Expense Reserve may be effected pursuant to this Section 5.4 at any time when (x) the Timber Notes have been accelerated pursuant to Section 7.2(b) of this Indenture, (y) such acceleration has not been rescinded pursuant to Section 7.2(c) of this Indenture, and (z) there shall be in effect a written notice delivered by the Trustee to the Issuer, or by the Majority Holders to the Issuer and the Trustee, stating that withdrawals from the Expense Reserve pursuant to this Section 5.4 are prohibited. The Collateral Agent may rely on the Issuer's certification without inquiry. (b) The Issuer shall be permitted to issue checks, drafts, or other instruments to third party payees against, and to request wire transfers to a payroll account from, the funds on deposit in the Expense Reserve for purposes permitted by paragraph (a) without the need for additional certifications; provided that the presentment for payment to the Trustee of any such check, draft or instrument, and any request for such a wire transfer, shall be deemed a representation and warranty by the Issuer that such expenditure is for such purpose (upon which the Collateral Agent may rely without inquiry). 5.5 Deemed Production. Upon receipt by the Issuer of (i) any proceeds in respect of a Lump Sum Sale pursuant to Section 6.1, (ii) any proceeds in respect of any sale of Company Owned Timberlands or Company Timber Rights pursuant to Section 6.1, (iii) any payments in respect of any condemnation or taking for public use under the power of eminent domain of any of the Mortgaged Property (including any recovery in the Takings Litigation), (iv) any insurance proceeds in respect of any damage to or loss or diminution in value of or income from any of the Mortgaged Property, (v) any proceeds of any Agreement Not to Cut or (vi) any Up Front Payment in respect of a Pay-As-You-Harvest-Sale (an "Unallocated Payment"), the Issuer shall recognize Deemed Production in the Monthly Period in which such amount is received (or, if received prior to the Monthly Deposit Date or prior to 11:00 a.m. New York City time on the Monthly Deposit Date, in the next preceding Monthly Period). In the case of the preceding clauses (i) to (iv) (other than a recovery in the Takings Litigation), Deemed Production shall be in respect of the number of Mbfe (as set forth in an Officer's Certificate delivered to the Trustee) of Company Timber (or Company Timber located on the Company Owned Timberlands or on the Company Timber Rights Property that is subject to the Company Timber Rights, as applicable) sold, condemned, taken, damaged or destroyed. In the case of clause (v), Deemed Production shall be in respect of the number of Mbfe (as set forth in an Officer's Certificate delivered to the Trustee) of Company Timber to which such Agreement Not to Cut relates. In the case of a recovery in the Takings Litigation, Deemed Production shall be in respect of the number of Mbfe (as set forth in an Officer's Certificate delivered to the Trustee) of Company Timber equal to the amount of such recovery divided by the then applicable SBE price per Mbf of old growth redwood, size quality code 2, for tractor logging. In the case of the preceding clause (vi), Deemed Production shall be in respect of the number of Mbfe (as set forth in an Officer's Certificate delivered to the Trustee) of Company Timber to which such Pay-As-You Harvest Sale relates, multiplied by the percentage that such Up Front Payment represents of the entire contract. Each Officer's Certificate delivered pursuant to this Section 5.5 (other than in the case of a recovery in the Takings Litigation) shall be based upon the information in the GIS (in the case of clauses (iv), (v) and (vi), to the extent practicable) and such Certificate shall so state. Upon the occurrence of any transaction which results in the Issuer's election to recognize Deemed Production pursuant to Section 6.4(iii)(B), the Issuer shall recognize Deemed Production in the Monthly Period in which such transaction occurs (or, if such transaction occurs on or prior to the Monthly Deposit Date, in the next preceding Monthly Period). Such Deemed Production shall be computed as set forth in Section 6.4(iii)(B). 5.6 Investment of Accounts, Etc. Amounts on deposit in the Collection Account and the Expense Reserve shall be invested by the Collateral Agent in such Eligible Investments specified in writing (or by oral instructions confirmed promptly thereafter in writing) by the Issuer that are consistent with the need to make withdrawals therefrom; provided, however, that the Expense Reserve may be maintained as a non-interest bearing account if the Collateral Agent shall reasonably determine that maintaining the Expense Reserve as an interest bearing account is administratively burdensome. Amounts deposited in the Payment Account pursuant to clauses (v), (vi) or (viii) of Section 5.3(c) or otherwise shall be invested by the Collateral Agent in such Eligible Investments specified in writing (or by oral instructions confirmed promptly thereafter in writing) by the Issuer that are consistent with the need to make withdrawals therefrom pursuant to Section 5.7. Amounts, if any, on deposit in the Liquidity Account shall be invested by the Collateral Agent in such Eligible Investments specified in writing (or by oral instructions confirmed promptly thereafter in writing) by the Issuer that are consistent with the need to make withdrawals therefrom pursuant to clause (iv) of Section 5.3(c) and Section 5.7. Amounts on deposit in the Prefunding Account or the Indebtedness Reserve Account shall be invested by the Collateral Agent in such Eligible Investments specified in writing (or by oral instructions confirmed promptly in writing) by the Issuer that are consistent with the Issuer's judgment as to the need to make withdrawals therefrom pursuant to Section 5.10 or 5.11, as the case may be. Amounts earned on funds in the Payment Account shall be deposited in the Payment Account, amounts earned on funds in the Expense Reserve shall be deposited in the Expense Reserve, amounts earned on funds in the Collection Account shall be deposited in the Collection Account, amounts earned on funds in the Liquidity Account shall be deposited in the Liquidity Account, amounts earned on funds in the Prefunding Account shall be deposited in the Prefunding Account and amounts earned on funds in the Indebtedness Reserve Account shall be deposited in the Indebtedness Reserve Account. 5.7 Withdrawals and Deposits on Note Payment Dates. (a) Prior to 1:00 p.m., New York City time, on each Note Payment Date (after giving effect to any deposits on such date from the Liquidity Account to the Collection Account and from the Collection Account to the Liquidity Account), the Collateral Agent shall deposit the amounts indicated below in the Payment Account in the order listed below: (i) unless a Line of Credit Acceleration has occurred or an Acceleration Event has occurred and is continuing on such Note Payment Date, from a borrowing under the Line of Credit Agreement or from the Liquidity Account, any amounts available under the Line of Credit Agreement or on deposit in the Liquidity Account, up to an amount equal to the excess, if any, of (A) the amount required to pay accrued and unpaid interest (excluding interest on premiums) on the Timber Notes and, if so provided in connection with the issuance of any Additional Timber Notes, such Additional Timber Notes on such Note Payment Date over (B) the amount available in the Payment Account to be paid to the Holders of Timber Notes and such Additional Timber Notes pursuant to Section 5.7(b)(i) below (after giving effect to any transfer on such date pursuant to clauses (v), (vi) or (viii) of Section 5.3(c) or Section 5.3(d)); and (ii) from any funds available to the Issuer, any amounts that the Issuer, at its option, elects to deposit therein to pay or prepay interest or principal on the Timber Notes or any Premium or interest on Premium then due and payable or becoming due and payable on such Note Payment Date. (b) On each Note Payment Date (after giving effect to the deposits to the Payment Account on such date pursuant to Section 5.7(a)), the Collateral Agent shall withdraw from the Payment Account all amounts then on deposit in the Payment Account and apply such funds in the following order of priority: (i) from amounts on deposit in the Payment Account (exclusive of amounts borrowed under the Line of Credit Agreement or withdrawn from the Liquidity Account pursuant to Section 5.7(a)(i) above for the payment of interest on such Note Payment Date), to the Holders of the Timber Notes and any Additional Timber Notes, an amount equal to all interest accrued and unpaid on the Timber Notes and any Additional Timber Notes as of such date, computed on the basis of a 360-day year of twelve 30-day months (including interest on past due principal and interest, but not including interest on premium) and, if there has been a Termination Advance under a Line of Credit Agreement that has not been replaced in accordance with the terms of Section 11.4, to the Liquidity Providers, an amount equal to all accrued and unpaid interest (other than any Supplemental Liquidity Provider Interest) on all outstanding Advances under the Line of Credit Agreement, as of such date, provided, that, if the amount on deposit in the Payment Account (exclusive of amounts borrowed under the Line of Credit Agreement or withdrawn from the Liquidity Account pursuant to Section 5.7(a)(i) for the payment of interest on such Note Payment Date) is insufficient to make such payment in full on all Classes of Timber Notes and any Additional Timber Notes and to the Liquidity Providers, such payments shall be made on each Class of Timber Notes and any Additional Timber Notes and to the Liquidity Providers pro rata in proportion to the interest (other than any Supplemental Liquidity Provider Interest) due on each such Class and to the Liquidity Providers; (ii) to the Holders of the Timber Notes and, if so provided in connection with the issuance of any Additional Timber Notes, such Additional Timber Notes, the amount borrowed under the Line of Credit Agreement or withdrawn from the Liquidity Account for the payment of interest on such Note Payment Date in payment of accrued and unpaid interest as of such date (including interest on past due principal and interest, but not including interest on premium) on the Timber Notes and such Additional Timber Notes, to the extent that the payments to such Holders pursuant to the immediately preceding clause (i) are insufficient to make payment in full of such accrued and unpaid interest, provided that, if the amount on deposit in the Payment Account is insufficient to make such payments in full on all Classes of Timber Notes and Additional Timber Notes, such payments shall be made on each Class of Timber Notes and Additional Timber Notes pro rata in proportion to the amounts payable to each such Class pursuant to this clause (ii); (iii) if there has been a Termination Advance under a Line of Credit Agreement that has not been replaced in accordance with the terms of Section 11.4, to the Liquidity Account, to the extent, if any, necessary to cause the amount on deposit in the Liquidity Account to equal the Required Liquidity Amount; (iv) to the Holders of each Class of Timber Notes, an amount equal to any Minimum Principal Amortization Amount due on such Class of Timber Notes as of such date, provided that, if the amount on deposit in the Payment Account is insufficient to make such payments in full on all Classes of Timber Notes, such payments shall be made, first, on the Class A-1 Timber Notes, second, on the Class A-2 Timber Notes, and, third, on the Class A-3 Timber Notes; (v) if there has been a Termination Advance under a Line of Credit Agreement that has not been replaced in accordance with the terms of Section 11.4, to the Liquidity Providers, an amount equal to the Line of Credit Amortization Amount, if any, due as of such Note Payment Date; (vi) to the Holders of Timber Notes, an amount equal to any Depletion Amortization Amount due as of such Note Payment Date; (vii) to the Holders of each Class of Timber Notes, an amount equal to any interest on Premium then due and owing on such Class of Timber Notes, provided that, if the amount on deposit in the Payment Account is insufficient to make such payment in full on all Classes of Timber Notes, such payment shall be made on each Class of Timber Notes pro rata in proportion to the interest on Premium due on each such Class; (viii) to the Holders of each Class of Timber Notes, an amount equal to any Premium then due and owing on such Class of Timber Notes, provided that, if the amount on deposit in the Payment Account is insufficient to make such payments in full on all Classes of Timber Notes, such payments shall be made pro rata in proportion to the Premium then due on each such Class; (ix) (A) if a Trapping Event or a Cash Retention Event shall have occurred and be continuing, or (B) to the extent directed by the Issuer, or (C) to the extent of amounts otherwise deposited to the Payment Account pursuant to Section 5.8 or Section 5.10, to the Holders of the Timber Notes, to prepay principal of, and any Prepayment Premium on, the Timber Notes; and (x) unless a Trapping Event or a Cash Retention Event shall have occurred and be continuing, to the Issuer, free and clear of the Lien of the Deed of Trust. (c) Principal payments payable pursuant to clauses (vi) and (ix) of Section 5.7(b) shall be paid, first, to the holders of the Class A-1 Timber Notes until the Class A-1 Timber Notes have been paid in full, second, to the holders of the Class A-2 Timber Notes until the Class A-2 Timber Notes have been paid in full and, third, to the holders of the Class A-3 Timber Notes. (d) If, on any Note Payment Date, there are insufficient funds in the Payment Account to pay to the Holders of any Class of Timber Notes all amounts pursuant to clauses (i), (ii), (iv), (vi), (vii), (viii) or (ix) of Section 5.7(b), any partial payment on such Class with respect to any such clause shall be made to the Holders of such Class pro rata in proportion to the unpaid principal amount of the outstanding Timber Notes of such Class (or, in the case of Non-Registration Premiums, pro rata in proportion to the unpaid principal amount of the outstanding Timber Notes of such Class with respect to which a Registration Default is continuing) held by such Holders on such date. Notwithstanding the foregoing provisions of this Section 5.7, in the event that a Line of Credit Acceleration has occurred or an Acceleration Event shall have occurred and be continuing, all interest, principal and other amounts (other than Additional Liquidity Provider Fees and Supplemental Liquidity Provider Interest) then owing by the Issuer under the Line of Credit Agreement shall be paid in full from the Payment Account on each Note Payment Date before any other amounts are paid from the Payment Account on such Note Payment Date. Payments pursuant to the preceding sentence shall be applied, first, to Liquidity Providers' Expenses, second, to interest (other than any Supplemental Liquidity Provider Interest) and, third, to principal. (e) Not less than two Business Days prior to each Note Payment Date, the Issuer shall prepare and submit to the Trustee and the Collateral Agent a certificate substantially in the form of Exhibit E hereto (a "Note Payment Trustee Certificate"). Each Note Payment Trustee Certificate shall set forth the following amounts and other information, each determined as of the Note Payment Date to which such Certificate relates: (i) the amount of all accrued and unpaid interest (excluding interest on Premiums) on the Timber Notes on such Note Payment Date; (ii) the amount, if any, of interest payable to the Liquidity Providers from the Payment Account on such Note Payment Date; (iii) the estimated balance, if any, in the Liquidity Account on a pro forma basis as of such Note Payment Date (after giving effect to any deposits on such date from the Liquidity Account to the Collection Account and from the Collection Account to the Liquidity Account, but prior to giving effect to any deposits on such date from the Liquidity Account to the Payment Account); (iv) the estimated amount, if any, available under the Line of Credit Agreement on such Note Payment Date; (v) the respective amounts, if any, to be deposited on such Note Payment Date in the Payment Account pursuant to Sections 5.3(c), 5.3(d) and 5.7(a), in each case identifying the Account or other source from which each deposit is to be made and the amount of each deposit from each such Account or other source, together with the aggregate amount expected to be on deposit in the Payment Account on such Note Payment Date from such Accounts and other sources; and (vi) the respective amounts required to be distributed from the Payment Account pursuant to clauses (i) through (x) of Section 5.7(b). Each Note Payment Trustee Certificate shall contain calculations in reasonable detail of the amounts required to be set forth therein and shall be signed by a Responsible Officer of the Issuer who shall certify as true and correct all information therein set forth. The Trustee may rely on such Note Payment Trustee Certificate without inquiry. (f) The Issuer shall clearly indicate on each page of the Note Payment Trustee Certificate that such material is to be maintained as confidential. The Trustee and the Collateral Agent shall treat any Note Payment Trustee Certificate designated as confidential material as confidential, and any Note Payment Trustee Certificate so designated shall not be available to Noteholders. Notwithstanding the foregoing, nothing in this Section 5.3(f) shall prohibit the Trustee and the Collateral Agent from disclosing such Note Payment Trustee Certificate to bank regulatory authorities (or otherwise as required by law) or to auditors, attorneys or other agents of the Trustee within the scope of their engagement. 5.8 Title Insurance Policy Proceeds. All proceeds of any Title Insurance Policy received by the Trustee or the Collateral Agent shall be held in Trust by the Collateral Agent subject to the Lien of the Deed of Trust for the benefit of the Secured Parties and shall be invested in Eligible Investments specified in writing (or by oral instructions confirmed promptly thereafter in writing) by the Issuer until distributed as provided herein. All such funds shall be held in a segregated trust account to be established at the Corporate Trust Office of the Securities Intermediary. Amounts on deposit in such account shall be under the exclusive dominion and control of the Collateral Agent and shall be subject to withdrawal only as provided in the following sentence. On the Note Payment Date next succeeding the receipt of any such proceeds, after deducting any expenses of the Trustee and the Collateral Agent therefrom, the Collateral Agent shall deposit such proceeds into the Payment Account and apply all such proceeds as provided in Section 5.7. 5.9 Release of Liquidity Account. On any Note Payment Date on which the amounts on deposit in the Liquidity Account and the Payment Account (after giving effect to transfers pursuant to Section 5.3(c)) equal or exceed all outstanding principal of, premium, if any, and interest on the Timber Notes and any Additional Timber Notes (including all Prepayment Premiums which would be payable on the Timber Notes and any Additional Timber Notes assuming the Timber Notes and any Additional Timber Notes were paid in full on such date) plus all outstanding principal and interest then owing to the Liquidity Providers, the Issuer may instruct the Collateral Agent to release from the Liquidity Account and transfer to the Payment Account for distribution pursuant to Section 5.7(b) any amounts on deposit in the Liquidity Account; provided that such release results in all outstanding principal of, Premium, if any, and interest on the Timber Notes and any Additional Timber Notes plus all outstanding principal and interest then owing to the Liquidity Providers being paid on such Note Payment Date. 5.10 Releases from Prefunding Account. The Issuer shall have the right, at any time and from time to time, to obtain the release of funds from the Prefunding Account upon the addition of an Additional Timber Property or Properties (other than the Elk River Timberlands) to the Mortgaged Property and compliance with the requirements and conditions of this Section 5.10, and the Collateral Agent shall release the same to the Issuer upon receipt by the Collateral Agent of a notice (the "Prefunding Release Notice") requesting such release, stating the amount of funds to be released and describing the Additional Timber Property or Properties to be added to the Mortgaged Property. The Prefunding Release Notice (upon which the Collateral Agent may rely without inquiry) shall be accompanied by the following items (unless such item is by its terms required to be provided simultaneously with such release): (a) If the amount to be released exceeds $2,500,000, a Board Resolution requesting such release and authorizing an application to the Collateral Agent therefor. (b) An Officer's Certificate, dated not more than 30 days prior to the date of the application for such release stating substantially as follows: (i) that, in the opinion of the signer, after giving effect to the release and the addition of the Additional Timber Property or Properties to the Mortgaged Property, the security afforded by the Indenture and the Deed of Trust will not be impaired by such release and addition in contravention of the provisions of the Indenture or the Deed of Trust; (ii) that no Event of Default has occurred and is continuing; (iii) the purchase price of the Additional Timber Property or Properties to be subjected to the Lien of the Deed of Trust; (iv) that the amount of funds to be released from the Prefunding Account does not exceed the lesser of (A) the purchase price of the Additional Timber Property or Properties to be subjected to the Lien of the Deed of Trust or (B) the then remaining amount in the Prefunding Account; (v) that all conditions precedent and other requirements provided for in the Indenture and the Deed of Trust relating to the release have been complied with (or, with respect to conditions that cannot be satisfied until the time of such release that such conditions will be satisfied at the time of such release, and specifying the same); and (vi) that, in the opinion of the signer, the acquisition of the Additional Timber Property or Properties does not materially adversely affect the ability of the Issuer to pay interest and Minimum Principal Amortization on the Timber Notes. (c) Simultaneously with such release, all actions necessary to grant to the Collateral Agent a first priority perfected Lien on the Additional Timber Property or Properties (subject only to Permitted Encumbrances) shall have been taken. (d) Simultaneously with such release, an Opinion of Counsel, substantially to the effect that all conditions precedent and other requirements in the Indenture and the Deed of Trust relating to the release of such funds from the Prefunding Account have been complied with. (e) Simultaneously with such release, evidence that a title insurance company shall have committed to insure, by endorsement to the existing mortgagee's title insurance policy relating the Company Owned Timberland and the Company Timber Rights or by issuance of a new mortgagee's title insurance policy in an amount equal to the lesser of (i) the fair value of the Additional Timber Property or Properties or (ii) the then outstanding principal balance of the Timber Notes and any Additional Timber Notes plus the amount of the then existing Commitments under the Line of Credit Agreement, that the Lien of the Deed of Trust is a first priority perfected lien upon the Additional Timber Property or Properties, subject only to Permitted Encumbrances, and that the Additional Timber Property or Properties are in compliance with the California Subdivision Map Act The Issuer may, in any Trustee Note Payment Certificate in respect of any Note Payment Date, direct that all or any portion of the funds in the Prefunding Account on such Note Payment Date be transferred to the Payment Account on such Note Payment Date and used on such Note Payment Date to prepay principal of the Timber Notes as contemplated by Section 5.7(b)(ix) but not for any other purpose. To the extent that the amount on deposit in the Prefunding Account on any Monthly Deposit Date exceeds $25,000,000 less the sum of the amounts, if any, theretofore released to the Issuer or transferred to the Payment Account from the Prefunding Account pursuant to the foregoing provisions of this Section 5.10, the Issuer may , in the Monthly Trustee Certificate in respect of such Monthly Deposit Date, direct that an amount up to the amount of such excess be transferred from the Prefunding Account to the Collection Account on such Monthly Deposit Date and be included in the Collection Account Disbursement Funds for such Monthly Deposit Date. Any releases of funds from the Prefunding Account made in compliance with this Section 5.10 shall be deemed not to impair the Lien of the Deed of Trust. 5.11 Releases from Indebtedness Reserve Account. The Issuer may cause the Collateral Agent to withdraw from the Indebtedness Reserve Account (to the extent of amounts then on deposit in the Indebtedness Reserve Account), at any time or from time to time (so long as the Timber Notes shall not have been accelerated pursuant to Section 7.2(a)), amounts to be used to pay (or to reimburse the Issuer for amounts paid for) interest and principal on the Indebtedness referred to in clause (u) of Section 4.9 (the "Indebtedness Reserve Debt") if, after giving effect thereto and to any principal then being paid on the Indebtedness Reserve Debt, the amount in the Indebtedness Reserve Account would not be less than the outstanding principal amount of the Indebtedness Reserve Debt. Notwithstanding the foregoing, no releases from the Indebtedness Reserve Account may be effected pursuant to this Section 5.11 at any time when (x) the Timber Notes have been accelerated pursuant to Section 7.2(b), (y) such acceleration has not been rescinded pursuant to Section 7.2(c) and (z) there shall be in effect a written notice delivered by the Trustee to the Issuer, or by the Holders of a majority of outstanding principal amount of the Timber Notes and any Additional Timber Notes to the Issuer and the Trustee, stating that releases from the Indebtedness Reserve Account are prohibited. ARTICLE 6 SALE OF COMPANY OWNED TIMBERLANDS OR COMPANY TIMBER RIGHTS; CERTAIN TIMBER SALES; SUBSTITUTIONS 6.1 Release of Company Owned Timberlands or Company Timber Rights. The Issuer shall have the right, at any time and from time to time, to (i) sell or otherwise dispose of any of the Company Owned Timberlands or Company Timber Rights or (ii) enter into any Lump Sum Sale, only upon compliance with the requirements and conditions of this Section 6.1, and the Trustee shall instruct the Collateral Agent to (A) in the case of clause (i), release the relevant Company Owned Timberlands or Company Timber Rights from the Lien of the Deed of Trust or (B) in the case of clause (ii), release the relevant Company Timber from the Lien of the Deed of Trust or grant the proposed purchaser harvesting rights to the relevant Company Timber prior to the Lien of the Deed of Trust, upon receipt by the Trustee and the Collateral Agent of a Release Notice (as hereinafter defined) requesting such release and describing the property to be so released, which Release Notice (upon which the Trustee and the Collateral Agent may rely without inquiry) shall be accompanied by the following items (unless such item is by its terms required to be provided simultaneously with such release): (a) If the fair value of the Company Owned Timberlands, Company Timber Rights or Company Timber, as the case may be, to be released exceeds $2,500,000, a Board Resolution requesting such release and authorizing an application to the Trustee and Collateral Agent therefor. (b) An Officer's Certificate, dated not more than 30 days prior to the date of the application for such release, stating substantially as follows: (i) that, in the opinion of the signer, the security afforded by the Deed of Trust will not be impaired by such release in contravention of the provisions of this Indenture or the Deed of Trust; (ii) that the Issuer will dispose of the Company Owned Timberlands, Company Timber Rights or Company Timber, as the case may be, so to be released, for a consideration representing, in the opinion of the signer, its fair value, and that either (A) in the case of a Lump Sum Sale, that such consideration consists solely of cash, or (B) in the case of a sale of Company Owned Timberlands or Company Timber Rights other than as described in clause (C), that such consideration consists solely of cash or (C) in the case of a sale of Company Owned Timberlands or Company Timber Rights, if such consideration does not consist solely of cash, that (x) the non-cash portion of such consideration consists of one or more promissory note(s) or other instruments representing the deferred portion of such sales price which do not, in the aggregate, exceed the Maximum Non-Cash Consideration Amount and (y) attached to such Release Notice is a schedule which sets forth the basis for computation of the Maximum Non-Cash Consideration Amount which schedule, to the best knowledge of such signer, represents a true, complete and accurate computation of such amount and (z) the non-cash portion of such consideration shall be subjected to the Lien of the Deed of Trust concurrently with any such release; (iii) that (A) no Event of Default has occurred and is continuing and (B) in the case of a sale of Company Owned Timberlands or Company Timber Rights, if such consideration does not consist solely of cash, that no event or condition exists which, with the giving of notice or passage of time, or both, would constitute a Trapping Event as of the next succeeding Monthly Deposit Date; (iv) the fair value, in the opinion of the signer, of the Company Owned Timberlands, Company Timber Rights or Company Timber, as the case may be, to be released at the date of such application for release and, in the case of a sale of Company Owned Timberlands or Company Timber Rights, if the consideration does not consist solely of cash, the fair value of the non-cash portion of such consideration; (v) if such release relates to Company Owned Timberlands, that the remaining Company Owned Timberlands have sufficient access to other portions of the Company Owned Timberlands, public or private roads and other transportation structures for the continued use of such remaining Company Owned Timberlands in substantially the manner carried on by the Issuer prior to such release; (vi) if the fair value of the property to be released is in excess of the greater of (A) 5% of the then-remaining aggregate principal balance of all outstanding Timber Notes and any outstanding Additional Timber Notes or (B) $45 million multiplied by the Lumber PPI Inflation Factor applicable on the date of such Officer's Certificate, (I) that Rating Agency Confirmation has been obtained or (II) that (x) such sale is made at a price no less than the Collateral Release Price and (y) the amount on deposit in the Payment Account on the next succeeding Note Payment Date (or, if the date of such release is a Note Payment Date, on such Note Payment Date) will, in the opinion of the signer (based on such assumptions as the signer considers to be reasonable in the circumstances), be sufficient to pay all Premiums expected to be payable on such Note Payment Date; and (vii) that all conditions precedent and other requirements provided for in the Indenture and the Deed of Trust relating to the release of the Company Owned Timberlands, Company Timber Rights or Company Timber, as the case may be, in question have been complied with (or, with respect to conditions that cannot be satisfied until the time of such release, that such conditions will be satisfied at the time of such release, and specifying the same). (c) If (i) the fair value of the Company Owned Timberlands, Company Timber Rights or Company Timber, as the case may be, to be released exceeds $25,000 and 1% of the aggregate principal balance of the Timber Notes and any Additional Timber Notes or (ii) the fair value of the Company Owned Timberlands, Company Timber Rights or Company Timber, as the case may be, to be released, together with the fair value of all Company Owned Timberlands, Company Timber Rights and Company Timber theretofore released in such calendar year, exceeds 10% of the aggregate principal balance of the Timber Notes and any Additional Timber Notes, a certificate of an Independent Appraiser, stating: (1) the fair value, in the opinion of the signer, of the Company Owned Timberlands, Company Timber Rights or Company Timber, as the case may be, to be released at the date of such application for release and, in the case of the sale of Company Owned Timberlands or Company Timber Rights, if such consideration does not consist solely of cash, the fair value of the non-cash portion of such consideration; and (2) that, in the opinion of the signer, the security afforded by the Deed of Trust will not be impaired by such release in contravention of the terms of the Deed of Trust or the Indenture. (d) Simultaneously with such release, all cash proceeds from the Company Owned Timberlands, Company Timber Rights or Company Timber, as the case may be, shall have been deposited into the Collection Account and, in the case of the sale of Company Owned Timberlands or Company Timber Rights, if such consideration does not consist solely of cash, (i) the non-cash portion of such consideration shall consist of one or more promissory note(s) or other instruments representing the deferred portion of such sales price which do not, in the aggregate, exceed the Maximum Non-Cash Consideration Amount and (ii) all action necessary to grant to the Trustee a first priority perfected security interest in the non-cash portion of such consideration shall have been taken. (e) Simultaneously with such release, an Opinion of Counsel, substantially to the effect that all conditions precedent and other requirements herein and under the Deed of Trust relating to the release of such Company Owned Timberlands, Company Timber Rights or Company Timber, as the case may be, have been complied with. (f) If such release relates to Company Owned Timberlands or Company Timber Rights, and the Company Owned Timberlands or Company Timber Rights to be released are less than all of the Company Owned Timberlands and Company Timber Rights, simultaneously with such release evidence that a title insurance company shall have committed to issue an endorsement to the Title Insurance Policy relating to the remaining Company Owned Timberlands and Company Timber Rights confirming that after such release such mortgagee's Title Insurance Policy insures against any loss that may be sustained by the Trustee or the Collateral Agent by reason of any loss of priority of the Lien of the Deed of Trust on the remaining Company Owned Timberlands and Company Timber Rights occasioned by the release of the Company Owned Timberlands or Company Timber Rights being released. (g) If required by Section 6.1(b)(vi), a copy of the Rating Agency Confirmation. In connection with any such release, the Issuer shall execute, deliver and record or file and obtain such instruments as the Collateral Agent and the Trustee may reasonably require. The Issuer shall exercise its rights under this Section by delivery to the Collateral Agent and the Trustee of a notice (each, a "Release Notice"), which shall refer to this Section, describe with particularity the items of property proposed to be covered by the release and be accompanied by a form of the instruments proposed to give effect to the release in form for execution by the Collateral Agent and/or the Deed of Trust Trustee (the "Release Documents"). Upon compliance with this Section 6.1, the Issuer shall direct the Collateral Agent and/or the Deed of Trust Trustee to execute, acknowledge (if applicable) and deliver to the Issuer a counterpart of the Release Documents within two Business Days after receipt by the Collateral Agent and the Trustee of a Release Notice and the satisfaction of the requirements of this Section. Any promissory notes or instruments representing the deferred portion of the sales price of Company Owned Timberlands or Company Timber Rights sold pursuant to this Section 6.1 (the "Section 6.1 Notes") shall be registered in the name of, or be payable to the order of, or be assigned to or endorsed to the order of the Collateral Agent, as collateral agent for the benefit of the Secured Parties, and shall be held by the Collateral Agent subject to the Lien of the Deed of Trust, until the next succeeding Monthly Deposit Date. On such Monthly Deposit Date, the Section 6.1 Notes shall be disposed of by the Collateral Agent in the manner provided in Section 5.3(d)(iv). All payments of principal of, interest on, or other amounts payable with respect to any Section 6.1 Notes received by the Collateral Agent shall be deposited into the Collection Account to be included in Collection Account Disbursement Funds to be withdrawn from the Collection Account as part of the Collection Account Disbursement on the next succeeding Monthly Deposit Date, and all proceeds of the sale of the Section 6.1 Notes shall be applied as provided in Section 5.3(d)(iv). The Collateral Agent is authorized to take such actions as are necessary and appropriate to transfer the Section 6.1 Notes as provided in Section 5.3(d)(iv). Any releases of Company Owned Timberlands, Company Timber Rights or Company Timber, as the case may be, made in compliance with the provisions of this Section 6.1 shall be deemed not to impair the Lien of the Deed of Trust. If any of the non-cash portion of any consideration received for the release of Company Owned Timberlands or Company Timber Rights consists of real property, then such release shall be governed by Section 6.4 and not this Section 6.1. 6.2 Sale of Company Timber. Nothing in Section 6.1 or in the Deed of Trust shall be deemed to prohibit the Issuer from selling Company Timber pursuant to Pay-as-You-Harvest Sales in the manner and to the extent contemplated by this Indenture and the Deed of Trust (including, without limitation, pursuant to the New Master Purchase Agreement), which sales may be conducted without any release or consent by the Collateral Agent or Trustee. 6.3 Sale of Pacific Lumber Timber Rights Property. Nothing in this Indenture or the Deed of Trust shall be deemed to prohibit the Issuer from selling or otherwise disposing of any Pacific Lumber Timber Rights Property, and the Trustee shall instruct the Collateral Agent to release the relevant Pacific Lumber Timber Rights Property from the Lien of the Deed of Trust upon receipt by the Trustee and the Collateral Agent of a Pacific Lumber Timber Rights Property Release Notice (as hereinafter defined) requesting such release and describing the property to be so released, which Pacific Lumber Timber Rights Property Release Notice (upon which the Trustee and the Collateral Agent may rely without inquiry) shall be accompanied by the following items (unless such item is by its terms required to be provided simultaneously with such release): (i) An Officer's Certificate, dated not more than 30 days prior to the date of the application for such release, stating substantially as follows: (1) that the remaining Company Owned Timberlands have sufficient access to other portions of the Company Owned Timberlands, public or private roads and other transportation structures for the continued use of such remaining Company Owned Timberlands in substantially the manner carried on by the Issuer prior to such release; (2) that the Company Owned Timberlands to be released consist solely of Pacific Lumber Timber Rights Property (or, if such Company Owned Timberlands consist partially of Pacific Lumber Timber Rights Property, that the conditions set forth in Section 6.1 or 6.4 with respect to the portion of such Company Owned Timberlands which is not Pacific Lumber Timber Rights Property have been satisfied) (or, with respect to conditions that cannot be satisfied until the time of such release, that such conditions will be satisfied at the time of such release, and specifying the same); and (3) that all conditions precedent and other requirements provided for in the Indenture and the Deed of Trust relating to the release of such Pacific Lumber Timber Rights Property have been complied with (or, with respect to conditions that cannot be satisfied until the time of such release, that such conditions will be satisfied at the time of such release, and specifying the same). (ii) Simultaneously with such release, evidence that a title insurance company shall have committed to issue an endorsement to the Title Insurance Policy relating to the remaining Company Owned Timberlands and Company Timber Rights confirming that after such release such Title Insurance Policy insures against any loss that may be sustained by the Trustee or the Collateral Agent by reason of any loss of priority of the Lien of the Deed of Trust on any of the remaining Company Owned Timberlands and Company Timber Rights occasioned by the release of the Company Owned Timberlands being released. The Issuer shall exercise its rights under this Section by delivery to the Collateral Agent and the Trustee of a notice (each a "Pacific Lumber Timber Rights Property Release Notice"), which shall refer to this Section, describe with particularity the items of property proposed to be covered by the release and be accompanied by a form of the instruments proposed to give effect to the release in form for execution by the Collateral Agent and/or the Deed of Trust Trustee (the "Pacific Lumber Timber Rights Property Release Documents"). Upon compliance with this Section 6.3, the Issuer shall direct the Collateral Agent and/or the Deed of Trust Trustee to execute, acknowledge (if applicable) and deliver to the Issuer a counterpart of the Pacific Lumber Timber Rights Property Release Documents within two Business Days after receipt by the Collateral Agent and the Trustee of a Pacific Lumber Timber Rights Property Release Notice and the satisfaction of the requirements of this Section. Any releases of Pacific Lumber Timber Rights Property made in compliance with the provisions of this Section 6.3 shall be deemed not to impair the Lien of the Deed of Trust. The proceeds of a sale or other disposition of Pacific Lumber Timber Rights Property conducted in accordance with the provisions of this Section 6.3 shall be payable to the Issuer or as the Issuer may direct, free and clear of the Lien of the Deed of Trust. 6.4 Release of Company Owned Timberlands or Company Timber Rights Upon Substitution of Property. The Issuer shall have the right, at any time and from time to time, to obtain the release of Company Owned Timberlands (or timber rights thereon) or Company Timber Rights from the Lien of the Deed of Trust upon the addition of Substitute Timber Property and compliance with the requirements and conditions of this Section 6.4, and the Trustee shall instruct the Collateral Agent to release the same from the Lien of the Deed of Trust upon receipt by the Trustee and the Collateral Agent of a Release and Substitution Notice (as hereinafter defined) requesting such release and describing the property to be released and the Substitute Timber Property, which Release and Substitution Notice (upon which the Trustee and the Collateral Agent may rely without inquiry) shall be accompanied by the following items (unless such item is by its terms required to be provided simultaneously with such release): (a) If the fair value of the Company Owned Timberlands (or timber rights thereon) or Company Timber Rights, as the case may be, to be released exceeds $2,500,000, a Board Resolution requesting such release and substitution and authorizing an application to the Trustee and the Collateral Agent therefor. (b) An Officer's Certificate, dated not more than 30 days prior to the date of the application for such release and substitution, stating substantially as follows: (i) that, in the opinion of the signer, after giving effect to the release and substitution, the security afforded by the Deed of Trust will not be impaired by such release and substitution in contravention of the provisions of this Indenture or the Deed of Trust; (ii) that no Event of Default has occurred and is continuing; (iii) the fair value, in the opinion of the signer, of the Company Owned Timberlands (or timber rights thereon) or Company Timber Rights to be released at the date of such application for release; (iv) the fair value, in the opinion of the signer, of the Substitute Timber Property to be subjected to the Lien of the Deed of Trust; (v) that the consideration to be received by the Issuer consists solely of Substitute Timber Property, or a combination of cash and Substitute Timber Property; (vi) that the remaining Company Owned Timberlands (after giving effect to the addition of the Substitute Timber Property) have sufficient access to other Company Owned Timberlands, public or private roads and other transportation structures for the continued use of such remaining Company Owned Timberlands in substantially the manner carried on by the Issuer prior to such release; (vii) if the fair value of the Company Owned Timberlands (or timber rights thereon) or Company Timber Rights to be released is in excess of the greater of (A) 5% of the then-remaining aggregate principal balance of all outstanding Timber Notes and any outstanding Additional Timber Notes or (B) $45 million multiplied by the Lumber PPI Inflation Factor applicable on the date of such Officer's Certificate, that Rating Agency Confirmation has been obtained; (viii) that the signer knows of no reason why a Timber Harvesting Plan with respect to the Substitute Timber Property should not be available on terms not materially more onerous than would have been the case with respect to the released property; (ix) that all conditions precedent and other requirements provided for in this Indenture and the Deed of Trust relating to the release of the Company Owned Timberlands (or timber rights thereon) or Company Timber Rights and substitution of the Substitute Timber Property in question have been complied with (or, with respect to conditions that cannot be satisfied until the time of such release and substitution, that such conditions will be satisfied at the time of such release and substitution, and specifying the same); and (x) in the event that any of the Substitute Timber Property consists of timber rights, that such timber rights consist of the ownership of, and (subject to compliance with applicable law) the right, in perpetuity or until at least December 31, 2048, to harvest, all trees and timber (including standing timber) then located or thereafter growing in the soil of the timberlands which are subject to such timber rights. (c) If (i) the fair value of the Company Owned Timberlands (or timber rights thereon) or Company Timber Rights to be released exceeds $25,000 and 1% of the aggregate principal balance of the Timber Notes and any Additional Timber Notes or (ii) the fair value of the Company Owned Timberlands (or timber rights thereon) or Company Timber Rights to be released, together with the fair value of all Company Owned Timberlands (or timber rights thereon), Company Timber Rights and Company Timber theretofore released in such calendar year, exceeds 10% of the aggregate principal balance of the Timber Notes and any Additional Timber Notes, a certificate of an Independent Appraiser, stating: (1) the fair value, in the opinion of the signer, of (x) the Company Owned Timberlands (or timber rights thereon) or Company Timber Rights to be released and (y) the Substitute Timber Property to be substituted, in each case at the date of such application for release; and (2) that, in the opinion of the signer, the security afforded by the Deed of Trust will not be impaired by such release and substitution in contravention of the terms of the Deed of Trust or this Indenture. (d) The then fair value of the Substitute Timber Property, together with any cash consideration received, shall be at least equal to the then fair value of the Company Owned Timberlands (or timber rights thereon) or Company Timber Rights to be released as evidenced by the certificates delivered pursuant to clauses (b) and/or (c) above. (e) Simultaneously with any release and substitution, all actions necessary to grant to the Collateral Agent a first priority perfected Lien on the Substitute Timber Property (subject only to Permitted Encumbrances) shall have been taken, and if any cash consideration is received, all such cash shall have been deposited into the Collection Account. (f) Simultaneously with such release an Opinion of Counsel, substantially to the effect that all conditions precedent and other requirements herein and under the Deed of Trust relating to the release of, and substitution for, such Company Owned Timberlands (or timber rights thereon) or Company Timber Rights have been complied with. (g) Simultaneously with such release, evidence that a title company shall have committed to issue an endorsement to the Title Insurance Policy relating to the remaining Company Owned Timberlands and Company Timber Rights confirming that after such release such Title Insurance Policy insures against any loss that may be sustained by the Trustee or the Collateral Agent by reason of any loss of priority of the Lien of the Deed of Trust on the remaining Company Owned Timberlands or Company Timber Rights occasioned by the release of the Company Owned Timberlands or Company Timber Rights being released and further insuring, by endorsement to the existing Title Insurance Policy or by issuance of a new Title Insurance Policy in an amount equal to the lesser of (i) the fair value of the Substitute Timber Property or (ii) the then outstanding principal balance of the Timber Notes and any Additional Timber Notes, plus the amount of the then existing Commitments under the Line of Credit Agreement, that the Lien of the Deed of Trust is a first priority perfected Lien upon the Substitute Timber Property, subject only to Permitted Encumbrances, and that the Substitute Timber Property is in compliance with the California Subdivision Map Act. (h) If required by Section 6.4(b)(vii), a copy of the Rating Agency Confirmation. In connection with any such release, the Issuer shall execute, deliver and record or file and obtain such instruments as the Collateral Agent and the Trustee may reasonably require including, without limitation, an amendment to the Deed of Trust subjecting the Substitute Timber Property to the Lien thereof. The Issuer shall exercise its rights under this Section 6.4 by delivery to the Collateral Agent and the Trustee of a notice (each, a "Release and Substitution Notice"), which shall refer to this Section, describe with particularity the items of property proposed to be covered by the release and proposed to be substituted for such released property and be accompanied by a form of the instruments proposed to give effect to the release and substitution in form for execution by the Collateral Agent and/or the Deed of Trust Trustee (the "Release and Substitution Documents"). Upon compliance with this Section 6.4, the Issuer shall direct the Collateral Agent and/or the Deed of Trust Trustee to execute, acknowledge (if applicable) and deliver to the Issuer a counterpart of the Release and Substitution Documents within two Business Days after receipt by the Collateral Agent and the Trustee of a Release and Substitution Notice and the satisfaction of the requirements of this Section. For purposes of this Section 6.4, timber rights on Company Owned Timberlands means the ownership of, and (subject to compliance with applicable law) the right in perpetuity (or for a period of time) to harvest, all or a portion of the trees and timber, including standing timber and crops, then located or thereafter growing in the soil of the Company Owned Timberlands which are subject to such timber rights. Any releases and substitutions of Company Owned Timberlands (or timber rights thereon) or Company Timber Rights made in compliance with the provisions of this Section 6.4 shall be deemed not to impair the Lien of the Deed of Trust. In addition to the foregoing requirements, no release and substitution of Company Owned Timberlands (or timber rights thereon) or Company Timber Rights shall be permitted pursuant to this Section 6.4 unless: (i) the aggregate fair value of all Company Owned Timberlands (or timber rights thereon) and Company Timber Rights released or to be released in accordance with this Section 6.4 at any time during the term of the Timber Notes would not exceed $90,000,000 multiplied by the Lumber PPI Inflation Factor then applicable (unless the Issuer shall have obtained Rating Agency Confirmation); (ii) the types of timber contained in the Substitute Timber Property are of the same types as contained on the Company Owned Timberlands (or timber rights thereon) or Company Timber Rights to be released or are otherwise included on the Structuring Schedule; and (iii) either (A) the number of Mbfe of timber on the Substitute Timber Property being acquired (as indicated in an Officer's Certificate) is at least equal to the number of Mbfe of Company Timber on the Company Owned Timberlands (or in respect of the timber rights thereon), or subject to the Company Timber Rights, being released (as indicated in an Officer's Certificate) (or, if Company Owned Timberlands (or timber rights thereon) or Company Timber Rights are being released in exchange for Substitute Timber Property and cash, the number of Mbfe of timber on the Substitute Timber Property being acquired (as indicated in an Officer's Certificate) is at least equal to the number of Mbfe of Company Timber on the Company Owned Timberlands (or in respect of the timber rights thereon), or subject to the Company Timber Rights, being released (as indicated in an Officer's Certificate) multiplied by a fraction, the numerator of which is the fair value of the Substitute Timber Property to be acquired and the denominator of which is the sum of the fair value of the Substitute Timber Property to be acquired and the cash to be received) or (B) the Issuer elects (in an Officer's Certificate) to recognize Deemed Production in respect of a number of Mbfe of Company Timber equal to the excess, if any, of the number of Mbfe of Company Timber on the Company Owned Timberlands (or in respect of the timber rights thereon), or subject to the Company Timber Rights, being released (or, if Company Owned Timberlands (or the timber rights thereon) or Company Timber Rights are being released in exchange for Substitute Timber Property and cash, equal to the excess, if any, of the number of Mbfe of Company Timber on the Company Owned Timberlands (or in respect of the timber rights thereon), or subject to the Company Timber Rights, being released multiplied by a fraction, the numerator of which is the fair value of the Substitute Timber Property to be acquired and the denominator of which is the sum of the fair value of the Substitute Timber Property to be acquired and the cash to be received) over the number of Mbfe of timber on the Substitute Timber Property being acquired or (C) the value of the Company Owned Timberlands (or timber rights thereon) or Company Timber Rights being released is less than $100,000 multiplied by the Lumber PPI Inflation Factor then applicable. The Officer's Certificate delivered pursuant to the preceding clauses (A) and (B) may be based upon good faith estimates of a Responsible Officer of the Issuer of the Mbfe of Company Timber on the Substitute Timber Property to be acquired. For the purposes of Sections 6.1(c) and 6.4(c), the fair value of Company Owned Timberlands (or timber rights thereon), Company Timber Rights and Company Timber released in any calendar year shall include (i) all Lump Sum Sales pursuant to Section 6.1, (ii) all sales of Company Owned Timberlands and Company Timber Rights pursuant to Section 6.1 and (iii) all releases and substitutions pursuant to Section 6.4, but shall exclude (A) all sales or other dispositions of Pacific Lumber Timber Rights Property pursuant to Section 6.3 and (B) all sales of Company Timber pursuant to Section 6.2. 6.5 Trust Indenture Act Requirements. The release of (i) any of the Company Owned Timberlands (or timber rights thereon) or Company Timber Rights or (ii) Company Timber pursuant to a Lump Sum Sale, from the Lien of the Deed of Trust will not be deemed to impair the Lien of the Deed of Trust in contravention of the provisions hereof and thereof if and to the extent such Company Owned Timberlands (or timber rights thereon), Company Timber Rights or Company Timber, as the case may be, is released pursuant to the terms of this Indenture and the Deed of Trust. The Trustee and each of the Noteholders and the Liquidity Providers acknowledge that a release of Company Owned Timberlands (or timber rights thereon), Company Timber Rights or Company Timber, as the case may be, in accordance with the terms of the Deed of Trust and this Indenture will not be deemed for any purpose to be an impairment of the Lien of the Deed of Trust in contravention of the terms of this Indenture and the Deed of Trust. To the extent applicable, without limitation, the Issuer and each obligor on the Timber Notes and any Additional Timber Notes shall cause TIA Section 314(d) relating to the release of property from the Lien of the Deed of Trust to be complied with. Any certificate or opinion required by TIA Section 314(d) may be made by a Responsible Officer of the Issuer, except in cases in which TIA Section 314(d) requires that such certificate or opinion be made by an Independent person. ARTICLE 7 DEFAULTS AND REMEDIES 7.1 Events of Default. "Event of Default" with respect to the Timber Notes, wherever used herein, means any one of the following events: (1) default in the payment of principal of any Timber Note on the Final Maturity Date; (2) failure of the Issuer to cause the amount on deposit in the Payment Account on any Note Payment Date, to the extent such amount is available for such application pursuant to Section 5.7, to be applied to pay any amount of Minimum Principal Amortization Amount (as such amount may be modified pursuant to Section 2.14(b)) or Depletion Amortization Amount (as such amount may be modified pursuant to Section 2.14(b)) that has become due or payable on any Class of Timber Notes, and the continuation of such default for a period of five days); (3) default in the payment of any Regular Interest or Default Interest on any Timber Note or in the payment of any interest on any Additional Timber Note (except interest on any premiums) when the same becomes due and payable and the continuation of such default for a period of five days; (4) failure of the Issuer to cause the amount on deposit in the Payment Account on any Note Payment Date, to the extent such amount is available for such application pursuant to Section 5.7, to be applied to pay any amount of premium that has become due or payable on any Timber Note or Additional Timber Note and the continuation of such default for a period of five days; (5) failure of the Issuer to cause the amount on deposit in the Payment Account on any Note Payment Date, to the extent such amount is available for such application pursuant to Section 5.7, to be applied to pay any amount of interest that has become due or payable on any amount of Premium on any Timber Note (or on any premium on any Additional Timber Note), and the continuation of such default for a period of five days; (6) the sale, transfer, conveyance, pledge or hypothecation of any membership interest in the Issuer or any interest therein by Pacific Lumber (other than any transfer incidental to a merger or sale or other disposition of substantially all of the assets of Pacific Lumber (or substantially all of the assets of Pacific Lumber excluding its interest in Salmon Creek) permitted by Section 4.2 of the New Services Agreement or a transfer incidental to a merger, consolidation or transfer of assets of the Issuer permitted by Section 4.13 of this Indenture). (7) default in the performance or observance of any covenant or agreement of the Issuer set forth in Sections 4.4(b), (c), (d) and (e), 4.5, 4.8, 4.9, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.17, 4.20, 4.21, 4.22, 4.23, 4.24, 4.25 and 4.26 of this Indenture or Sections 7.1(c, (d), (e), (g) and (h), and 7.2(a), (b) and (c) of the Deed of Trust (and, in each such case, to the extent such default is remediable, such default shall continue for a period of 15 days following written notice from the Trustee, or from the Holders of 25% in aggregate principal amount of the outstanding Timber Notes and any Additional Timber Notes); (8) the failure of the Board of Managers to contain at least two individuals who are Independent Managers, and the continuation of such failure for a period of 30 consecutive days (or, if such failure results from the death or resignation of an Independent Manager, and provided that the Issuer is diligently attempting to obtain replacement Independent Managers, the continuation of such failure for a period of 90 days); (9) default in the observance or performance of any covenant or agreement of the Issuer made in this Indenture or the Deed of Trust (other than a covenant or agreement, a default in the observance or performance of which is elsewhere in this Section 7.1 specifically dealt with); or the Services Provider shall default in the observance or performance of any covenant or agreement made by it in the New Services Agreement; or Pacific Lumber shall default in the observance of any covenant or agreement made by it in the New Master Purchase Agreement or in any Conveyance Document (and, in each such case, to the extent such default is remediable, such default shall continue for a period of 30 days following written notice from the Trustee, or from the Holders of 25% in aggregate principal amount of the outstanding Timber Notes and any Additional Timber Notes); (10) any representation or warranty of the Issuer made in this Indenture, the Deed of Trust or any other Operative Document, or any representation or warranty made by Pacific Lumber in any Operative Document, or, in each such case, in any certificate or other writing delivered pursuant hereto or thereto, shall prove to have been incorrect in any material respect as of the time when the same was made (and, in each such case, to the extent such default is remediable, such default shall continue for a period of 30 days following written notice from the Trustee, or from the Holders of 25% in aggregate principal amount of the outstanding Timber Notes and any Additional Timber Notes); (11) the Issuer shall become Bankrupt or Insolvent; or (12) a final judgment or judgments for the payment of money in excess of $500,000 in the aggregate shall be rendered against the Issuer by one or more courts, administrative tribunals or other bodies having jurisdiction over the Issuer and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Issuer shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal. 7.2 Acceleration of Maturity; Rescission and Annulment. (a) If an Event of Default under Section 7.1(11) shall occur, an amount equal to all amounts payable with respect to the Timber Notes and any Additional Timber Notes shall, without any demand, presentment or notice (all of which are expressly waived by the Issuer), become immediately due and payable. (b) If any Event of Default under Sections 7.1(1), (2), (3), (4) or (5) shall occur and be continuing, the Trustee may, or, if the Holders of 25% in aggregate outstanding principal amount of the Timber Notes and any Additional Timber Notes so elect, shall, declare all amounts payable with respect to the Timber Notes and any Additional Timber Notes to be immediately due and payable, and upon any such declaration of acceleration such amount shall become immediately due and payable. (c) If an Event of Default under Sections 7.1(6), (7), (8), (9), (10) or (12) shall occur and be continuing, if the Majority Holders so elect, the Trustee shall declare all amounts payable with respect to the Timber Notes and any Additional Timber Notes to be immediately due and payable, and upon any such declaration of acceleration such amount shall become immediately due and payable. (d) At any time after such declaration of acceleration of maturity has been made (other than a declaration approved by the Noteholders of 100% in aggregate principal amount of outstanding Timber Notes and any Additional Timber Notes) and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article 7 provided, the Majority Holders, by written notice to the Issuer and the Trustee, may rescind and annul such declaration of acceleration and its consequences if: (1) the Issuer has paid or deposited with the Trustee a sum sufficient to pay: (x) all payments of principal of and interest and premium, if any, on the Timber Notes and any Additional Timber Notes and all other amounts that would then be due and payable hereunder or upon the Timber Notes and any Additional Timber Notes otherwise than by virtue of such declaration of acceleration; and (y) all sums paid or advanced by the Trustee and the Collateral Agent hereunder or under the Deed of Trust on behalf of the Issuer and the reasonable compensation, expenses, disbursements and advances of the Trustee and the Collateral Agent and their agents and counsel; and (2) all Events of Default, other than the nonpayment of the principal of the Timber Notes and any Additional Timber Notes that has become due and payable solely by such declaration of acceleration, have been cured or waived. (e) No such rescission and annulment under this Indenture shall affect any subsequent default or impair any right consequent thereon. 7.3 Collection of Indebtedness and Suits for Enforcement by Trustee. (a) The Issuer covenants that if the Timber Notes have been declared due and payable pursuant to paragraph (b) or (c) of Section 7.2 and such declaration has not been rescinded and annulled pursuant to Section 7.2(d), the Issuer will, upon demand of the Trustee, pay to the Liquidity Providers the whole amount then due and payable to the Liquidity Providers and pay to the Trustee, for the benefit of the Noteholders, the whole amount then due and payable on all outstanding Timber Notes and any Additional Timber Notes and in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including, without limitation, the reasonable compensation, expenses, disbursements and advances of the Trustee and the Collateral Agent and their agents and counsel. (b) If the Issuer fails forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, may exercise all such rights as are provided under this Indenture and the Deed of Trust, may institute a Proceeding in any court of competent jurisdiction for the collection of the sums so due and unpaid, and may prosecute such Proceeding to judgment or final decree, and may enforce the same against the Issuer or other obligor upon such Timber Notes and Additional Timber Notes and collect in the manner provided by law out of the property of the Issuer or other obligor upon such Timber Notes and Additional Timber Notes, wherever situated, the monies adjudged or decreed to be payable. (c) If an Event of Default occurs and is continuing, the Trustee may, as more particularly provided in Section 7.4, proceed to protect and enforce its rights and the rights of the Noteholders and the holders of any Additional Timber Notes, by such appropriate Proceedings as the Trustee shall deem most effective to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or the Deed of Trust or in aid of the exercise of any power granted herein or to enforce any other proper remedy or legal or equitable right vested in the Trustee by this Indenture or the Deed of Trust or by law. (d) In any Proceeding brought by the Trustee, the Trustee shall be held to represent the Noteholders and it shall not be necessary for any such Noteholder to be a party to any such Proceeding. 7.4 Trustee May File Proofs of Claim. (a) Without limiting the rights of any Noteholder to do the same, the Trustee, in case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other similar Proceeding relating to the Issuer or any other obligor upon the Timber Notes or any Additional Timber Notes or to the Mortgaged Property or any Person having or claiming any ownership interest in the Mortgaged Property, or to the creditors or property of the Issuer or such other obligor or Person (irrespective of whether the principal of any Timber Notes or any Additional Timber Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 7.4), shall be entitled and empowered, by intervention in such Proceeding or otherwise: (1) to file and prove a claim or claims for the aggregate amount of principal, interest and premiums, if any, owing and unpaid in respect of the Timber Notes and any Additional Timber Notes and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including, without limitation, any claim for reasonable compensation, expenses, disbursements and advances of the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, except as a result of negligence or bad faith) and of the Noteholders allowed in such Proceeding; and (2) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Noteholder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Noteholders, to pay the Trustee and the Collateral Agent any amount due to either of them for the reasonable compensation, expenses, disbursements and advances of the Trustee and the Collateral Agent, their agents and counsel, and any other amounts due the Trustee and the Collateral Agent under Section 9.7. (b) Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or vote for or accept or adopt on behalf of any Noteholder any plan of reorganization, arrangement, adjustment or composition affecting the Timber Notes or any Additional Timber Notes or the rights of any Noteholder thereof or to authorize the Trustee to vote in respect of the claim of any Noteholder in any such proceeding or to vote for the election of a trustee in bankruptcy or similar person. 7.5 Trustee May Enforce Claims Without Possession of Notes. All rights of action and of asserting claims under this Indenture or under any of the Timber Notes or any of the Additional Timber Notes may be enforced by the Trustee without the possession of any of the Timber Notes or any of the Additional Timber Notes or the production thereof in any Proceeding, and any such Proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable expenses, disbursements and compensation of the Trustee, each predecessor Trustee and their respective agents and attorneys, be for the ratable benefit of the Noteholders and shall be applied in accordance with Section 7.7. 7.6 Remedies. If an Event of Default shall have occurred and be continuing, the Trustee may institute a Proceeding in its own name and as trustee of an express trust for the collection of all amounts then payable on the Timber Notes and on any Additional Timber Notes or under the Line of Credit Agreement or under this Indenture or the Deed of Trust with respect thereto, and exercise all remedies under this Indenture or the Deed of Trust, whether by declaration or otherwise, enforce any judgment obtained and collect from the Issuer and any other obligor upon such Timber Notes or Additional Timber Notes monies adjudged due. 7.7 Application of Money Collected. On any date when the Timber Notes have been declared due and payable during the continuance of an Event of Default and such declaration and its consequences have not been rescinded and annulled (a "Post-Acceleration Date"), any monies collected by the Trustee pursuant to this Article Seven or otherwise with respect to the Timber Notes and on any Additional Timber Notes shall be deposited into the Payment Account and shall be applied, first, to amounts described in Section 9.7 (exclusive of indemnification payments) and to Liquidity Providers' Expenses (exclusive of indemnification payments), second, to the payment of all interest (other than Supplemental Liquidity Provider Interest) and principal owing to the Liquidity Providers, third, to the payment of interest (other than interest on premiums) due on each Class of Timber Notes and any Additional Timber Notes pro rata in proportion to the interest (other than interest on premiums) due on each such Class, fourth, to the payment of principal on each Class of Timber Notes and any Additional Timber Notes pro rata in proportion to the principal due on each such Class, fifth, to the payment of any interest on premiums on each Class of Timber Notes and any Additional Timber Notes pro rata in proportion to the interest on premiums due on each such Class, sixth, to the payment of any premiums on each Class of Timber Notes and any Additional Timber Notes pro rata in proportion to the premiums due on each such Class, seventh, to the payment of any Additional Liquidity Provider Fees and any Supplemental Liquidity Provider Interest owing under the Line of Credit Agreement, eighth, to the payment of indemnification payments under Section 9.7 and indemnification payments owing by the Issuer under the Line of Credit Agreement and, ninth, to the Issuer, free and clear of the Lien of the Deed of Trust. 7.8 Limitation of Suits. No Holder of any Timber Note or Additional Timber Note shall have any right to institute any Proceeding with respect to this Indenture, the Timber Notes, any Additional Timber Notes or the Deed of Trust, or for the appointment of a receiver or trustee, or for any other remedy hereunder, or under the Timber Notes or the Deed of Trust, unless: (a) such Noteholder has previously given written notice to the Trustee of a continuing Event of Default; (b) the holders of not less than 25% in aggregate outstanding principal amount of Timber Notes, any Additional Timber Notes and Advances shall have made a written request to the Trustee to institute a proceeding in respect of such Event of Default in its own name hereunder or under the Deed of Trust; (c) such holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in complying with such request; (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute such Proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Majority Holders (as such term is defined in Section 7.13(c)). A Noteholder may not use this Indenture to prejudice the rights of another Noteholder or to obtain a preference or priority over such other Noteholder. 7.9 Unconditional Rights of Noteholders To Receive Principal and Interest. Notwithstanding any other provisions in this Indenture or the Deed of Trust, the Holder of any Timber Note or Additional Timber Note shall have the right, which is absolute and unconditional, to receive payment of the principal of, and interest and premium, if any, on, such Timber Note or Additional Timber Note on or after the respective due dates thereof expressed in such Timber Note or Additional Timber Note or in this Indenture and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Noteholder; provided, however, that no Holder shall have the right to institute any such suit, if and to the extent that the institution or prosecution thereof or the entry of judgment therein would, under applicable law, result in the surrender, impairment, waiver or loss of the Lien of the Deed of Trust. Without limiting the foregoing, in no event shall any Noteholder exercise any right of set-off, banker's lien, or the like, against any deposit account or property of the Company held or maintained by such Noteholder or amount owing by such Noteholder to the Company, without prior consent of the Majority Holders, which rights of set-off, banker's lien and the like are waived by the Noteholder's acceptance of its Note and the benefit of this Indenture. 7.10 Restoration of Rights and Remedies. If the Trustee, the Collateral Agent or any Noteholder has instituted any Proceeding to enforce any right or remedy under this Indenture or the Deed of Trust and such Proceeding has been discontinued or abandoned for any reason or has been determined adversely to the Trustee, the Collateral Agent or such Noteholder, then and in every such case the Issuer, the Trustee, the Collateral Agent and the Noteholders shall, subject to any determination in such Proceeding, be restored severally and respectively to their former positions hereunder and under the Deed of Trust, and thereafter all rights and remedies of the Trustee, the Collateral Agent and the Noteholders shall continue as though no such Proceeding had been instituted. 7.11 Rights and Remedies Cumulative. No right or remedy conferred upon or reserved to the Trustee, the Collateral Agent or the Noteholders in this Indenture or the Deed of Trust is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or thereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder or thereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. 7.12 Delay or Omission Not a Waiver. No delay or omission of the Trustee, the Collateral Agent or any Noteholder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article 7, by the Deed of Trust or by law to the Trustee, the Collateral Agent or the Noteholders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee, the Collateral Agent or, subject to Section 7.8, the Noteholders, as the case may be. 7.13 Control by Majority Holders. Except as otherwise specified in this Indenture, the Majority Holders shall have the right to direct the time, method, and place of conducting any Proceeding for any remedy available to the Trustee under this Indenture or otherwise with respect to the Timber Notes or exercising any trust or power conferred on the Trustee or the Collateral Agent, including the giving of any notice or direction under the Deed of Trust, provided that: (a) such direction shall not be in conflict with any rule of law or with this Indenture; and (b) the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. (c) the Liquidity Providers shall have the right to vote pro rata with the Holders of the Timber Notes and any Additional Timber Notes, based on the outstanding principal amount of Timber Notes, Additional Timber Notes and Advances, in directing the Trustee or Collateral Agent with respect to whether and how to exercise rights against the Mortgaged Property under the Deed of Trust and, for such purpose (and for purposes of Section 7.8(e)), the "Majority Holders" shall be deemed to consist of a majority by outstanding principal amount of Holders of Timber Notes and Additional Timber Notes and the Liquidity Providers. 7.14 Course of Dealing Not a Waiver. No course of dealing between the Trustee, the Collateral Agent and/or any Noteholder, on the one hand, and the Issuer or any person claiming through or under the Issuer, on the other hand, or any delay on the part of the Trustee, the Collateral Agent and/or any Noteholder in exercising any right available to them shall operate as a waiver of any rights of the Trustee, the Collateral Agent or the Noteholder. 7.15 Waiver of Stay or Extension Laws. The Issuer covenants (to the fullest extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture or the Deed of Trust; and the Issuer (to the fullest extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power granted herein to the Trustee or in the Deed of Trust to the Collateral Agent, but will suffer and permit the execution of every such power as though no such law had been enacted. 7.16 Action on Notes. The Trustee's right to seek and recover judgment on the Timber Notes or under this Indenture shall not be affected by the seeking, obtaining or application of any other relief under or with respect to this Indenture or the Deed of Trust. No rights or remedies of the Trustee, the Collateral Agent or the Noteholders shall be impaired by the recovery of any judgment by the Trustee or the Collateral Agent against the Issuer or by the levy of any execution under such judgment upon any portion of the Mortgaged Property or upon any of the assets of the Issuer. 7.17 Waiver of Past Defaults. Subject to Sections 7.9 and 10.2, the Majority Holders by notice to the Trustee may waive an existing Default and its consequences except (1) a Default or Event of Default in the payment of the principal of or interest or Premium on a Timber Note as specified in clauses (1) - (5) of Section 7.1 or (2) a Default in respect of a provision that under Section 10.2 cannot be amended without the consent of each Noteholder affected. When a Default or Event of Default is waived, it is deemed cured and ceases, but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. 7.18 Certain Limitations on Exercise of Remedies under Deed of Trust. In connection with any trustee sale or judicial sale by the Deed of Trust Trustee under the Deed of Trust, the Collateral Agent shall not accept any cash bid in an amount less than the aggregate amount payable on the Timber Notes and any Additional Timber Notes plus the aggregate amount, if any, of principal and interest then owed to the Liquidity Providers, unless the holders of 66 2/3% in aggregate outstanding principal amount of Advances under the Line of Credit Agreement, Timber Notes and any Additional Timber Notes shall have approved the taking of such action (which approval may be given generally and need not be given in respect of any specific sale or bid). In the event that relevant law provides that a trustee sale or judicial sale may be made in respect of less than all of the Company Owned Timberlands and Company Timber Rights, and the Collateral Agent shall determine to permit a trustee sale or judicial sale for less than all of the Company Owned Timberlands and Company Timber Rights, in connection with any such trustee sale or judicial sale by the Deed of Trust Trustee, the Collateral Agent shall not accept any cash bid in an amount less than the pro rata portion of the aggregate amount payable on the Timber Notes and any Additional Timber Notes plus the aggregate amount, if any, of principal and interest then owed to the Liquidity Providers, unless the holders of 66 2/3% in aggregate outstanding principal amount of Advances under the Line of Credit Agreement, Timber Notes and any Additional Timber Notes shall have approved the taking of such action (which approval may be given generally and need not be given in respect of any specific sale or bid). ARTICLE 8 DEFEASANCE AND COVENANT DEFEASANCE 8.1 Issuer's Option to Effect Defeasance or Covenant Defeasance. The Issuer may, at its option by Board Resolution, at any time, with respect to the Timber Notes and any Additional Timber Notes, elect to have either Section 8.2 or Section 8.3 be applied to all of the outstanding Timber Notes and any Additional Timber Notes (the "Defeased Notes"), upon compliance with the conditions set forth below in this Article 8. 8.2 Defeasance and Discharge. Upon the Issuer's exercise under Section 8.1 of the option applicable to this Section 8.2, the Issuer shall be deemed to have been discharged from its obligations with respect to the Defeased Notes on the date the conditions set forth below are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Issuer shall be deemed to have paid and discharged the entire indebtedness represented by the Defeased Notes, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.5 and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all its other obligations under such Defeased Notes, this Indenture and the Deed of Trust insofar as such Defeased Notes are concerned (and the Trustee, at the expense of the Issuer, and, upon written request, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of Defeased Notes to receive solely from the trust fund described in Section 8.5 and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest on such Defeased Notes when such payments are due, (b) the Issuer's obligations with respect to such Defeased Notes under Sections 2.3, 2.4, 2.5, 2.6, 2.7, 2.8, 2.9, and 4.2, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder, including, without limitation, the Trustee's rights under Section 9.7, and (d) this Article 8. Subject to compliance with this Article 8, the Issuer may exercise its option under this Section 8.2 notwithstanding the prior exercise of its option under Section 8.3 with respect to the Timber Notes and any Additional Timber Notes. 8.3 Covenant Defeasance. Upon the Issuer's exercise under Section 8.1 of the option applicable to this Section 8.3, the Issuer shall be released from its obligations under any covenant or provision contained in Sections 4.3 through 4.32, subsections (6), (7), (8), (9), (10) and (12) of Section 7.1 shall not constitute a Default or an Event of Default, with respect to the Defeased Notes on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), and the Defeased Notes shall thereafter be deemed to be not "outstanding" for the purposes of any direction, waiver, consent or declaration or other act of the Noteholders (and the consequences of any thereof) in connection with such covenants and Events of Default, but shall continue to be deemed "outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Defeased Notes, the Issuer may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section or Article, whether directly or indirectly, by reason of any reference elsewhere herein to any such Section or Article or by reason of any reference in any such Section or Article to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under subsections (6), (7), (8), (9), (10) and (12) of Section 7.1, but, except as specified above, the remainder of this Indenture and such Defeased Notes shall be unaffected thereby. 8.4 Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 8.2 or Section 8.3 to the Defeased Notes : (1) The Issuer shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 9.10 who shall agree to comply with the provisions of this Article 8 applicable to it ("qualifying trustee")) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Timber Notes and any Additional Timber Notes, (a) money in an amount, or (b) U.S. Government Obligations (as defined below) which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than the due date of any payment, money in an amount, or (c) a combination thereof, sufficient (in the opinion of a nationally recognized firm of independent certified public accountants expressed in a written certification thereof delivered to the Trustee), without consideration of reinvestment of interest of such U.S. Government Obligations, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of, premium, if any, and interest on the Defeased Notes of each Class to maturity (based upon the original Scheduled Amortization of the Timber Notes (and any similar schedule with respect to any Additional Timber Notes) for such Class with adjustments to such original Scheduled Amortization schedule (and any similar schedule with respect to any Additional Timber Notes) for such Class, which adjustments shall (A) increase the amount of principal payable in accordance with the original Scheduled Amortization schedule (and any similar schedule with respect to any Additional Timber Notes) for such Class on the next succeeding Note Payment Date by the amount of any Payment Deficiency on the date of defeasance or covenant defeasance and (B) decrease, in order of maturity, the amount of principal payable in accordance with the original Scheduled Amortization schedule (and any similar schedule with respect to any Additional Timber Notes) for such Class on the next succeeding Note Payment Date(s) by the excess, if any, of (i) aggregate principal amount that was paid on or prior to the date of defeasance on the Defeased Notes, over (ii) the sum of all amounts specified in Schedule B to the Indenture as Scheduled Amortization (and any similar schedule with respect to any Additional Timber Notes) for such Class opposite the respective dates occurring on or before the date of defeasance; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Notes. For this purpose, "U.S. Government Obligations" means (i) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act), as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. (2) No Default or Event of Default under subsection 7.1(11) shall have occurred and be continuing on the date of such deposit or at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (3) No event or condition shall exist that would prevent the issuer from making payments of the principal of, premium, if any, and interest on the Timber Notes and any Additional Timber Notes on the date of such deposit or at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (4) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, any of the Operative Documents, or any other material agreement or instrument to which the Issuer is a party or by which it is bound. (5) The Issuer shall have delivered to the Trustee an Opinion of Counsel (who shall be Independent) or a ruling from the Internal Revenue Service to the effect that the Holders of the outstanding Timber Notes and any Additional Timber Notes will not recognize income, gain or loss for United States federal income tax purposes as a result of such defeasance or covenant defeasance, as the case may be, and will be subject to United States federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance or covenant defeasance, as the case may be, had not occurred. (6) The Issuer shall have delivered to the Trustee an Opinion of Counsel (who shall be Independent) to the effect that, (x) the trust funds established pursuant to this Article will not be subject to any rights of other creditors of the Issuer, and (y) after the 91st day following the deposit, the trust funds established pursuant to this Article will not be subject to the effect of any applicable United States bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally. (For the limited purpose of the Opinion of Counsel referred to in this clause (6), such Opinion may contain an assumption that the conclusions contained in a customary solvency letter by a nationally recognized appraisal firm, dated as of the date of the deposit and taking into account such deposit, are accurate as of such date, provided that such solvency letter is also addressed and delivered to the Trustee.) (7) The Issuer shall have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that all conditions precedent (other than conditions requiring the passage of time) provided for relating to either the defeasance under Section 8.2 or the covenant defeasance under Section 8.3 (as the case may be) have been complied with as contemplated by this Section 8.4. Opinions required to be delivered under this Section may have qualifications customary for opinions of the type required. Expenses of defeasance or covenant defeasance shall be payable solely from funds not held pursuant to this Article 8. 8.5 Deposited Money and U.S. Government Obligations to be Held in Trust; Other Miscellaneous Provisions. All money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee--collectively for purposes of this Section 8.5, the "Trustee") pursuant to Section 8.4 in respect of the Defeased Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Defeased Notes and this Indenture, to the payment, either directly or through any Paying Agent, as the Trustee may determine, to the Holders of such Defeased Notes of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Issuer shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 8.4 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Defeased Notes. Until principal, interest and all amounts payable in respect of the Defeased Notes have been paid in full or defeased pursuant to this Article 8, all amounts payable by the Issuer in respect of its indemnification obligations pursuant to this paragraph shall be payable solely from funds not held pursuant to this Article 8. Anything in this Article 8 to the contrary notwithstanding, the Trustee shall promptly deliver or pay to the Issuer from time to time upon Issuer Request any money or U.S. Government Obligations held by it as provided in Section 8.4 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance. 8.6 Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 8.2 or 8.3, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Issuer's obligations under this Indenture, the Timber Notes and any Additional Timber Notes and the Deed of Trust shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.2 or 8.3, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.2 or 8.3, as the case may be; provided, however, that if the Issuer makes any payment to the Trustee or Paying Agent of principal of, premium, if any, or interest on any Timber Note or Additional Timber Note following the reinstatement of its obligations, the Trustee or Paying Agent shall promptly pay any such amount to the Holders of the Timber Notes and any Additional Timber Notes and the Issuer shall be subrogated to the rights of the Holders of such Timber Notes and any Additional Timber Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 9 THE TRUSTEE AND THE COLLATERAL AGENT 9.1 Duties of Trustee and Collateral Agent. (a) The Trustee and the Collateral Agent, prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred, undertake to perform such duties and only such duties as are specifically set forth in this Indenture and the Deed of Trust. If an Event of Default has occurred and is continuing, the Trustee and the Collateral Agent shall exercise the rights and powers vested in it by this Indenture and the Deed of Trust and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (1) the Trustee and the Collateral Agent need perform only those duties that are specifically set forth in this Indenture and the Deed of Trust and no covenants or obligations shall be implied in this Indenture or the Deed of Trust against the Trustee or the Collateral Agent; and (2) in the absence of bad faith on its part, the Trustee and the Collateral Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee or the Collateral Agent and conforming to the requirements of this Indenture and the Deed of Trust; provided, however, that the Trustee and the Collateral Agent shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture and the Deed of Trust. (c) The Trustee and the Collateral Agent may not be relieved from liability for their own negligent action, their own negligent failure to act or their own willful misconduct, except that: (1) this paragraph does not limit the effect of paragraph (b) of this Section 9.1; (2) neither the Trustee nor the Collateral Agent shall be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee or the Collateral Agent was negligent in ascertaining the pertinent facts; and (3) neither the Trustee nor the Collateral Agent shall be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 7.13. (d) Every provision of this Indenture and the Deed of Trust that in any way relates to the Trustee or the Collateral Agent is subject to paragraphs (a), (b) and (c) of this Section 9.1. (e) Money held in trust by the Trustee need not be segregated from other funds except (i) to the extent provided by Article 5 of this Indenture and (ii) to the extent required by law. (f) No provision of this Indenture or the Deed of Trust shall require the Trustee or the Collateral Agent to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or thereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. 9.2 Rights of Trustee and Collateral Agent. Subject to Section 9.1: (a) The Trustee and the Collateral Agent may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. Neither the Trustee nor the Collateral Agent need investigate any fact or matter stated in the document. (b) Before the Trustee or the Collateral Agent acts or refrains from acting, it may require an Officer's Certificate or an Opinion of Counsel. (c) The Trustee and the Collateral Agent may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) Neither the Trustee nor the Collateral Agent shall be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers conferred on it by this Indenture or the Deed of Trust; provided, however, that the Trustee's or the Collateral Agent's conduct does not constitute wilful misconduct, negligence or bad faith. (e) The Trustee and the Collateral Agent may consult with counsel, and the advice or Opinion of Counsel with respect to matters of law relating to this Indenture, the Timber Notes and the Deed of Trust shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder or thereunder in good faith and in accordance with the advice or Opinion of Counsel. 9.3 Individual Rights of Trustee and Collateral Agent. The Trustee or the Collateral Agent, in its individual or any other capacity, may become the owner or pledgee of Timber Notes and may otherwise deal with the Issuer or its Affiliates with the same rights it would have if it were not Trustee or Collateral Agent. Any Paying Agent or Registrar may do the same with like rights. Notwithstanding the foregoing, the Trustee and the Collateral Agent must comply with Sections 9.10 and 9.12. 9.4 Trustee's and Collateral Agent's Disclaimer. Neither the Trustee nor the Collateral Agent shall be responsible for, and neither the Trustee nor the Collateral Agent makes any representation as to the validity or adequacy of this Indenture, the Notes, or the Deed of Trust, and neither the Trustee nor the Collateral Agent shall be accountable for the Issuer's use of the proceeds from the Timber Notes, and neither the Trustee nor the Collateral Agent shall be responsible for any statement in this Indenture, the Notes, or the Deed of Trust other than its certificate of authentication. 9.5 Notice of Defaults. If a Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Noteholder (in the manner and to the extent provided in TIA Section 313(c)), to the Line of Credit Agent and to each Rating Agency notices of the Default within 60 days after it occurs. Except in the case of a Default in payment of principal of or interest on any Timber Note, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interest of Noteholders. 9.6 Reports by Trustee to Noteholders. As promptly as practicable after each May 15, beginning with the May 15 following the date of this Indenture, and in any event prior to July 15 in each year, the Trustee shall mail to each Noteholder a brief report dated as of May 15 of such year that complies with TIA Section 313(a). The Trustee also shall comply with TIA Section 313(b)(1) and (2). A copy of such report at the time of its mailing to Noteholders shall be filed with the SEC and each stock exchange, if any, on which the Timber Notes are listed. The Issuer agrees to notify the Trustee whenever the Timber Notes become listed on any stock exchange and of any delisting thereof. 9.7 Compensation and Indemnity. The Issuer shall pay to the Trustee and the Collateral Agent from time to time reasonable compensation for its services. The Trustee's and the Collateral Agent's compensation shall not be limited by any law on compensation relating to the trustee of an express trust. The Issuer shall reimburse the Trustee and the Collateral Agent upon request for all reasonable out-of-pocket expenses incurred by it, except any such expense as may arise from the Trustee's or Collateral Agent's negligence, bad faith or wilful misconduct. Such expenses shall include the reasonable compensation and expenses of the Trustee's and the Collateral Agent's agents and counsel. The Issuer shall indemnify the Trustee and the Collateral Agent against any loss, liability or expense (including reasonable attorneys' fees) incurred by it without negligence or bad faith on its part in connection with the administration of this trust and the performance of its duties hereunder. The Trustee and the Collateral Agent shall notify the Issuer promptly of any claim for which it may seek indemnity. The Issuer shall have the right to defend the claim and the Trustee and the Collateral Agent shall cooperate in the defense. The failure of the Trustee or the Collateral Agent to so notify the Issuer shall not relieve the Issuer of its obligations hereunder. The Issuer need not pay for any settlement made without its written consent. The Issuer need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee or the Collateral Agent through willful misconduct, negligence or bad faith. Until principal, interest and all other amounts payable in respect of the Timber Notes have been paid in full, all amounts payable by the Issuer in respect of its indemnification obligations pursuant to this paragraph shall be payable solely from Excess Funds. The Issuer's payment obligations pursuant to this Section shall survive the discharge of this Indenture and release of the Deed of Trust. When the Trustee or Collateral Agent incurs expenses after the occurrence of an Event of Default specified in Section 7.1(12) with respect to the Issuer, the expenses are intended to constitute expenses of administration under the Bankruptcy Law. 9.8 Replacement of Trustee and Collateral Agent. A resignation or removal of the Trustee or the Collateral Agent and the appointment of a successor Trustee and Collateral Agent shall become effective only upon the successor Trustee's and Collateral Agent's acceptance of appointment as provided in this Section 9.8. The Trustee and the Collateral Agent may resign at any time by so notifying the Issuer and the Holders in writing. The Majority Holders may remove the Trustee and the Collateral Agent by so notifying the Trustee and the Collateral Agent in writing and may appoint a successor Trustee and Collateral Agent with the Issuer's consent. The Issuer shall remove the Trustee and the Collateral Agent if: (1) the Trustee or Collateral Agent fails to comply with Section 9.10; (2) the Trustee or Collateral Agent is adjudged as bankrupt or insolvent or an order for relief is entered with respect to the Trustee or Collateral Agent under any Bankruptcy Law; (3) a custodian, receiver or other public officer takes charge of the Trustee or Collateral Agent or its property; or (4) the Trustee or Collateral Agent otherwise becomes incapable of acting. If the Trustee or Collateral Agent resigns or is removed or if a vacancy exists in the office of Trustee or Collateral Agent for any reason, the Issuer shall promptly appoint a successor Trustee and Collateral Agent. A successor Trustee and Collateral Agent shall deliver a written acceptance of its appointment to the retiring Trustee and Collateral Agent and to the Issuer. Thereupon the resignation or removal of the retiring Trustee and Collateral Agent shall become effective, and the successor Trustee and Collateral Agent shall have all the rights, powers and duties of the Trustee and Collateral Agent under this Indenture and the Deed of Trust. The successor Trustee and Collateral Agent shall mail a notice of its succession to Noteholders. The retiring Trustee and Collateral Agent shall promptly transfer all property held by it as Trustee or Collateral Agent to the successor Trustee. If a successor Trustee and Collateral Agent does not take office within 60 days after the retiring Trustee and Collateral Agent resigns or is removed, the retiring Trustee and Collateral Agent, the Issuer or the Majority Holders may petition any court of competent jurisdiction for the appointment of a successor Trustee and Collateral Agent. If the Trustee and Collateral Agent fails to comply with Section 9.10, any Noteholder may petition any court of competent jurisdiction for the removal of the Trustee and Collateral Agent and the appointment of a successor Trustee and Collateral Agent. 9.9 Successor Trustee or Collateral Agent by Merger. If the Trustee or Collateral Agent consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets (including the trust created by this Indenture) to, another corporation or banking association, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee and Collateral Agent; provided that in the case of a transfer of all or substantially all of its corporate trust business to another corporation, the transferee corporation expressly assumes all the Trustee's and Collateral Agent's liabilities under the Indenture and the Deed of Trust. In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trusts created by this Indenture and the Deed of Trust, any of the Timber Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Timber Notes so authenticated; and in case at that time any of the Timber Notes shall not have been authenticated, any successor to the Trustee may authenticate such Timber Notes either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Timber Notes or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor trustee or authenticate Timber Notes in the name of any predecessor trustee shall only apply to its successors by merger, conversion or consolidation. 9.10 Eligibility; Disqualification. The Trustee and the Collateral Agent shall at all times satisfy the requirements of TIA Section 310(a)(1) and (2). In addition, without limiting the foregoing, the Trustee and the Collateral Agent shall at all times be authorized to conduct a corporate trust business, in good standing, and be either (a) a bank or trust company having, or (b) a wholly-owned subsidiary of a bank or trust company having, a combined capital and surplus of at least $250,000,000 as set forth in its most recent published annual report of condition. The Trustee and the Collateral Agent shall comply with TIA Section 310(b), including the optional provision permitted by the second sentence of TIA Section 310(b)(9). 9.11 Preferential Collection of Claims Against Issuer. The Trustee and the Collateral Agent shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee and Collateral Agent who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. 9.12 Trustee and Collateral Agent. The Trustee and the Collateral Agent shall at all times be one and the same Person. 9.13 Escrow Agreement. The Trustee is authorized to enter into a confidentiality agreement satisfactory to the Trustee pursuant to Section 6 of the Escrow Agreement among the Issuer, Pacific Lumber, Salmon Creek and U.S. Bank of California. ARTICLE 10 AMENDMENTS 10.1 Without Consent of Noteholders. The Issuer and the Trustee may amend, supplement or otherwise modify this Indenture or the Timber Notes or any Additional Timber Notes without notice to or consent of any Noteholder: (1) to cure any ambiguity, omission, defect or inconsistency; (2) to provide for uncertificated notes in addition to or in place of certificated notes; provided, however, that the uncertificated notes are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated notes are described in Section 163(f)(2)(B) of the Code; (3) to make any change that does not adversely affect the rights of any Noteholder; (4) to add to the covenants of the Issuer for the benefit of the Noteholders or to surrender any right or power herein conferred upon the Issuer; (5) to comply with the TIA; (6) to comply with the provisions of Section 4.13; or (7) subject to the limitations set forth in Section 2.14(b), in connection with the issuance of any Additional Timber Notes. After an amendment, supplement or modification under this Section becomes effective, the Issuer shall mail to Noteholders a notice briefly describing such amendment, supplement or other modification. The failure to give such notice to all Noteholders, or any defect therein, shall not impair or affect the validity of an amendment, supplement or other modification under this Section 10.1. 10.2 With Consent of Noteholders. (a) The Issuer and the Trustee may amend, supplement or otherwise modify this Indenture or the Timber Notes or any Additional Timber Notes without notice to any Noteholder but (i) with the written consent of the Majority Holders and Rating Agency Confirmation or (ii) with the written consent of the Supermajority Holders (after prior notice of the Rating Agency Evaluation) and Rating Agency Evaluation. Subject to Sections 7.9 and 7.17, the Majority Holders may waive compliance by the Issuer with any provision of this Indenture, the Deed of Trust or the Timber Notes or any Additional Timber Notes without notice to any Noteholder. (b) Notwithstanding anything to the contrary contained in Sections 10.1 and 10.2(a), without the consent of each Noteholder affected, an amendment, supplement, other modification or waiver may not: (1) reduce the aggregate outstanding principal amount of Timber Notes (or of Timber Notes and any Additional Timber Notes, as applicable) whose Noteholders must consent to an amendment, supplement, other modification or waiver; (2) reduce the rate of or extend the time for payment of interest on any Timber Note; (3) reduce the principal of or extend the fixed maturity of any Timber Note or Additional Timber Note; or (4) reduce the premium payable (including any change in the formulas utilized to compute such amount) upon the redemption or prepayment of any Timber Note or Additional Timber Note; (5) make any Timber Note or Additional Timber Note payable in money other than that stated in the Timber Note or Additional Timber Note; (6) impair the right to institute suit for the enforcement of any payment on or with respect to any Timber Note or Additional Timber Note; or (7) make any change in this Section 10.2. (c) It shall not be necessary for the consent of the Noteholders under this Section 10.2 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. (d) After an amendment, supplement, waiver or other modification under this Section becomes effective, the Issuer shall mail to Noteholders a notice briefly describing such amendment. The failure to give such notice to all Noteholders, or any defect therein, shall not impair or affect the validity of an amendment, supplement, waiver or other modification under this Section. Any amendment, supplement, waiver or other modification shall be binding upon all subsequent transferees of Notes. 10.3 Compliance with Trust Indenture Act. Every amendment, supplement or other modification to this Indenture, the Timber Notes or any Additional Timber Notes shall comply with the TIA as then in effect. 10.4 Effect of Consents and Waivers; No Revocation of Consents. A consent to an amendment, supplement or other modification or a waiver by a Noteholder under or in connection with this Indenture or the Deed of Trust shall bind the Noteholder and every subsequent holder of that Timber Note or Additional Timber Note or portion of the Timber Note or Additional Timber Note that evidences the same debt as the consenting Noteholder's Timber Note or Additional Timber Note, even if notation of the consent or waiver is not made on the Timber Note or Additional Timber Note. Once such consent shall be given by a Noteholder, such consent may not be revoked by such Noteholder or any subsequent holder. After an amendment, supplement or other modification or waiver becomes effective, it shall bind every Noteholder, unless it makes a change described in any of clauses (1) through (7) of Section 10.2(b). In that case, the amendment, supplement, waiver or other modification shall bind each Noteholder who has consented to it and every subsequent Holder of a Timber Note or Additional Timber Note or a portion of a Timber Note or Additional Timber Note that evidences the same debt as the consenting Noteholder's Timber Note or Additional Timber Note. The Issuer shall (or, if Definitive Timber Notes have been issued, may, but shall not be obligated to) fix a record date for the purpose of determining the Noteholders entitled to give their consent or take any other action described above. If a record date is fixed, then notwithstanding the immediately preceding paragraph, those persons who were Noteholders at such record date (or their duly designated proxies), and only those persons, shall be entitled to give such consent or to take any such action, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 130 days after such record date. 10.5 Notation on or Exchange of Notes. If an amendment changes the terms of a Timber Note or Additional Timber Note, the Trustee may require the Noteholder to deliver it to the Trustee. The Trustee may place an appropriate notation on the Timber Note or Additional Timber Note regarding the changed terms and return it to the Holder. Alternatively, if the Issuer or the Trustee so determines, the Issuer in exchange for the Timber Note or Additional Timber Note shall issue and the Trustee shall authenticate a new Timber Note or Additional Timber Note that reflects the changed terms. Failure to make the appropriate notation or to issue a new Timber Note or Additional Timber Note shall not affect the validity of such amendment, supplement or other modification. 10.6 Trustee to Sign Amendments, Etc. The Trustee shall sign any amendment, supplement or other modification authorized pursuant to this Article 10 if the amendment, supplement or other modification does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not sign it. In signing such amendment, supplement or other modification the Trustee shall be entitled to receive, and (subject to Section 9.1) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that such amendment, supplement, waiver or other modification is authorized or permitted by this Indenture. ARTICLE 11 LINE OF CREDIT 11.1 Line of Credit Agreement . In order to provide liquidity for the payment of interest on the Timber Notes, the Issuer has entered into a Line of Credit Agreement, with the Commitments thereunder equal to the Required Liquidity Amount. 11.2 Advances Under Line of Credit Agreement. (a) Interest Advances. In the event that any Note Payment Trustee Certificate delivered to the Trustee indicates that, on the Note Payment Date to which such Note Payment Trustee Certificate relates, there will be insufficient funds in the Payment Account on such Note Payment Date (the amount of such insufficiency being referred to as a "Funding Deficiency") to pay the interest on the Timber Notes required to be paid pursuant to clause (i) of Section 5.7(b) on such Note Payment Date, the Issuer shall, on or prior to the date of delivery of such Note Payment Trustee Certificate, if there is then an amount available under the Line of Credit Agreement, deliver a notice of borrowing under the Line of Credit Agreement (and deliver a copy thereof to the Trustee) for an Advance (any Advance pursuant to a notice of borrowing given pursuant to this Section 11.2(a), an "Interest Advance") to be made under the Line of Credit Agreement prior to 1:00 p.m. New York City time on such Note Payment Date in an amount (the "Deficiency Amount") equal to the lesser of (i) the amount then available under the Line of Credit Agreement and (ii) the amount indicated on such Note Payment Trustee Certificate which, when added to the other funds expected to be in the Payment Account on such Note Payment Date, will be sufficient to permit the payment in full, from funds available therefor under Section 5.7(b) of the Indenture, of all accrued and unpaid interest (excluding interest on Premiums) on the Timber Notes. If the Note Payment Trustee Certificate indicates that a Funding Deficiency exists, such Note Payment Trustee Certificate is not accompanied by a copy of a notice of borrowing under the Line of Credit Agreement in the Deficiency Amount and there is then an amount available under the Line of Credit Agreement, the Trustee shall promptly deliver a notice of borrowing under the Line of Credit Agreement (and deliver a copy thereof to the Issuer) for an Interest Advance in the Deficiency Amount (or any portion thereof not reflected in a notice of borrowing delivered by the Issuer as aforesaid) to be made under the Line of Credit Agreement prior to 1:00 p.m. New York City time on such Note Payment Date. In the event that, as of 1:00 p.m. New York City time on any Note Payment Date there exists a Funding Deficiency in the Payment Account, the Trustee shall (I) pay the interest on the Timber Notes on the Payment Date to the extent of the funds available therefor in the Payment Account and (II) if there is then an amount available under the Line of Credit Agreement, deliver a notice of borrowing under the Line of Credit Agreement (and deliver a copy thereof to the Issuer) for an Interest Advance to be made under the Line of Credit Agreement on the next Business Day or as soon as practicable thereafter in an amount equal to the lesser of (i) the amount then available under the Line of Credit Agreement and (ii) the amount which, when added to the other funds in the Payment Account on such Note Payment Date, will be sufficient to permit the payment in full, from funds available therefor under Section 5.7(b) of the Indenture, of all accrued and unpaid interest (excluding interest on Premiums) on the Timber Notes to the Note Payment Date. If the Interest Advance referred to in clause (II) above has been deposited into the Payment Account at or before 1:00 p.m. New York City time on any Business Day, then, at or before 2:00 p.m. New York City time on such Business Day, or if such Interest Advance has been deposited into the Payment Account after 1:00 p.m. New York City time on any Business Day, at or before 2:00 p.m. New York City time on the following Business Day, the Trustee shall utilize such Interest Advance to make a supplemental interest payment pursuant to clause (ii) of Section 5.7(b) in the amount thereof to the Holders of the Timber Notes. The proceeds of each Interest Advance shall be deposited in the Payment Account as provided in Section 5.7(a)(i). (b) Non-Renewal Advances. If the Line of Credit Agreement has a Scheduled Termination Date prior to the date that is 15 days after the Final Maturity Date, then, no earlier than the 120th day and no later than the 90th day prior to such Scheduled Termination Date, the Issuer shall request that the Liquidity Providers extend the Scheduled Termination Date for a period not less than 364 days after the Scheduled Termination Date (unless a Line of Credit Acceleration has theretofore occurred or a Termination Advance has theretofore been made under the Line of Credit Agreement). If the Trustee has not received a copy of such request from the Issuer by the date that is 90 days prior to such Scheduled Termination Date, the Trustee shall, on the first Business Day thereafter, request that the Liquidity Providers extend the Scheduled Termination Date for a period of 364 days after the Scheduled Termination Date (unless a Line of Credit Acceleration has theretofore occurred or a Termination Advance has theretofore been made under the Line of Credit Agreement). The Issuer shall give the Trustee prompt notice (an "Extension Notice") of any extension of the then effective Scheduled Termination Date, which shall be accompanied by a written statement of the Line of Credit Agent to such effect and shall specify the date to which the Scheduled Termination Date has been extended. If the Trustee has not received an Extension Notice on or before the 11th day prior to the then effective Scheduled Termination Date, the Trustee shall, on the following Business Day, deliver a notice of borrowing under the Line of Credit Agreement (and deliver a copy thereof to the Issuer) for an Advance (a "Non-Renewal Advance") in an amount equal to the entire amount then available under the Line of Credit Agreement (unless the Issuer shall have earlier delivered such a notice of borrowing and delivered a copy thereof to the Trustee or unless a Line of Credit Acceleration has theretofore occurred or a Termination Advance has theretofore been made under the Line of Credit Agreement). The proceeds of any Non-Renewal Advance shall be deposited in the Liquidity Account. (c) Downgrade Advances. If any Liquidity Provider shall cease to have the Required Liquidity Provider Rating (a "Downgraded Liquidity Provider"), the Issuer shall deliver written notice thereof to the Trustee promptly after it obtains notice or knowledge of such fact. If, by the date that is 30 days after the giving of such notice, the Trustee has not received written notice from the Liquidity Providers or the Line of Credit Agent that the Commitment of the Downgraded Liquidity Provider under the Line of Credit Agreement has been assumed by one or more Liquidity Providers having the Required Liquidity Provider Rating, the Trustee shall, on the following Business Day, deliver a notice of borrowing under the Line of Credit Agreement (and deliver a copy thereof to the Issuer) for an Advance (a "Downgrade Advance") in an amount equal to the entire amount then available under the Line of Credit Agreement (unless the Issuer shall have earlier delivered such a notice of borrowing and delivered a copy thereof to the Trustee or unless a Line of Credit Acceleration has theretofore occurred or a Termination Advance has theretofore been made under the Line of Credit Agreement). The proceeds of any Downgrade Advance shall be deposited in the Liquidity Account. (d) Interest Rate Option. If the applicable form of a notice of borrowing delivered by the Trustee under this Section 11.2 permits the selection of an interest rate option in respect of an Advance, the Trustee shall select such available interest rate option as has been specified to the Trustee in advance in writing by the Issuer or, in the absence of such specification, such available interest rate option as the Trustee shall, in its sole discretion, determine to select. 11.3 Amendments to Line of Credit Agreement. The Issuer shall not consent to any amendment to the Line of Credit Agreement, unless (i) such amendment has been approved by a resolution of the Board of Managers, including all Independent Managers and (ii) either (A) such amendment is to (1) cure any ambiguity, omission, defect or inconsistency, (2) add to the covenants of the other parties thereto for the benefit of the Issuer, the Holders of the Timber Notes or the Trustee, (3) surrender any right of the other parties thereto, (4) modify the obligations of the other parties thereto among such other parties, (5) provide for the assignment to, and assumption by, Liquidity Providers having the Required Liquidity Provider Rating of the rights and obligations of one or more Liquidity Providers, (6) extend the Scheduled Termination Date of the Line of Credit Agreement and/or (7) modify the fees or the interest rates payable by the Issuer under the Line of Credit Agreement; provided that no such amendment may adversely affect in any material respect the interests of the Holders of the Timber Notes (it being understood that no amendment referred to in the preceding clauses (5), (6) and (7) shall be deemed to have such adverse effect) or (B) such amendment has received Rating Agency Confirmation. 11.4 Replacement of Line of Credit Agreement. (a) At any time, the Issuer may, at its option, arrange for a replacement Line of Credit Agreement to replace the then existing Line of Credit Agreement. No such replacement Line of Credit Agreement shall become effective and no such replacement Line of Credit Agreement shall be deemed a "Line of Credit Agreement" unless and until each of the following conditions shall have been satisfied: (i) such replacement Line of Credit Agreement has received Rating Agency Confirmation; (ii) the terms of such replacement Line of Credit Agreement shall not be inconsistent with this Article 11 or Sections 5.3 and 5.7; (iii)all monetary obligations then owing under the Line of Credit Agreement being replaced have been paid (which payment shall be made first from any available funds in the Liquidity Account as described in Section 11.4(b)) and the Commitments thereunder have been terminated; (iv) the amount available under the replacement Line of Credit Agreement is not less than the Required Liquidity Amount; and (v) an Officer's Certificate shall have been delivered to the Trustee stating that each of the foregoing conditions has been satisfied. Upon satisfaction of the conditions set forth in this Section 11.4(a), (i) the replaced Line of Credit Agreement shall cease to be a "Line of Credit Agreement", and the Liquidity Providers pursuant to the replaced Line of Credit Agreement shall cease to be "Liquidity Providers", under this Indenture, the Deed of Trust and the other Operative Documents and (ii) such replacement Line of Credit Agreement shall be deemed to be the "Line of Credit Agreement", and the Liquidity Providers under such replacement Line of Credit shall be deemed to be the "Liquidity Providers", under this Indenture, the Deed of Trust and the other Operative Documents. (b) Upon satisfaction of the conditions set forth in Section 11.4(a), the Trustee shall release all funds then in the Liquidity Account for use in payment of the monetary obligations owing under the Line of Credit Agreement being replaced and any remaining funds in the Liquidity Account shall be paid to or as directed by the Issuer, free and clear of the Lien of the Deed of Trust. ARTICLE 12 MISCELLANEOUS 12.1 Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. 12.2 Notices. Any notice or communication shall be in writing and delivered in person, transmitted by facsimile (confirmed in writing by mail simultaneously dispatched) or mailed by first-class mail addressed as follows: If to the Issuer: Scotia Pacific Company LLC P.O. Box 712 125 Main Street Second Floor Scotia, California 95565 Telecopy No.: (707) 764-5001 Attention: Vice President, Finance and Administration With copies to: Scotia Pacific Company LLC 5847 San Felipe, Suite 2610 Houston, Texas 77057 Telecopy No.: (713) 267-3702 Attention: General Counsel and if to the Trustee: State Street Bank and Trust Company Two International Place, 4th Floor Boston, Massachusetts 02110 Attention: Corporate Trust Administration (Scotia Pacific Company LLC Timber Collaterized Notes) Telecopy No.: (617) 664-5371 and if to the Liquidity Providers or the Line of Credit Agent: Bank of America National Trust and Savings Association, as Agent Bank of America National Trust and Savings Association Paper & Forest Products #9973 555 California Street - 41st Floor San Francisco, CA 94104 Attention: M. J. Balok, Managing Director Telecopy No.: (415) 622-2385 with a copy to Bank of America National Trust and Savings Association Agency Administrative Services #5596 1850 Gateway Blvd. Concord, CA 94520-3281 Attention: Scotia Pacific AO Telecopy No.: (925) 675-8500 The Issuer, the Trustee or the Line of Credit Agent by notice to the others may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Noteholder shall be mailed to the Noteholder at the Noteholder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Noteholder or any defect in it shall not affect its sufficiency with respect to other Noteholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. Notwithstanding anything to the contrary in this Section 12.2, notices to the Issuer or the Trustee shall only be deemed given when received by the Issuer or the Trustee, as the case may be. 12.3 Communication by Holders with Other Noteholders. Noteholders may communicate pursuant to TIA Section 312(b) with other Noteholders with respect to their rights under this Indenture or the Timber Notes and the Trustee will comply with TIA Section 312(b). The Issuer, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). 12.4 Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Issuer to the Trustee to take any action under this Indenture, the Issuer shall furnish to the Trustee upon the Trustee's request: (i) an Officer's Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with (or will have been complied with upon the execution and delivery of designated instruments); and (ii) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with (or will have been complied with upon the execution and delivery of designated instruments). except that in the case of any application or request as to which the furnishing of such Officers' Certificate or Opinion of Counsel is specifically required by any provisions of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. 12.5 Statements Required in Certificate or Opinion. (a) Each certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture shall include: (1) a statement that the person making such certificate or rendering such opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such covenant or condition has been complied with. (b) Unless otherwise expressly provided herein, any application, request, order, certified resolution, certificate, notice, statement or other instrument of the Issuer or of any other Person required or permitted to be filed with the Trustee or to be made or given under this Indenture shall be dated and shall state the provision or provisions of this Indenture pursuant to which it is filed, made or given and shall be signed by a Responsible Officer of the Person taking such action. (c) Any counsel giving an Opinion of Counsel that an instrument conforms to the requirements of this Indenture, or with respect to any similar matter, may state that such counsel is not passing upon the truth, accuracy or good faith of the facts or opinions stated in any application, request, order, certified resolution, Officer's Certificate, appraiser's certificate, notice, statement or other instrument required to be delivered to the Trustee signed by any Person other than such counsel. (d) Any Officer's Certificate of the Issuer or certificate of an appraiser, forester or other expert may be based, insofar as the matters therein are of a legal nature, upon an Opinion of Counsel, unless such officer, appraiser or forester knows that such Opinion of Counsel is, or any of the facts upon which such Opinion of Counsel is based is, erroneous. (e) Any Opinion of Counsel may be based, insofar as it relates to factual matters or information in possession of the Issuer or the Services Provider, upon an Officer's Certificate or representations of a Responsible Officer of the Issuer or the Services Provider, unless such counsel knows that such Officer's Certificate or representations are erroneous. (f) Any Opinion of Counsel may be based, insofar as it relates to appraisal matters, upon an appraiser's certificate, unless such counsel knows that the appraiser's certificate is erroneous. (g) Any Opinion of Counsel may be based on the written opinion of other counsel reasonably satisfactory to the Trustee, in which event such Opinion of Counsel shall be accompanied by a copy of such other counsel's opinion addressed to the Trustee. 12.6 When Timber Notes Disregarded. In determining whether the Holders of the required principal amount of Timber Notes have concurred in any request, demand, authorization, direction, notice, consent or waiver under or in connection with this Indenture or the Deed of Trust, Timber Notes owned by the Issuer or by any person described in the last clause of the definition of "outstanding" shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such request, demand, authorization, direction, notice, consent or waiver, only Timber Notes which the Trustee knows are so owned shall be so disregarded. Also, subject to the foregoing, only Timber Notes outstanding at the time shall be considered in any such determination. 12.7 Rules by Trustee, Paying Agent and Registrar. The Trustee may make reasonable rules for action by or a meeting of Noteholders. The Registrar and the Paying Agent may make reasonable rules for their functions. 12.8 Business Days. If a payment date is not a Business Day, payment shall be made on the next succeeding Business Day, and no interest or Deficiency Premiums shall accrue for the intervening period. If a regular record date is not a Business Day, the record date shall not be affected. 12.9 GOVERNING LAW. THE LAWS OF THE STATE OF NEW YORK SHALL GOVERN THIS INDENTURE, THE TIMBER NOTES AND ANY ADDITIONAL TIMBER NOTES, WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 12.10 No Recourse Against Others. A manager, director, officer, employee, member or stockholder, as such, of the Issuer or the Trustee shall not have any liability for any obligations of the Issuer or the Trustee under the Timber Notes or any Additional Timber Notes or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Timber Note or Additional Timber Note, each Noteholder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Timber Notes or any Additional Timber Notes. 12.11 Successors. All agreements of the Issuer in this Indenture and the Timber Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. 12.12 Severability. In case any provision of this Indenture or in the Timber Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions thereof shall not in any way be affected or impaired thereby. 12.13 Multiple Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. This Indenture may be executed in two or more counterparts, each of which shall be an original, but all of them together constitute the same agreement. 12.14 Table of Contents; Headings. The table of contents, cross reference sheet and headings of the Articles and Sections of this Indenture and the Timber Notes have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify, restrict or otherwise affect the meaning or interpretation of any of the terms or provisions hereof. 12.15 Benefits of Indenture. Nothing in this Indenture or the Notes, express or implied, shall give to any person, other than the parties hereto and their successors hereunder, the Noteholders, and the Liquidity Providers, any benefit or any legal or equitable right, remedy or claim under this Indenture. 12.16 Limitations on Bankruptcy Petition Against Issuer. The Trustee and each of the Noteholders hereby covenant and agree that, prior to the date which is one year and one day after the payment in full of all outstanding Timber Notes and Additional 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, unless the consent of the Holders of 51% in aggregate outstanding principal amount of the Timber Notes and any Additional Timber Notes to the taking of such action is obtained. 12.17 Entire Agreement. This Indenture constitutes the entire agreement of the parties with respect to the subject matter hereof. 12.18 Concerning Paying Agents, Registrars, Securities Intermediaries and Collateral Agents. Whether or not any applicable provision of this Indenture or any other Operative Document expressly so provides, and notwithstanding any other provision of this Indenture or any other Operative Document to the contrary, any document, investment direction or other written or oral statement of any other Person on which the Trustee is entitled to rely may also be relied upon by any Paying Agent, Registrar, Securities Intermediary or Collateral Agent. ARTICLE 13 DISCHARGE 13.1 Discharge. This Indenture shall cease to be of further effect at such time as (i) all outstanding Timber Notes and any Additional Timber Notes have become due and payable, will become due and payable within six months (based upon the actual principal amount of the Timber Notes and any Additional Timber Notes previously paid and future payments of principal based upon Minimum Principal Amortization (column L of the Structuring Schedule)), or have been called for redemption on a redemption date that is within six months under arrangements satisfactory to the Trustee for giving the notice of redemption and the Issuer shall have irrevocably (i.e., without condition or right of withdrawal) deposited with the Trustee funds sufficient to pay all outstanding Timber Notes and any Additional Notes, including unpaid principal thereof, accrued and unpaid Regular Interest, accrued and unpaid Default Interest, if any, premiums, if any, and interest on premiums, if any, thereon, and the Issuer shall have paid in full all other sums payable hereunder and under the Deed of Trust by the Issuer and (ii) an Officer's Certificate and an Opinion of Counsel to the effect of the preceding clause (i) shall have been delivered to the Trustee; provided that the Issuer's obligations under Sections 2.3, 2.5, 2.6, 2.7, 2.8, 2.9, 9.7 and 9.8 shall survive until the Timber Notes and any Additional Notes have been paid in full, and thereafter the Issuer's obligations under Section 9.7 shall continue to survive. Upon satisfaction of the conditions in the preceding clauses (i) and (ii), the Trustee shall acknowledge in writing the discharge of the Issuer's obligations under the Timber Notes and this Indenture except for those surviving obligations specified herein. IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. SCOTIA PACIFIC COMPANY LLC By: /S/ GARY L. CLARK Name: Gary L. Clark Title: Vice President-Financial Administration STATE STREET BANK AND TRUST COMPANY, as Trustee By: /S/ EARL W. DENNISON Name: Earl W. Dennison Title: Vice President SCHEDULE A DEFINITIONS An "Acceleration Event" will be deemed to exist at any time when the Timber Notes have been accelerated and such acceleration has not been rescinded. "Accounts" has the meaning given to such term in Section 5.1(a) of the Indenture. "Actual Production" through any date means the number of Mbfe of Company Timber actually harvested and sold from July 20, 1998 through such date, except any such Company Timber that has been included in Deemed Production for such period. "Additional Liquidity Provider Fees" means any commitment fee, agent's fee or similar fee payable to the Liquidity Providers or to any agent for the Liquidity Providers under the Line of Credit Agreement to the extent, but only to the extent, that the amount or rate of such fee is in excess of the amount that would be payable therefor under the terms of the Bank of America Credit Agreement as in effect on the Closing Date, it being understood that no amount of any such fee that is or becomes payable pursuant to the terms of the Bank of America Credit Agreement as in effect on the Closing Date, whether or not such amount is actually payable on the Closing Date, shall constitute Additional Liquidity Provider Fees. "Additional Services" has the meaning given to such term in Schedule 1 to the New Additional Services Agreement. "Additional Timber Notes" means notes issued pursuant to a Supplemental Indenture pursuant to Section 2.14 of the Indenture. "Additional Timber Properties" means (a) any timber rights or timberlands located in the State of California which are purchased by the Company subsequent to the Closing Date and subjected to the Lien of the Deed of Trust in connection with the release of funds from the Prefunding Account pursuant to Section 5.10 of the Indenture and (b) the Elk River Timberlands if and when the Elk River Timberlands become subject to the Lien of the Deed of Trust. "Adjusted Debt Obligations" means, on any Note Payment Date, an amount equal to the excess, if any, of (a) the aggregate unpaid principal amount of the outstanding Timber Notes on such date, determined before giving effect to the payment of any amount paid in respect of the Timber Notes on such date, over (b) the Aggregate Minimum Principal Amortization Amount on such date. "Advance" means any Interest Advance and any Termination Advance, which may be a borrowing, draw or other cash receipt obtained by the Issuer or the Trustee or behalf of the Issuer from the Liquidity Providers under the Line of Credit Agreement. The term "borrow" when used with respect to any Advance means to obtain such Advance under the Line of Credit Agreement and the term "borrowing" has a like meaning. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition of "Affiliate," "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Aggregate Minimum Principal Amortization Amount" as of any Note Payment Date means the aggregate, for all Classes of Timber Notes, of the respective Minimum Principal Amortization Amounts for such date. "Agreement Not to Cut" means any agreement by the Issuer to limit or refrain from cutting, harvesting, severing or selling any Company Timber in exchange for a monetary payment to the Issuer. "Alternate Property" means timberlands (a) containing at least the number of Mbfe of timber as the Headwaters Acquisition Property, (b) having a fair value at least equal to the Headwaters Acquisition Property, (c) having expected operating costs not materially greater than the Headwaters Acquisition Property, and (d) having sufficient access or access rights to enable harvesting operations to be conducted thereon, all of which matters shall be reflected in an Officer's Certificate. "Assigned Proceeds" has the meaning given to such term in Section 2.1 of the Deed of Trust. "Assigned Proceeds Obligor" means any Person (a) owing any Assigned Proceeds, (b) having in their possession any Assigned Proceeds or (c) obligated to pay, perform or deliver any Assigned Proceeds. "Authenticating Agent" has the meaning given to such term in Section 2.2 of the Indenture. "Bank of America Credit Agreement" means the Credit Agreement, dated July 20, 1998, among the Issuer, Bank of America National Trust and Savings Association, as Agent, and the other financial institutions parties thereto, as such credit agreement may from time to time be extended, amended, modified, supplemented or amended and restated in accordance with the provisions of Section 11.3 of the Indenture. "Bankruptcy Law" means any Federal or State bankruptcy, insolvency, reorganization or similar law for the relief of debtors from time to time in effect. "Bankrupt or Insolvent" or "Bankruptcy or Insolvency" shall have occurred or exist with respect to any Person if: (a) such Person shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property under any Bankruptcy Law, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Federal Bankruptcy Code, (iv) file a petition seeking to take advantage of any other Bankruptcy Law, or (v) acquiesce in writing to any petition filed against it in an involuntary case under the Federal Bankruptcy Code; (b) a proceeding or case shall be commenced, without the application or consent of such Person, in any court of competent jurisdiction, seeking under any Bankruptcy Law (i) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of such Person, or of all or any substantial part of its assets or (iii) similar relief in respect of such Person under any Bankruptcy Law, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing (other than an order referred to in clause (c) below) shall be entered and continue unstayed and in effect, for a period of 60 or more consecutive days; or (c) an order for relief against such Person shall be entered in an involuntary case under the Federal Bankruptcy Code. "Bill of Sale" has the meaning given to such term in the definition of "Conveyance Documents." "Board of Managers" means: (a) the Board of Managers of the Issuer; or (b) any Manager or committee of such Board of Managers duly authorized under applicable law to act on behalf of such Board of Managers. "Board Resolution" means a resolution duly adopted by the Board of Managers of the Issuer. "Book-Entry Note" means any beneficial interest in the Timber Notes, ownership and transfers of which shall be made through book entries by a Clearing Agency as described in Section 2.6 of the Indenture; provided, that after the occurrence of a condition whereupon book-entry registration and transfer are no longer permitted and Definitive Notes are issued to all Note Owners, such Timber Notes shall no longer be "Book-Entry Notes." "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in the Borough of Manhattan, the City of New York, New York, in San Francisco, California or in the Commonwealth of Massachusetts, are authorized or required by law or executive order to close. A "Cash Retention Event" shall be deemed to exist on any date, subsequent to January 20, 2014, on which any Timber Notes are outstanding. "Cedel" means Cedel Bank, societe anonyme. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act, as the same may be in effect from time to time, any successor statute, and the rules and regulations thereunder. "Certificate" means a certificate conforming to the requirements of Section 12.5 of the Indenture and Section 10.9 of the Deed of Trust. "Class" means any of (i) the Class A-1 Timber Notes, (ii) the Class A-2 Timber Notes, (iii) the Class A-3 Timber Notes or (iv) any class of Additional Timber Notes. "Class A-1 Timber Notes" means the Class of Timber Notes issued pursuant to the Indenture and designated as the Scotia Pacific Company LLC 6.55% Class A-1 Timber Collateralized Notes. "Class A-2 Timber Notes" means the Class of Timber Notes issued pursuant to the Indenture and designated as the Scotia Pacific Company LLC 7.11% Class A-2 Timber Collateralized Notes. "Class A-3 Timber Notes" means the Class of Timber Notes issued pursuant to the Indenture and designated as the Scotia Pacific Company LLC 7.71% Class A-3 Timber Collateralized Notes. "Clearing Agency" shall mean an organization registered as a "clearing agency" pursuant to Section 17A of the Exchange Act, and meeting the requirements of the definition of the term "clearing corporation" in Article Eight of the Uniform Commercial Code of the State of New York, which is the Holder of any Book-Entry Note. "Clearing Agency Agreement" shall mean the letter of representations dated on or prior to the Closing Date, among the Issuer, the Trustee and the initial Clearing Agency relating to the Book-Entry Notes, as the same may be amended, modified or supplemented. "Clearing Agency Participant" shall mean a broker, dealer, bank, other financial institution or other Person for whom from time to time a Clearing Agency records in a book-entry system ownership, transfers and pledges of securities deposited with such Clearing Agency. "Clearing System Certificate" A certificate in substantially the form of Exhibit L to the Indenture or such other form of certificate as shall be satisfactory to the Registrar, Euroclear and Cedel. "Closing Date" shall mean the date on which the Timber Notes are issued pursuant to the Indenture. "Code" means the Internal Revenue Code of 1986, as amended. "Collateral Agent" means State Street Bank and Trust Company, in its capacity as collateral agent for the Holders of the Timber Notes and the Liquidity Providers pursuant to the Deed of Trust and the Indenture, together with its successors in such capacity. "Collateral Agent Expenses" means any expenses or damages of or compensation owing to the Collateral Agent (including, without limitation, the reasonable fees and disbursements of counsel to the Collateral Agent) incurred with respect to the enforcement or administration of the Deed of Trust or owing to the Collateral Agent as part of the Secured Obligations. "Collateral Mortgaged Property" means and includes all Mortgaged Property (including both those now and hereafter existing), to which Article 9 of the Uniform Commercial Code may now or hereafter apply, including, but not limited to, personal property (tangible and intangible), fixtures, goods, documents, instruments, general intangibles, chattel paper, accounts, deposit accounts, products and proceeds, and further including, without limitation, Harvested Timber, Company Timber to be cut pursuant to a Purchase Agreement, the Assigned Proceeds, the Data Processing Equipment, Data Processing Information, the Subject Contracts and the Accounts. "Collateral Release Price" means, as of any date, in respect of any Company Owned Timberlands or Company Timber Rights to be released from the Lien of the Deed of Trust on such date pursuant to Section 6.1 of the Indenture, an amount equal to the product of (a) the number of Mbfe of Company Timber located on the Company Owned Timberlands to be released (or on the Company Timber Rights Property that is subject to the Company Timber Rights to be released, as applicable) and (b) an amount equal to $724, escalated at rate of 3-1/2% per annum (compounded annually, commencing January 1, 1999) to such date. "Collateral Value Factor", for any Monthly Calculation Date, shall be the factor indicated as of such date in the Structuring Schedule under the caption "Collateral Value Factor" (column H). "Collection Account" means account number GE4767 established pursuant to Section 5.1(a) of the Indenture with the Securities Intermediary in the name of "State Street Bank and Trust Company, as Collateral Agent for the Scotia Pacific Company LLC Class A-1, A-2 and A-3 Noteholders and the Liquidity Providers--Collection Account," and all successor accounts thereto. "Collection Account Disbursement" has the meaning given to such term in Section 5.3(b) of the Indenture. "Collection Account Disbursement Funds" has the meaning given to such term in Section 5.3(b) of the Indenture. "Collection Account Rate" means, for any date, a rate per annum equal to the rate per annum (determined as of a date not more than three Business Days prior to such date) for the offering to leading banks in the London interbank market of Dollar deposits having a term of 30 days and in an amount comparable to the amount to which such rate is applied. "Commitment" means, at any time, the maximum principal or face amount of the Advances, whether or not outstanding, that a Liquidity Provider is required to make under the Line of Credit Agreement at such time, as such amount may be varied or adjusted from time to time. "Commitments" means, at any time, the aggregate amount of the Commitments of all Liquidity Providers at such time. "Company Timber" means (i) all trees and timber, including, without limitation, standing timber and crops, now located on or hereafter planted or growing in the soil of any Company Timber Property (other than the Pacific Lumber Timber Rights Property), or any part or parcel thereof, and all additions, substitutions and replacements thereof (including timber to be cut pursuant to a Purchase Agreement) and (ii) any and all Harvested Timber. "Company Timber Property" means the Company Owned Timberlands and the Company Timber Rights Property. "Company Timber Rights" means (i) the timber rights of the Issuer in respect of the Company Timber Rights Property referred to in clause (i) of the definition of such term, including, without limitation, the ownership of, and (subject to compliance with applicable law) the right in perpetuity (or, in the case of Company Timber Rights in respect of not more than 200 acres of timberlands, the right expiring not earlier than November 1, 2027) to harvest, all trees and timber, including, without limitation, standing timber and crops, now located on or hereafter planted or growing in the soil of such Company Timber Rights Property or any part or parcel thereof and (ii) any timber rights which are (A) purchased by the Issuer subsequent to the Closing Date with funds from the Prefunding Account, (B) in perpetuity or expire no earlier than December 31, 2048 and (C) described in an amendment to the Deed of Trust. "Company Timber Rights Property" means (i) those portions of the timberlands owned by Pacific Lumber, Salmon Creek or an unrelated third party on the date hereof which are subject to the Company Timber Rights and are described with particularity in the Pacific Lumber Timber Deeds and, as to a portion of such lands, in certain maps referenced in the Pacific Lumber Timber Deeds and held by an escrow agent pursuant to an Escrow Agreement by and among the Issuer, Pacific Lumber, Salmon Creek and such escrow agent, dated as of the Closing Date, and (ii) any timberlands that are subject to timber rights referred to in clause (ii) of the definition of Company Timber Rights. "Company Owned Timberlands" means: (a) the parcels of land described in (i) Exhibit A to the Deed of Trust and (ii) any amendment to the Deed of Trust with respect to the addition of Substitute Timber Property or Additional Timber Properties, together with the entire right, title and interest of the Issuer in and to such parcels of land, subject to Permitted Encumbrances, together with (a) all right, title and interest of the Issuer in and to all buildings, structures and other improvements now standing, or at any time hereafter constructed or placed, upon such land, including, without limitation, all right in and to all equipment and fixtures of every kind and nature on such land or in any such buildings, structures or other improvements (such buildings, structures, other improvements, equipment and fixtures being herein collectively called the "Improvements"), (b) all right, title and interest of the Issuer in and to all and singular the tenements, hereditaments, easements, rights of way, rights, privileges and appurtenances in and to such land belonging or in any way appertaining thereto, including without limitation, all right, title and interest of the Issuer in, to and under any streets, ways, alleys, vaults, gores or strips of land adjoining such land and (c) all claims or demands of the Issuer, in law or in equity, in possession or expectancy of, in and to such land together with all rents, income, revenues, issues and profits from and in respect of the property described above in this paragraph (a) and the present and continuing right to make claim for, collect, receive and receipt for the same as hereinafter provided. It is the intention of the Issuer that, so far as may be permitted by law, all of the foregoing, whether now owned or hereafter acquired by the Issuer, affixed, attached or annexed to such land shall be and remain or become and constitute a part of the Mortgaged Property and the security covered by and subject to the Lien of the Deed of Trust; (b) all right, title and interest of the Issuer in and to (i) all extensions, improvements, betterments, renewals, substitutes and replacements of and on the property described in the foregoing clause (a) and (ii) all additions and appurtenances thereto not presently leased to or owned by the Issuer and hereafter leased to, acquired by or released to the Issuer or, constructed, assembled or placed upon the Company Owned Timberlands immediately upon such leasing, acquisition, release, construction, assembling or placement, and without any further grant or other act by the Issuer (including, without limitation, all lands added by lot line adjustment to any existing legal parcel constituting part of the Company Owned Timberlands); and (c) all the estate, right, title and interest of the Issuer, in and to all contract rights, actions and rights in action, relating to the property described in clause (a), including, without limitation, all rights to insurance proceeds and unearned premiums arising from or relating to damage to such property. Notwithstanding the foregoing, Company Owned Timberlands shall not include any Pacific Lumber Timber. "Contingent Obligation" means, as to any Person, any obligation of such Person guaranteeing any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligations of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (x) for the purchase or payment of any such primary obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business or obligations in connection with surety or appeal bonds. "Conveyance Documents" means (i) the Grant Deed dated March 18, 1993 from Pacific Lumber, as grantor, to Scotia Pacific Holding Company, a Delaware corporation ("Scotia Pacific"), as grantee, conveying certain of the Company Owned Timberlands to Scotia Pacific and reserving in Pacific Lumber certain timber rights (the "First Pacific Lumber Grant Deed"), (ii) the Grant Deed dated on or prior to the Closing Date from Pacific Lumber, as grantor, to the Issuer, as grantee, conveying certain Company Owned Timberlands to the Issuer (the "Second Pacific Lumber Grant Deed"), (iii) the Quitclaim Deed dated on or prior to the Closing Date from Pacific Lumber to the Issuer conveying to the Issuer all of Pacific Lumber's interest in certain of the timber rights previously reserved by Pacific Lumber in the First Pacific Lumber Grant Deed (the "Pacific Lumber Quitclaim Deed"), (iv) three Grant Deeds, each dated on or prior to the Closing Date, from Pacific Lumber, as grantor, to the Issuer, as grantee, conveying the Company Timber Rights to the Issuer (the "Pacific Lumber Timber Deeds"), (v) the Bill of Sale and General Assignment dated as of March 23, 1993 transferring from Pacific Lumber certain of the Data Processing Information and other personal property to Scotia Pacific (the "Bill of Sale"), (vi) the Bill of Sale and General Assignment dated as of the Closing Date transferring from Pacific Lumber certain Data Processing Information and other personal property with respect to certain Company Owned Timberlands and the Company Timber Rights to the Issuer (the "New Bill of Sale"), (vii) the New Environmental Indemnification Agreement, (viii) the New Reciprocal Rights Agreement and (ix) the Transfer Agreement dated as of the Closing Date (the "New Transfer Agreement") among the Issuer, Pacific Lumber and Salmon Creek. "Corporate Trust Office" means the office of the Trustee, the Collateral Agent or the Registrar, as applicable, at which the trust created by this Indenture shall be principally administered. "Counsel" means legal counsel reasonably satisfactory to the Trustee. Such legal counsel may be an employee, officer, manager or director of the Issuer, Pacific Lumber or an Affiliate of either of them, unless otherwise indicated. "covenant defeasance" shall have the meaning set forth in Section 8.3 of the Indenture. "Data Processing Equipment" means all hardware, software, or other data processing systems or equipment, whether now owned or hereafter acquired by the Issuer, and wherever located. "Data Processing Information" means all information, programs, know-how, methods or methodology relating to the management of the Company Timber Property, the harvesting, severing or cutting of Company Timber, and the preparation of applications for Timber Harvesting Plans, including, without limitation, all such information, programs, know-how, methods or methodology relating to the GIS. "De Minimis Receipts" means payments received by the Issuer in an aggregate amount not greater than $50,000 at any one time that would otherwise be required to be deposited in the Collection Account and which the Issuer has deposited into another bank account. "Debt Obligations", as of any date (in each case determined before giving effect to any payment made on such date), means the sum of (a) the outstanding principal balance of the Timber Notes as of such date plus (b) interest accrued and unpaid on the Timber Notes to such date, including any interest on unpaid interest (computed on the basis of a 360-day year of twelve 30-day months), plus (c) any Premium accrued and unpaid on the Timber Notes and any interest accrued and unpaid thereon. "Deed of Trust" means the Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment dated the Closing Date by the Issuer, as trustor, in favor of the Deed of Trust Trustee for the benefit of the Collateral Agent, as beneficiary and agent for the Secured Parties, as the same may be amended, supplemented and otherwise modified and in effect from time to time. "Deed of Trust Trustee" means Fidelity National Title Insurance Company, and its successors in the trust created by the Deed of Trust. "Deemed Collateral Value", for any Monthly Calculation Date, shall be an amount equal to the product (in Dollars) of the Collateral Value Factor for such date and the Deemed Remaining Harvest Quantity for such date. "Deemed Production" through any date, means the number of Mbfe of Company Timber deemed harvested and sold from July 20, 1998 through such date pursuant to Section 5.5 of the Indenture. "Deemed Remaining Harvest Quantity" means, for any Monthly Calculation Date, an amount equal to the excess of (i) of the Structured Harvest Quantity over (ii) the sum of all Actual Production and all Deemed Production (each expressed in Mbfe) through such date. "Default" means any occurrence or condition that, with notice or the lapse of time, or both, would become an Event of Default. "Default Interest" means the interest accruing at the Default Rate on any amount of Regular Interest on any Class of Timber Notes that was not paid when such amount became due and payable. "Default Rate" means the applicable Note Rate plus 2.00% per annum. "defeasance" shall have the meaning set forth in Section 8.2 of the Indenture. "Defeased Notes" shall have the meaning set forth in Section 8.1 of the Indenture. "Deficiency Premium Amount", with respect to any Payment Deficiency on any Class of Timber Notes with respect to which a Deficiency Premium Amount is payable on a Note Payment Date, means an amount of interest (computed on the basis of a 360-day year of twelve 30-day months) on such Payment Deficiency, for the period from and including the Note Payment Date immediately preceding such Note Payment Date to but excluding such Note Payment Date, at a rate per annum equal to 1.50%. "Definitive Notes" has the meaning given to such term in Section 2.1. "Depletion Amortization Amount" means, on any Note Payment Date, an amount, if any, equal to the lesser of (a) the excess, if any, of (i) the balance in the Payment Account on such date over (ii) the sum of the Minimum Obligations on such date or (b) the Excess Debt Obligations Amount on such date. "Depository" means, with respect to the Global Certificates, DTC or such other Person or Persons as shall be designated as Depository by the Registrar pursuant to Section 2.6(a) of the Indenture. "Discounted Servicing Obligation", at any Monthly Deposit Date or Note Payment Date, means the amount specified as the Discounted Servicing Obligation (column J) opposite the Monthly Period preceding such date on the Structuring Schedule. "Disposal Site" means any site, facility or location to which any Hazardous Materials from or attributable to the Company Owned Timberlands have been transported for treatment, disposal, storage or deposit. "Dollars" and "$" means lawful money of the United States of America. "Downgrade Advance" has the meaning set forth in Section 11.2(c) of the Indenture. "DTC" means The Depository Trust Company, a New York corporation. "DTC Custodian" has the meaning given to such term in Section 2.1. "Eligible Investments" means any one or more of the following, which, in each case, matures (or is redeemable by the holder thereof without the incurrence of a loss) not later than the date the funds invested therein are required to be used: (a) direct obligations of, and obligations fully guaranteed or insured by, the United States of America or any agency or instrumentality of the United States of America, the obligations of which are backed by the full faith and credit of the United States of America; (b) demand deposits (including but not limited to controlled disbursement accounts or other similar accounts) and time deposits with, and certificates of deposit and bankers' acceptances issued by, any bank or trust company organized under the laws of the United States of America or any State thereof whose unsecured, unguaranteed long-term senior debt obligations are rated "AA" by S&P and "Aa2" by Moody's or higher, or whose unsecured, unguaranteed commercial paper obligations are rated "A-1" by S&P and "P-1" by Moody's or higher, including the Trustee, so long as the Trustee otherwise satisfies such requirements (or, in the case of the Expense Reserve, whether or not the Trustee satisfies such requirements); (c) repurchase agreements entered into with entities whose unsecured, unguaranteed long-term debt obligations are rated "AA" by S&P and "Aa2" by Moody's or higher, or whose unsecured, unguaranteed commercial paper obligations are rated "A-1" by S&P and "P-1" by Moody's or higher, pursuant to a written agreement with respect to any obligation described in clause (a) above; (d) commercial paper (including both noninterest-bearing discount obligations and interest-bearing obligations payable on demand or on a specified date not later than 150 days from the date of acquisition thereof) and having a rating of "A-1" by S&P and "P-1" by Moody's or higher; (e) direct obligations or shares of any money market fund or other similar investment company all of whose investments consist of obligations described in the foregoing clauses of this definition and that is rated "AAm" by S&P and "Aa" by Moody's or higher; (f) taxable auction rate securities commonly known as "money market notes" that at the time of purchase have been rated and the ratings for which (i) for direct issues, must not be less than "P-1" if rated by Moody's and not less than "A-1" if rated by S&P, or (ii) for collateralized issues which follow the asset coverage tests set forth in the Investment Company Act of 1940, as amended, must have long-term ratings of at least "AAA" if rated by S&P and "Aaa" if rated by Moody's; or (g) with Rating Agency Confirmation, any investments hereafter developed which are substantially comparable to those described above. "Elk River Timberlands" means, in the event that any Headwaters Acquisition Property is acquired by an Affiliate of the Issuer upon consummation of the Headwaters Agreement (as such term is defined in the Offering Memorandum), (a) such Headwaters Acquisition Property or (b) the Alternate Property, either (a) or (b) of which will be transferred to the Issuer within 180 days after consummation of the Headwaters Agreement and made subject to the Lien of the Deed of Trust promptly after the acquisition thereof by the Issuer. "Environmental Laws" means all federal, state or local statutes, laws, ordinances, regulations, rules, rulings, orders, restrictions, requirements, writs, injunctions, decrees or other official acts relating to the environment or hazardous or similar substances (including, without limitation, CERCLA and similar state laws), whether now or hereafter enacted or imposed by any Governmental Authority. "Euroclear" means Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System. "Event of Default" has the meaning given to such term in Section 7.1 of the Indenture. "Excess Debt Obligations Amount" means, on any Note Payment Date, an amount equal to the excess, if any, of (a) the sum of (i) the Adjusted Debt Obligations on such date plus (ii) the Discounted Servicing Obligation at such date over (b) the Total Collateral Value at such date. "Excess Funds" has the meaning given to such term in Section 5.3(c)(x) of the Indenture. "Excess Payment" has the meaning given to such term in Section 2.12(a) of the Indenture. "Exchange Act" means the Securities Exchange Act of 1934, as amended and in effect from time to time. "Exchange Offer Registration Statement" shall mean a registration statement of the Issuer on an appropriate form under the Securities Act with respect to the Registered Exchange Offer, all amendments and supplements to such registration statement, including post-effective amendments thereto, in each case including the prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchange Timber Notes" shall mean debt securities of the Issuer identical in all material respects to the Timber Notes (except that the Non-Registration Premium provisions and the transfer restrictions shall be modified or eliminated, as appropriate, and interest thereon shall accrue from and including the last date to which interest was paid on the Timber Notes or, if no such interest has been paid, from the Closing Date) to be issued under the Indenture to Holders in exchange for Registrable Securities pursuant to the Registered Exchange Offer. "Expense Reserve" means account number GE4766 established pursuant to Section 5.1(a) of the Indenture with the Securities Intermediary in the name of "State Street Bank and Trust Company, as Collateral Agent for the Scotia Pacific Company LLC Class A-1, A-2 and A-3 Noteholders and the Liquidity Providers--Expense Reserve," and all successor accounts thereto. "Final Maturity Date" means July 20, 2028. "Financial Asset" means "financial asset" as defined in Section 8- 102(a)(9) of the Uniform Commercial Code. "First Pacific Lumber Grant Deed" has the meaning given to such term in the definition of "Conveyance Documents." "General Laws" means all applicable statutes, laws, ordinances, regulations, rules, rulings, orders, restrictions, requirements, writs, injunctions, decrees or other official acts of any Governmental Authority, now and hereafter existing at any time or times, other than Environmental Laws and Tax Laws. "GIS" means the geographical information system of the Issuer, including any Data Processing Equipment and/or Data Processing Information which is a part of such system, and any updates, upgrades or modifications thereto developed by Pacific Lumber or the Issuer. "Global Notes" has the meaning ascribed to such term in Section 2.1. "Governmental Authority" means (a) the United States of America, (b) any State, commonwealth, county, parish, municipality, territory, possession or other governmental subdivision within the United States of America or under the jurisdiction of the United States of America and (c) any Tribunal. "Grant Deeds" means the First Pacific Lumber Grant Deed and the Second Pacific Lumber Grant Deed. "Harvested Timber" means all trees, timber and crops which have been severed, cut or harvested from the Company Timber Property (other than the Pacific Lumber Timber Rights Property), or any parcel thereof, and with respect to which title has not yet passed to a third party purchaser in compliance with the terms of the Indenture. "Hazardous Materials" means (a) any "hazardous waste," "hazardous substance," "hazardous material," "hazardous constituent," "toxic chemical," "toxic substance," "acutely toxic substance," "pollutant" or "contaminant," or any other formulation intended to define, list or classify substances by reason of hazardous, dangerous, toxic or other deleterious properties, such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity or "EP toxicity," as defined in any Environmental Law (including, without limitation, asbestos, polychlorinated biphenyls, oil, petroleum, petroleum-related or petroleum-derived products, natural gas, natural gas liquids, liquified natural gas or synthetic natural gas), or any similar substances, (b) any substance the presence of which on any property included in the Company Owned Timberlands is prohibited by any Environmental Law, (c) any underground storage tanks, (d) any flammable substances or explosives or any radioactive materials and (e) any other substances subject to any rules or regulations (including, without limitation, any notice requirements or special handling requirements) of any Governmental Authority under any Environmental Law. "Hazardous Materials Contamination" means the contamination (whether now existing or hereafter occurring) of any improvements, facilities, soil, groundwater, air or other elements on or of any property included in the Company Owned Timberlands or the contamination of any improvements, facilities, soil, groundwater, air or other elements on or of any other lands as a result of Hazardous Materials at any time (before or after date of the Deed of Trust) emanating from any Company Owned Timberlands. "Holder" means the Person in whose name a Timber Note or an Additional Timber Note is registered on the Register or on any similar register for any Additional Timber Notes, as the case may be. "Headwaters Acquisition Property" means, of the approximately 7,700 acres of timberlands expected to be acquired by an Affiliate of the Issuer upon the consummation of the Headwaters Agreement, that portion of such timberlands, if any, actually so acquired by an Affiliate of the Issuer upon consummation of the Headwaters Agreement. "Indebtedness" means, as to any Person, without duplication, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, (ii) the face amount of all letters of credit issued for the account of such Person and all drafts drawn thereunder, (iii) the aggregate amount payable under all capital leases under which such person is the lessee, (iv) all Contingent Obligations of such Person, (v) all net obligations of such Person under any interest rate protection agreements, (vi) all obligations of such Person under "take-or-pay" or other similar agreements and (vii) all liabilities of the types described in clauses (i), (ii), (iii), (iv), (v) and (vi) secured by any Lien on any property owned by such Person, whether or not such liabilities have been assumed by such Person; provided, however, that Indebtedness shall not include (a) trade payables due within 90 days, accrued expenses and other current liabilities arising in the ordinary course of business in commercially reasonable amounts not inconsistent with industry standards, (b) compensation, pension obligations and other obligations arising from employee benefits and employee arrangements in commercially reasonable amounts not inconsistent with industry standards, (c) indebtedness consisting of letters of credit or otherwise required by law in respect of workers' compensation obligations or similar social insurance and (d) indebtedness the occurrence of which is expressly contemplated by the terms of the Indenture or other Operative Documents. "Indebtedness Reserve Account" means account number GE4806 established pursuant to Section 5.1(a) of the Indenture with the Securities Intermediary in the name of "State Street Bank and Trust Company, as Collateral Agent for the Scotia Pacific Company LLC Class A-1, A-2 and A-3 Noteholders and the Liquidity Providers--Indebtedness Reserve Account," and all successor accounts thereto.. "Indebtedness Reserve Debt" has the meaning given to such term in Section 5.11 of the Indenture. "Indenture" shall mean the Indenture between the Issuer and the Trustee, pursuant to which the Timber Notes have been issued, as the same may be amended, modified or supplemented. "Independent" when used with respect to any specified Person, means that such Person: (a) is in fact independent of the Issuer and any other obligor upon the Timber Notes; (b) is not an employee, officer, manager, director or an Affiliate of the Issuer or such other obligor; and (c) does not own, and that no Affiliate of such Person owns, directly or indirectly, any beneficial or other interest in the Issuer or such other obligor or in any Affiliate of the Issuer or such other obligor. "Independent Appraiser" means any person who in the course of his business appraises properties of a type similar to the Company Owned Timberlands or Company Timber Rights and who is Independent. "Independent Manager" means a Person who, on any date on which a determination thereof is to be made: (a) is a voting member of the Board of Managers; (b) is not an Affiliate of the Issuer (otherwise than to the extent such Person may be deemed an Affiliate of the Issuer by virtue of such position as a manager or as a director of the Issuer or of any entity merged with or consolidated into the Issuer) or Pacific Lumber, or an employee, officer or director of Pacific Lumber, or an employee or officer of the Issuer; (c) has not received, directly or indirectly, at any time during the two years immediately preceding such date, material compensation or payment from the Issuer or Pacific Lumber or from any Affiliate of the Issuer or Pacific Lumber (except for director's or manager's fees and expense reimbursement for serving as such); (d) does not own, directly or indirectly, any beneficial or other interest in the Issuer or Pacific Lumber; and (e) shall have a fiduciary duty to the Noteholders. "Insolvency Event of Default" means the Event of Default specified in Section 7.1(11) of the Indenture. "Institutional Accredited Investor" means a Person which is an institution and is an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act, but is not a QIB. "Interest Advance" has the meaning set forth in Section 11.2(a) of the Indenture. "Issuer" has the meaning given to such term in the recitals to the Indenture. "Issuer Taxes" means (without duplication) all taxes, assessments, fees, levies, imposts, duties, deductions, withholdings or other charges, together with any interest and penalties payable in connection therewith, from time to time or at any time imposed or assessed by any statute, law, ordinance, regulation, rule, ruling, order, writ, injunction, decree or other official act of any Governmental Authority (a) against the Issuer by reason of the Issuer's ownership, harvesting, sale or other disposition or use of all or any part of the Mortgaged Property, (b) upon or with respect to, measured by or charged against, required to be deducted or withheld from or otherwise attributable to all or any part of the Mortgaged Property (or the use, sale or other disposition thereof) or (c) upon or against the Issuer, the Collateral Agent, the Services Provider, the Trustee or any Beneficiary (as defined in the Deed of Trust) by reason of the Deed of Trust or the Liens created thereby, including, without limitation, yield, franchise, sales, transfer, gross receipts, profits, income (other than income taxes imposed on amounts paid or accrued on the Notes), property, ad valorem, production and severance taxes. "Legended Definitive Note" means a Definitive Note bearing the Securities Legend. "Lien" means any deed of trust, security interest, assignment, pledge, hypothecation, charge or other encumbrance. "Lien of the Deed of Trust" means the lien, assignment and security interest created or granted, or renewed, extended and continued in force and effect, by the Deed of Trust (including the after-acquired property provisions of the Deed of Trust), or created by any subsequent conveyance under the Deed of Trust or supplement to the Deed of Trust in favor of the Collateral Agent (whether made by the Issuer or any other Person), or otherwise created, effectively constituting any property a part of the security and Mortgaged Property held by the Collateral Agent for the benefit of the Secured Parties. "Line of Credit Acceleration" means the election of the Liquidity Providers, during the continuance of a Triggering Event, to permanently cancel their obligations to make Advances under the Line of Credit Agreement (other than by reason of a Termination Advance having been made or the occurrence of the Scheduled Termination Date) or, if a Termination Advance has been made, to require that such Advance be payable on each Monthly Deposit Date and Note Payment Date in accordance with Sections 5.3 and 5.7 of the Indenture, in each case as provided in the Line of Credit Agreement, or such other meaning as provided in the Line of Credit Agreement then in effect. "Line of Credit Agent" means the financial institution or other agent under the Line of Credit Agreement, designated thereunder from time to time, through whom the Liquidity Providers make Advances to the Issuer or to the Trustee on behalf of the Issuer and who is authorized to receive payments of interest and principal payable to the Liquidity Providers from the Issuer, in accordance with the terms of the Line of Credit Agreement. "Line of Credit Agreement" means a credit facility, including a line of credit, revolving loan agreement, letter of credit facility or any similar financing facility, of the Issuer in effect from time to time with one or more Liquidity Providers each of whom, as of the date such credit facility is first entered into, or, if later with respect to any Liquidity Provider, as of the date it first becomes party thereto, has the Required Liquidity Provider Rating, pursuant to which the Issuer or the Trustee on behalf of the Issuer may obtain Interest Advances or a Termination Advance from the Liquidity Providers thereunder, as such credit facility may from time to time be extended, amended, modified, supplemented or amended and restated in accordance with the provisions of Section 11.3 of the Indenture; provided, however, that such credit facility is either (I) the Bank of America Credit Agreement or (II) a replacement for a then existing Line of Credit Agreement entered into in compliance with Section 11.4 of the Indenture. As of the Closing Date, the Line of Credit Agreement is the Bank of America Credit Agreement. "Line of Credit Amortization Amount" means, as of any Note Payment Date, the amount, if any, of principal, which, under the terms of the Line of Credit Agreement is payable on such Note Payment Date in respect of a Termination Advance. "Liquidity Account" means account number GE4808 established pursuant to Section 5.1(a) of the Indenture with the Securities Intermediary in the name of "State Street Bank and Trust Company, as Collateral Agent for the Scotia Pacific Company LLC Class A-1, A-2 and A-3 Noteholders and the Liquidity Providers -- Liquidity Account," and all successor accounts thereto. "Liquidity Provider" means any financial institution that is at the relevant time a party to the Line of Credit Agreement and has a Commitment thereunder or has Advances outstanding thereunder. "Liquidity Providers' Expenses" means, as of any date, all amounts then due from the Issuer under the Line of Credit Agreement, other than interest (including any Supplemental Liquidity Provider Interest) and principal and other than any Additional Liquidity Provider Fees; provided, however, that indemnification obligations under the Line of Credit Agreement shall not be deemed to be Liquidity Providers' Expenses (but shall be deemed to be obligations for interest and principal on Advances) to the extent that such indemnification obligations include, or represent compensation for or damages constituting, the principal of and interest on Advances. "Lumber PPI Index" means, with respect to any date, the 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 or any substitute index hereafter adopted by the Department of Labor. "Lumber PPI Inflation Factor" means, with respect to any date, a fraction, the numerator of which is the then most recent Lumber PPI Index and the denominator of which is the Lumber PPI Index in effect with respect to January 1, 1998. "Lump Sum Sale" means, with respect to any sale of Company Timber, any agreement or arrangement pursuant to which the Issuer receives full cash payment in advance for the purchase price for a specified quantity of Company Timber (or Company Timber covered by one or more Timber Harvesting Plans or contained on one or more parcels of land), and is required to provide, subsequent to the date of such payment, the quantity of timber provided therein (or covered by such Timber Harvesting Plans or contained on such parcels). "Majority Holders," at any date, means, subject to the provisions of Section 7.13 of the Indenture, the Holders of a majority in aggregate outstanding principal amount of Timber Notes and any Additional Timber Notes of all Classes at such date. "Manager" means a manager of the Issuer. "Material Adverse Effect" means any material adverse effect on (a) the Mortgaged Property or the operation, use or value thereof, (b) the ability of the Issuer to perform and observe in all material respects its covenants and obligations under the Deed of Trust, the Indenture or any of the other Operative Documents, (c) the condition (financial or otherwise), results of operations, business or business prospects of the Issuer or (d) the rights or remedies of the Trustee or any Noteholder under the Indenture or of the Deed of Trust Trustee or the Collateral Agent under the Deed of Trust. "Maximum Non-Cash Consideration Amount" shall mean, as of the date of release of any Company Owned Timberlands or Company Timber Rights (the "Release Date"), an amount equal to the amount of Excess Funds which would be available for payment to or as directed by the Issuer pursuant to Section 5.3(c)(x) of the Indenture on the next succeeding Monthly Deposit Date, based upon the following assumptions: (i) all Section 6.1 Notes proposed to be received in connection with the sale of Company Owned Timberlands or Company Timber Rights were to be received in the form of cash, (ii) no proceeds from any Company Owned Timberlands or Company Timber Rights (pursuant to sales under the New Master Purchase Agreement or otherwise) were received during the period from the Release Date through and including the next succeeding Monthly Deposit Date (except for the proceeds of sales pursuant to the New Master Purchase Agreement made prior to the Release Date in the Monthly Period to which such next succeeding Monthly Deposit Date relates), (iii) except for Deemed Production attributable to such sale of Company Owned Timberlands or Company Timber Rights, there was no Actual Production or Deemed Production during the period, if any, from and including the Release Date through the end of the Monthly Period to which such next succeeding Monthly Deposit Date relates, (iv) the balances in the Collection Account, the Liquidity Account, if any, plus any amount available under the Line of Credit Agreement and the Expense Reserve shall equal the respective balances as of such Release Date (giving effect to transactions on such date and to payments under the New Master Purchase Agreement to be made on such next succeeding Monthly Deposit Date in respect of sales made prior to the Release Date) and (v) all transfers to and from the Collection Account as described in Sections 5.3(c)(i) through (ix), except to the extent provided in clauses (ii), (iii) and (iv) of this definition, shall be computed in the same manner as such items would be computed on the next succeeding Monthly Deposit Date. "Mbfe" means, with respect to (i) old growth redwood, one Mbfe for each one thousand board feet, net Scribner scale, of Company Timber, (ii) old growth Douglas-fir, 0.723757 Mbfe for each one thousand board feet, net Scribner scale, of Company Timber, (iii) young growth redwood, 0.751381 Mbfe for each one thousand board feet, net Scribner scale, of Company Timber, (iv) young growth Douglas-fir, 0.488950 Mbfe for each one thousand board feet, net Scribner scale, of Company Timber and (v) each other species or category of Company Timber other than hardwoods (i.e., trees which are not conifers), 0.309392 Mbfe for each one thousand feet, net Scribner scale, of Company Timber. "Minimum Principal Amortization" means, for any Class of Timber Notes, the amount of principal payments on the Timber Notes of such Class set forth for such Class under the column headed "Minimum Principal Amortization" in Schedule B to the Indenture. "Minimum Principal Amortization Amount" means, for any Class of Timber Notes, as of any Note Payment Date, the excess, if any, of: (i) the sum of all amounts specified with respect to such Class in Schedule B to the Indenture as Minimum Principal Amortization opposite the respective Note Payment Dates occurring on or prior to such Note Payment Date, over (ii) the aggregate principal amount that was paid on the Timber Notes of such Class prior to such Note Payment Date. "Minimum Obligations" means, on any Note Payment Date, the sum of (a) the Aggregate Minimum Principal Amortization Amount on such Note Payment Date, (b) all accrued and unpaid interest (excluding interest on premiums) due and payable to the Holders of the Timber Notes and any Additional Timber Notes on such Note Payment Date, and (c) the aggregate amount, if any, of principal and interest (other than any Supplemental Liquidity Provider Interest) in respect of outstanding Advances under the Line of Credit Agreement to be paid from the Payment Account on such Note Payment Date. "Monthly Calculation Date" means the last day of each calendar month. "Monthly Certificate Delivery Date", with respect to any Monthly Calculation Date, means the day which is two Business Days prior to the Monthly Deposit Date with respect to such Monthly Calculation Date. "Monthly Deposit Date", with respect to any Monthly Calculation Date, means (a) the 20th day of the calendar month following such Monthly Calculation Date or (b) if such day is not a Business Day, the Business Day immediately succeeding such day (provided, however, that all calculations as of such Monthly Deposit Date shall be computed as of the date that would have been a Monthly Deposit Date if such date were a Business Day). "Monthly Period" means, with respect to any Monthly Calculation Date, the calendar month ending on such Monthly Calculation Date. "Monthly Noteholder Certificate" means a Certificate in substantially in the form of Exhibit D to the Indenture. "Monthly Trustee Certificate" means a Certificate as of a Monthly Calculation Date prepared and delivered by the Issuer pursuant to Section 5.3(b) of the Indenture (which Certificate, except as otherwise provided herein, shall relate to the sale of Company Timber during the Monthly Period ending on such Monthly Calculation Date). "Moody's" means Moody's Investors Service, Inc. or any successor to such corporation's business of rating securities. "Mortgaged Property" means all of the rights, titles, interests and estates now owned or hereafter acquired by the Issuer in, to and under, each of the following: (a) the Company Owned Timberlands; (b) the Company Timber Rights; (c) all Company Timber; (d) the Accounts, all funds, investments, securities and Financial Assets from time to time held in or credited to any Account, all Security Entitlements with respect to any Account and all interests, profits, Proceeds, or other income derived from such funds, investments, securities, Financial Assets and Security Entitlements and all the Issuer's rights in any funds held in any Account; (e) all the Subject Contracts, and all the Proceeds now or hereafter receivable, owing, deliverable, performable or attributable to or under the Subject Contracts; (f) all Data Processing Equipment and all other machinery, equipment and other tangible personal property and all fixtures and improvements now or hereafter situated upon any part of the Company Owned Timberlands; (g) all Data Processing Information and all other information, programs, know-how, methods or methodology relating to the management of the Company Timber Property and the harvesting, severing or cutting of Company Timber; (h) all existing and future permits, licenses, rights-of-way, easements, leases, franchises, certificates of public convenience and necessity, and all similar rights and privileges, that relate to or are appurtenant to any part of the Company Timber Property; (i) all Proceeds of and other rights relating to insurance or condemnation (including, without limitation, any judgments, insurance proceeds, awards of damages and settlements) receivable or accruing by reason of the loss of, damage to, diminution in the value of or income or revenues from, or taking (by power of eminent domain or otherwise) of all or any part of the properties or interests hereinabove or hereinbelow described in this definition of the Mortgaged Property; (j) all documents, instruments, drafts, acceptances, general intangibles, chattel paper, deposit accounts, accounts, and all the Proceeds therefrom or attributable thereto, whether now or hereafter existing, arising out of or relating to the sale, use, exchange, development, operation, cutting, harvesting, storage, gathering, transportation, improvement, marketing, disposal, lease, handling or other dealings with or of all or any portion of the properties or interests hereinabove or hereinbelow described in this definition of Mortgaged Property; (k) without limiting the foregoing descriptions, all equipment and inventory (as such terms are defined in the Uniform Commercial Code) and all documents (as defined in the Uniform Commercial Code) now and at any time or times hereafter obtained or acquired by the Issuer covering or representing all or any portion of the properties or interests hereinabove or hereinbelow described in this definition of Mortgaged Property; (l) all Timber Harvesting Plans and any other permits, documents or other governmental approvals pertaining to the harvesting, cutting, severing, transporting, storing, processing or handling of the Company Timber; and all plans, engineering reports, land planning, maps, surveys, and information and any other reports, plans, maps, surveys or information to be used in connection with the Company Owned Timberlands or Company Timber Rights. (m) all property of any kind or description that (i) may from time to time after the date of the Deed of Trust by delivery or by writing of any kind be conveyed, mortgaged, pledged, assigned or transferred to the Collateral Agent by the Issuer, or by any Person, with the consent of the Issuer, or otherwise as expressly permitted by the terms of the Deed of Trust and accepted by the Collateral Agent to be held as part of the Mortgaged Property or (ii) is required by the terms of the Indenture or the Deed of Trust to be subjected to the Lien of the Deed of Trust; (n) each and every right, privilege, hereditament and/or appurtenance in anywise incident or appertaining to any of the properties or interests hereinabove or hereinbelow described in this definition of the Mortgaged Property; (o) the Proceeds from or attributable to the rights, titles, interests and estates hereinabove referred to in this definition of the Mortgaged Property (including, without limitation, all Assigned Proceeds), all guarantees and suretyship agreements relating to any such Proceeds, and the rights, titles and interests of the Issuer therein, and all security for payment or performance thereof, now or hereafter existing or arising; (p) all other personal property used in connection with the above-described Mortgaged Property; and (q) all extensions, renewals, proceeds, accessions, improvements, substitutions and replacements of and to any of the above-described Mortgaged Property. Notwithstanding the foregoing, Mortgaged Property shall not include (i) any Pacific Lumber Timber, (ii) any motor vehicles subject to a certificate of title law, (iii) any Timber Harvesting Plans, to the extent that the Issuer is prohibited from granting a security interest therein, (iv) any permits, documents or other governmental approvals other than Timber Harvesting Plans which the Issuer is prohibited by applicable law from granting a security interest in or (v) any accounts or inventory (as each such term is defined in the Uniform Commercial Code) of Pacific Lumber or any proceeds thereof. "New Additional Services Agreement" means the New Additional Services Agreement dated as of the Closing Date between the Issuer and Pacific Lumber, as the same may be amended, modified or supplemented. "New Bill of Sale" has the meaning assigned to such term in the definition of "Conveyance Documents." "New Environmental Indemnification Agreement" means the New Environmental Indemnification Agreement dated as of the Closing Date between the Issuer and Pacific Lumber, as the same may be amended, modified or supplemented. "New Master Purchase Agreement" means the New Master Purchase Agreement dated as of the Closing Date between the Issuer and Pacific Lumber, as the same may be amended, modified or supplemented. "New Reciprocal Rights Agreement" means the New Reciprocal Rights Agreement dated as of the Closing Date among the Issuer, Pacific Lumber and Salmon Creek, as the same may be amended, modified or supplemented. "New Services Agreement" means the New Services Agreement entered into between the Issuer and Pacific Lumber dated as of the Closing Date, as the same may be amended, modified or supplemented, and any similar agreement hereafter entered into between the Issuer and any Person (other than Pacific Lumber) as successor Services Provider, as the same may be amended, modified or supplemented. "New Transfer Agreement" has the meaning assigned to such term in the definition of "Conveyance Documents." "Nonrecourse Timber Acquisition Indebtedness" means purchase money indebtedness incurred by the Issuer in the course of acquisition of any timberlands or timber rights, provided that (i) in the event of nonpayment of such purchase money indebtedness, the holder thereof shall only have recourse for repayment to the property securing such indebtedness and (ii) the agreements in respect of such purchase money indebtedness shall contain a non-petition agreement substantially similar to that included in the New Master Purchase Agreement. "Non-Renewal Advance" has the meaning set forth in Section 11.2(b) of the Indenture. "Note Owner," with respect to a Book-Entry Note, means the person who is the owner of such Book-Entry Note, as reflected on the books of the Clearing Agency, or on the books of a Person maintaining an account with such Clearing Agency (directly or through a Clearing Agency Participant, in accordance with the rules of such Clearing Agency). "Note Payment Date" means January 20, 1999, and the 20th day of each January and July thereafter through and including the Final Maturity Date. Notwithstanding the foregoing provisions of this definition, if any date or day that would constitute a Note Payment Date is not a Business Day, the next succeeding such date or day shall constitute the Note Payment Date (provided, however, that interest and Deficiency Premiums payable on such Note Payment Date, and all other calculations as of such Note Payment Date, shall be computed as of the date which would have been a Note Payment Date if such date were a Business Day). "Note Payment Noteholder Certificate" means a Certificate substantially in the form of Exhibit F to the Indenture. "Note Payment Trustee Certificate" means the Certificate required to be prepared and submitted by the Issuer pursuant to Section 5.7(e) of the Indenture. "Note Purchase Agreement" means the Purchase Agreement dated as of July 9, 1998 among the Issuer, Pacific Lumber and Salomon Brothers Inc., as Representative of the Initial Purchasers, in respect of the initial purchase of the Timber Notes. "Note Rate" means, for each Class of Timber Notes, the interest rate indicated on the face of each Timber Note of such Class. "Noteholder" means a Holder. "Offering Memorandum" means the Offering Memorandum dated July 9, 1998 relating to the offering of the Timber Notes, as such Offering Memorandum may be amended or supplemented. "Officer" has the meaning given to such term in the definition of "Responsible Officer." "Officer's Certificate" means a certificate that: (a) is signed by a Responsible Officer of the Person or Persons required to furnish or submit such certificate; and (b) complies with the applicable requirements of Section 12.5 of the Indenture or Section 10.9 of the Deed of Trust, as the case may be. "Operating Agreement" means the Agreement of Limited Liability Company of the Issuer, as amended from time to time. "Operating Default" means: (a) any failure by the Services Provider to provide any certificate, report or notice to the Issuer or the Trustee, all in accordance with the New Services Agreement, and the continuation of such failure for five Business Days after notice thereof from the Issuer or the Trustee; (b) any failure by the Services Provider to observe or perform any covenant or agreement of the Services Provider under the New Services Agreement that has a Material Adverse Effect (and if such default is remediable, the continuation of such default for a period of 30 days after notice thereof from the Issuer or the Trustee); (c) the execution by the Services Provider of any instrument purporting to assign any of its duties or responsibilities under the New Services Agreement except as expressly permitted by the New Services Agreement; (d) any representation or warranty made by Pacific Lumber as initial Services Provider in the New Services Agreement (or by any successor Services Provider in any other New Services Agreement) shall prove to have been incorrect as of the time when the same was made and the circumstance or condition in respect of which such representation or warranty was incorrect has a Material Adverse Effect (and if such default is remediable, the continuation of such default for a period of 30 days after notice thereof from the Issuer or the Trustee); or (e) the Bankruptcy or Insolvency of the Services Provider. "Operative Documents" means the Indenture, the Deed of Trust, the Timber Notes from time to time outstanding, the New Services Agreement, the New Master Purchase Agreement (and log purchase agreements entered into pursuant thereto) and the Conveyance Documents. "Opinion of Counsel" means a written opinion of Counsel which: (a) complies with the applicable requirements of Section 12.5 of the Indenture or Section 10.9 of the Deed of Trust, as applicable; (b) is addressed to the Trustee or the Collateral Agent, as applicable; and (c) is in form and substance reasonably satisfactory to the addressee. "outstanding" when used with reference to any Timber Notes or any Additional Timber Notes, means, as of any particular time, all Timber Notes (or Additional Timber Notes, as applicable) theretofore authenticated and delivered by the Trustee, other than Timber Notes (or Additional Timber Notes, as applicable) in respect of which all outstanding or accrued principal of, Regular Interest and Default Interest on, Premium on and interest on Premium (or similar amounts with respect to the Additional Timber Notes, as applicable) shall have been paid in full in accordance with the Indenture; Timber Notes or Additional Timber Notes theretofore canceled by the Trustee, or surrendered to the Trustee for cancellation, pursuant to Section 2.9 of the Indenture; Timber Notes or Additional Timber Notes in substitution for which other Timber Notes or Additional Timber Notes shall theretofore have been authenticated and delivered pursuant to the Indenture; and solely for purposes of determining whether the holders of the requisite aggregate outstanding principal amount of Timber Notes (or Timber Notes and Additional Timber Notes, as applicable) have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Timber Notes (and Additional Timber Notes, as applicable) registered in the name of (i) the Issuer or any other obligor upon the Timber Notes (or Additional Timber Notes, as applicable), (ii) any nominee or Affiliate of the Issuer or such other obligor, (iii) any successor to the interest of the Issuer in all or substantially all of the Mortgaged Property, (iv) any nominee or Affiliate of any such successor, (v) Pacific Lumber or (vi) any nominee or Affiliate or nominee of any Affiliate of Pacific Lumber. "Pacific Lumber" means The Pacific Lumber Company and any successor in interest thereto. "Pacific Lumber Timber" means (i) all trees and timber, including, without limitation, standing timber and crops, now located on or hereafter planted or growing in the soil of any Pacific Lumber Timber Rights Property, or any part or parcel thereof, and all additions, substitutions and replacements thereof and (ii) any and all of the foregoing which have been severed, cut or harvested from the Pacific Lumber Timber Rights Property or any part of parcel thereof. "Pacific Lumber Timber Deeds" has the meaning assigned to such term in the definition of "Conveyance Documents." "Pacific Lumber Timber Rights" means the timber rights of Pacific Lumber in respect of the Pacific Lumber Timber Rights Property, including, without limitation, the ownership of, and (subject to compliance with applicable law) the right in perpetuity to harvest, all trees and timber, including, without limitation, standing timber and crops, now located on or hereafter planted or growing in the soil of any Pacific Lumber Timber Rights Property or any part or parcel thereof. "Pacific Lumber Timber Rights Property" means those portions of the Company Owned Timberlands specifically identified as Pacific Lumber Timber Rights Property on those certain maps held by an escrow agent pursuant to an Escrow Agreement by and among the Issuer, Pacific Lumber, Salmon Creek and such escrow agent, dated as of the Closing Date. "Pacific Lumber Timber Rights Property Release Documents" has the meaning assigned to such term in Section 6.3 of the Indenture. "Pacific Lumber Timber Rights Property Release Notice" has the meaning set forth in Section 6.3 of the Indenture. "Pay-as-You-Harvest Sale" means, with respect to any sale of Company Timber, any agreement or arrangement pursuant to which (A) the Issuer shall receive partial payment in advance (the "Up-Front Payment") for the purchase of a specified quantity of Company Timber (or Company Timber covered by one or more Timber Harvesting Plans or contained on one or more parcels of land), and the balance of which shall be paid as (or after) such Company Timber is harvested and/or delivered or (B) the Issuer shall receive payments for the purchase of a specified quantity of Company Timber (or Company Timber covered by one or more Timber Harvesting Plans or contained on one or more parcels of land) as (or after) such Company Timber is harvested and/or delivered. "Paying Agent" has the meaning given to such term in Section 2.3 of the Indenture. "Payment Account" means account number GE4765 established pursuant to Section 5.1(a) of the Indenture with the Securities Intermediary in the name of "State Street Bank and Trust Company, as Collateral Agent for the Scotia Pacific Company LLC Class A-1, A-2 and A-3 Noteholders and the Liquidity Providers--Payment Account," and all successor accounts thereto. "Payment Default" means any Event of Default specified in paragraph (1), (2), (3), (4) or (5) of Section 7.1 of the Indenture. "Payment Deficiency" has the meaning given to such term in Section 2.12(b) of the Indenture. "Permitted Encumbrances" means: (a) the specific matters, if any, to which the Deed of Trust is expressly made subject as set forth in a Schedule to a mortgagee title insurance policy in favor of the Trustee or Collateral Agent in respect of the Mortgaged Property; (b) the New Reciprocal Rights Agreement; (c) easements, restrictions, rights-of-way, servitudes, restrictive covenants, permits, licenses, use agreements, boundary agreements, surface leases, subsurface leases, or other similar encumbrances on, over or in respect of the Company Timber or the Company Timber Property contained in or arising from or in respect of any document, instrument or agreement entered into by or with the consent of the Issuer in connection with any Timber Harvesting Plans, Timber Laws or Environmental Laws; (d) discrepancies, conflicts in boundary lines, shortages in area, encroachments or any other facts which a correct survey would disclose, none of which, singly or in the aggregate, materially adversely affects the operation or value of the Mortgaged Property or materially adversely impairs the Issuer's or the Collateral Agent's right to receive and retain the proceeds of cutting, harvesting or severing of Company Timber attributable to the Company Owned Timberlands or the Company Timber Rights; (e) Liens for Issuer Taxes not yet delinquent or that are being diligently contested by the Issuer in good faith by appropriate proceedings and against which adequate reserves are being maintained in accordance with generally accepted accounting principles by the Issuer, provided that the enforcement or foreclosure of any such lien shall have been stayed pending the resolution of such proceedings; (f) operators' liens or mechanics' or materialmen's liens arising in the ordinary course of business and incidental to the incurrence of reasonable expenses permitted by the Indenture or Deed of Trust with respect to the Mortgaged Property for amounts not yet due and payable or that are being diligently contested by the Issuer in good faith by appropriate proceedings and against which adequate reserves are being maintained by the Issuer, provided that the enforcement or foreclosure of any such lien shall have been stayed pending the resolution of such proceedings and such lien is fully subordinate to and subject in right of prior payment of the Secured Obligations; (g) easements, restrictions, rights-of-way, servitudes, restrictive covenants, permits, licenses, use agreements, boundary agreements, surface leases, subsurface leases or other similar encumbrances on, over or in respect of the Company Timber or Company Owned Timberlands, none of which, singly or in the aggregate, materially adversely affects the operation or value of the Mortgaged Property or materially adversely impairs the Issuer's or the Collateral Agent's right to receive and retain the Proceeds of cutting, harvesting or severing Company Timber attributable to the Company Owned Timberlands or the Company Timber Rights; (h) such sales contracts and other similar agreements as are customarily found in connection with operating properties comparable to the Company Owned Timberlands or Company Timber Rights, none of which, singly or in the aggregate, materially adversely affects the operation or value of the Mortgaged Property or materially adversely impairs the Issuer's or the Collateral Agent's right to receive and retain the Proceeds of cutting, harvesting or severing Company Timber attributable to the Company Owned Timberlands or the Company Timber Rights; (i) any lease, contract or other agreement or encumbrance (including, without limitation, the interest of any purchaser under a Lump Sum Sale Agreement entered into in accordance with Section 6.1 of the Indenture in and to the Company Timber so purchased) granted or created by the Issuer after the date of the Deed of Trust that is specifically permitted and authorized under the terms of the Indenture and/or the Deed of Trust; and (j) Liens securing the Indebtedness referred to in clause (u) of Section 4.9 of the Indenture. "Permitted Investments" means (i) Eligible Investments, (ii) any Section 6.1 Notes, and (iii) investments of a nature described in the definition of Eligible Investments, without regard to the required ratings or maturities set forth therein. "Person" means an individual, a corporation, a partnership, a trust, an unincorporated organization, a limited liability company (including, without limitation, the Issuer), or a government or political subdivision thereof. "Personnel Costs" means all costs and expenses incurred by the Issuer after the Closing Date attributable to individuals employed by the Issuer. "Post-Acceleration Date" has the meaning given to such term in Section 7.7 of the Indenture. "PPI Index" means, with respect to any date, the most recent Producer Price Index (all Commodities) as published by the United States Department of Labor, Bureau of Labor Statistics or any substitute index hereafter adopted by the Department of Labor. "Prefunding Account" means account number GE4794 established pursuant to Section 5.1(a) of the Indenture with the Securities Intermediary in the name of "State Street Bank and Trust Company, as Collateral Agent for the Scotia Pacific Company LLC Class A-1, A-2 and A-3 Noteholders and the Liquidity Providers--Prefunding Account," and all successor accounts thereto. "Premium" means any Prepayment Premium payable in respect of an Excess Payment pursuant to Section 2.12(a) of the Indenture, any Deficiency Premium Amount payable in respect of a Payment Deficiency pursuant to Section 2.12(b) of the Indenture and any Non-Registration Premium payable pursuant to Section 2.12(c) of the Indenture. "Premium Provision" means, for any Monthly Deposit Date, an amount equal to that described in either paragraph (a) or (b) below: (a) if such Monthly Deposit Date is a Note Payment Date, the Premium Provision will equal the amount, if any, of the Prepayment Premium that will become payable on such Monthly Deposit Date by virtue of the payments or prepayments of principal on the Timber Notes being made on such Note Payment Date, less the amount, if any, of all amounts of Premium Provision deposits made in the Payment Account since the immediately preceding Note Payment Date and the interest earned on such deposits to such Monthly Deposit Date; and (b) if such Monthly Deposit Date is not a Note Payment Date, the Premium Provision will equal an amount equal to the present value at such Monthly Deposit Date (discounted from the immediately succeeding Note Payment Date at the Collection Account Rate, compounded monthly) of the excess, if any, of (i) the amount, if any, of the Prepayment Premium that would become payable on the Timber Notes on such Monthly Deposit Date if such Monthly Deposit Date were a Note Payment Date and the Scheduled Amortization for each Class of Timber Notes with respect to such Monthly Deposit Date were the amount obtained by multiplying the Scheduled Amortization for such Class of Timber Notes with respect to the immediately succeeding Note Payment Date by a fraction, the numerator of which is the number of months from the immediately preceding Note Payment Date to such Monthly Deposit Date and the denominator of which is six over (ii) the amount, if any, of all amounts of Premium Provision deposited in the Payment Account after the immediately preceding Note Payment Date and the interest earned on such deposits to such Monthly Deposit Date. "Premium Provision Refundable Amount" means, for any Monthly Deposit Date (except any Monthly Deposit Date immediately following a Monthly Deposit Date that is a Note Payment Date), the amount, if any, by which the Premium Provision for the immediately preceding Monthly Deposit Date exceeded the Premium Provision for such Monthly Deposit Date. The "Premium Provision Refundable Amount" for any Monthly Deposit Date immediately following a Monthly Deposit Date that is a Note Payment Date shall be zero. "Prepayment Premium" means, with respect to principal of any Class of Timber Notes paid earlier than provided under the Scheduled Amortization for such Class of Timber Notes, the premium that will be due and payable as a result of such prepayment, determined as provided in the Indenture. "Prepayment Premium Amount," for any Class of Timber Notes with respect to any Excess Payment on such Class on any date, means an amount that is equal to the excess, if any, of: (a) the sum of (i) the present value (as defined below and subject to the assumption below) at such date of such Excess Payment plus (ii) the sum of the present values (as so defined and subject to said assumption) at such date of the amounts of interest, computed at the Note Rate for such Class, that would thereafter have accrued with respect to such Excess Payment over (b) such Excess Payment. For purposes of this definition, (1) the present values of such Excess Payment and interest thereon shall be calculated assuming that such Excess Payment had been paid on the Note Payment Date or Note Payment Dates on which such Excess Payment would have otherwise been paid if a portion of the principal amount of the applicable Class of Timber Notes that equals (but does not exceed) the Scheduled Amortization Amount for such Class on each such Note Payment Date were paid on such Note Payment Date, (2) "present value" shall be computed in accordance with generally accepted financial practice based on a 360-day year of twelve 30-day months and at a discount rate, compounded semiannually on each Note Payment Date, equal to the Reinvestment Yield and (3) "Reinvestment Yield" shall be determined by reference to the most recent Federal Reserve Statistical Release H. 15(519) (or, if such Statistical Release is no longer published, any publicly available source of similar market data) that became publicly available at least two, but not more than six, Business Days prior to the date on which the Excess Payment occurs or, in the case of an optional redemption, prior to the redemption date and shall be the sum of (A) 0.50% per annum plus (B) the most recent weekly average yield on actively traded U.S. Treasury securities adjusted to a constant maturity equal to the then remaining weighted average life (computed as described in the following paragraph) of such Excess Payment. For purposes of clause (1) of the preceding sentence, the Scheduled Amortization Amount for the applicable Class of Timber Notes on any Note Payment Date or Note Payment Dates shall be calculated assuming that, after the date on which the payment of the Excess Payment occurs, no payments of principal (other than those assumed to be made in clause (1) of the preceding sentence) will be made to the holders of such Class of Timber Notes. If the weighted average life of the Excess Payment (so computed) is not equal to the constant maturity of a U.S. Treasury security for which a weekly average yield is given, the Reinvestment Yield shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of U.S. Treasury securities for which such yields are given, except that if the weighted average life of the Excess Payment (so computed) is less than one year, the weekly average yield in actively traded U.S. Treasury securities adjusted to a constant maturity of one year shall be used. For the purpose of clause (3)(B) of the preceding paragraph, "weighted average life" shall mean the number of years (calculated to the nearest one-twelfth year) obtained by dividing (a) the sum of the products obtained by multiplying, for each date on which an Excess Payment (or portion thereof) would have been paid if such Excess Payment had been paid in accordance with the Scheduled Amortization for the applicable Class of Timber Notes set forth in Schedule B to the Indenture, (i) the number of years (calculated to the nearest one-twelfth year) which will elapse between the date on which such Excess Payment is made and the date on which such Excess Payment (or portion thereof) would have been paid if such Excess Payment had been paid in accordance with the Scheduled Amortization Schedule for the applicable Class of Timber Notes by (ii) the Excess Payment (or portion thereof) which would have been paid if such Excess Payment had been paid in accordance with the Scheduled Amortization Schedule for such Class by (b) the Excess Payment on which the Prepayment Premium Amount is computed. "Proceeding" means any suit in equity, action at law or other judicial or administrative proceeding. "Proceeds" means all proceeds, products, offspring, rents or profits of or derived from the Mortgaged Property. The term "Proceeds" includes whatever is receivable or received when any of the Mortgaged Property or Proceeds is sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including return premiums, with respect to any insurance relating thereto. "Producer Price Index Inflation Factor" means, with respect to any date, a fraction, the numerator of which is the then most recent PPI Index and the denominator of which is the PPI Index in effect with respect to January 1, 1998. "Purchase Agreement" shall mean (i) the New Master Purchase Agreement or (ii) any other agreement for the purchase of stumpage or logs between the Issuer and any other Person, as the same may be extended, renewed, modified, amended or supplemented. "Purchase Agreement Default" means: (a) any failure by Pacific Lumber to make any payment, transfer or deposit to the Issuer or the Trustee in accordance with the New Master Purchase Agreement, and the continuation of such failure for ten Business Days after notice from the Issuer or the Trustee; (b) any failure by Pacific Lumber to observe or perform any covenant or agreement of Pacific Lumber under the New Master Purchase Agreement that has a Material Adverse Effect (and if such default is remediable, the continuation of such default for a period of 30 days after notice from the Issuer or the Trustee); (c) the execution by Pacific Lumber of any instrument purporting to assign any of its duties or responsibilities under the New Master Purchase Agreement except as expressly permitted by the New Master Purchase Agreement; (d) any representation or warranty of Pacific Lumber in the New Master Purchase Agreement shall prove to have been incorrect as of the time when the same was made and the circumstance or condition in respect of which such representation or warranty was incorrect has a Material Adverse Effect (and if such default is remediable, the continuation of such default for a period of 30 days after notice from the Issuer or the Trustee); (e) the Bankruptcy or Insolvency of Pacific Lumber; or (f) the failure by the applicable Affiliate of the Issuer to transfer the Elk River Timberlands, if any, to the Issuer within the time period specified under the definition of "Elk River Timberlands," and the continuation of such failure for ten Business Days after notice from the Issuer or the Trustee. "QIB" means "qualified institutional buyer" as defined in Rule 144A under the Securities Act. "qualifying trustee" shall have the meaning set forth in Section 8.4 of the Indenture. "Quitclaim Deed" has the meaning assigned to such term in the definition of "Conveyance Documents." "Rating Agencies" means, at any time, S&P and Moody's or any successor to each such corporation's business of rating securities, which is then providing a rating for any of the Timber Notes. "Rating Agency Condition" means, with respect to the issuance of any Additional Timber Notes, that at the time of the issuance of such Additional Timber Notes and after giving effect to the issuance thereof, the Timber Notes shall be rated by S&P and Moody's not lower than the Required Note Ratings. "Rating Agency Confirmation" means, with respect to any action proposed to be taken by the Issuer, that each of the Rating Agencies which is then providing a rating for the Timber Notes shall have unconditionally (except for conditions which will be fulfilled prior to consummation of the transaction requiring Rating Agency Confirmation) confirmed in writing that the contemplated action will not result in a downgrade, withdrawal or qualification of the then current rating given each Class of Timber Notes then outstanding by such Rating Agency. "Rating Agency Evaluation" shall mean, with respect to any action proposed to be taken by the Issuer, that each of the Rating Agencies which is then providing a rating for the Timber Notes shall have indicated in writing the rating which will be given to the Timber Notes of each Class by such Rating Agency as a consequence of such action, which may be a downgrading of such rating. "Record Date" for any Note Payment Date, means the close of business on the fifth day of the month in which such Note Payment Date occurs. If a Record Date is not a Business Day, the Record Date shall not be affected. "Register" shall have the meaning set forth in Section 2.3 of the Indenture. "Registered Exchange Offer" shall mean the proposed offer of the Issuer to issue and deliver to the Holders of the Registrable Securities that are not prohibited by any law or policy of the SEC from participating in such offer, in exchange for the Registrable Securities of each Class, a like aggregate principal amount of the Exchange Timber Notes of such Class. "Registrable Securities" shall mean the Timber Notes; provided, however, that any Timber Note shall cease to be a Registrable Security when (i) such Timber Note has been exchanged for a freely tradeable Exchange Timber Note upon consummation of the Registered Exchange Offer and is thereafter freely tradeable by the holder thereof not an Affiliate of the Issuer, (ii) a Registration Statement with respect to such Timber Note shall have been declared effective under the Securities Act and such Timber Note shall have been disposed of pursuant to such Registration Statement, (iii) such Timber Note shall have been sold to the public in compliance with Rule 144 (or any similar provision then in force) under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act, or (iv) such Timber Note shall have ceased to be outstanding. "Registrar" shall have the meaning set forth in Section 2.3 of the Indenture. "Registration Default" means, if (i) the Exchange Offer Registration Statement or a Shelf Registration Statement, if applicable, is not declared effective on or prior to 180 days after the Closing Date, (ii) the Registered Exchange Offer is not consummated on or prior to 240 days after the Closing Date or (iii) a Shelf Registration Statement is filed and declared effective on or prior to 180 days after the Closing Date but shall thereafter cease to be effective or usable (at any time that the Issuer is obligated to maintain the effectiveness thereof) in connection with resales of Timber Notes or Exchange Timber Notes in accordance with and during the periods specified in the Registration Rights Agreement. "Registration Rights Agreement" means the Registration Rights Agreement, dated the Closing Date, between the Issuer and Salomon Brothers Inc, as representative for Salomon Brothers Inc, BancAmerica Robertson Stephens, Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, as initial purchasers. "Registration Statement" means any Exchange Offer Registration Statement or Shelf Registration Statement. "Regular Interest" means interest on the unpaid portions of the principal amounts of the outstanding Timber Notes (computed on the basis of a 360-day year of twelve 30-day months). "Regulation S Transfer Certificate" means a certificate substantially in the form of Exhibit H to the Indenture. "Regulation S Exchange Certificate" means a certificate substantially in the form of Exhibit I to the Indenture. "Reinvestment Factor" means, for any Monthly Deposit Date in each year, the following factors:
Monthly Deposit Dates Factor -------------------------- -------------------------- January 20 and July 20 1.00000 February 20 and August 20 1.02872 March 20 and September 20 1.02291 April 20 and October 20 1.01713 May 20 and November 20 1.01139 June 20 and December 20 1.00568
"Reinvestment Yield" has the meaning given to such term in the definition of "Prepayment Premium Amount". "Release and Substitution Notice" has the meaning given to such term in Section 6.4 of the Indenture. "Release and Substitution Documents" has the meaning given to such term in Section 6.4 of the Indenture. "Release Date" has the meaning given to such term under the definition of "Maximum Non-Cash Consideration Amount." "Release Documents" has the meaning given to such term in Section 6.1 of the Indenture. "Release Notice" has the meaning given to such term in Section 6.1 of the Indenture. "Required Liquidity Amount", as of any date, is an amount equal to the aggregate, for all Classes of Timber Notes outstanding, of (i) the Note Rate for such Class multiplied by (ii) the principal amount of such Class then outstanding. The Required Liquidity Amount may be modified in connection with the issuance of Additional Timber Notes. "Required Liquidity Provider Rating" means, with respect to a Liquidity Provider, a rating on its short-term unsecured debt obligations of not less than P-1 by Moody's and A-1 by S&P or, if S&P and Moody's have not rated such Liquidity Provider's short-term unsecured debt obligations, a rating on its long-term unsecured debt obligations of not less than Aa2 by Moody's and not less than AA by S&P or, in each case, if any such Rating Agency adopts a new rating system, any successor rating thereto. "Required Note Ratings" shall mean:
Rating for ------------------------ Rating Agency Class A-1 Class A-2 Class A-3 - -------------- --------- --------- --------- Moody's A1 A3 Baa2 S&P A A BBB
or, if any such Rating Agency adopts a new rating system, any successor rating thereto. "Responsible Officer" or "Officer" (a) of any Person that is a corporation (other than the Trustee), means the chairman of the board of directors, the president or any vice president, the controller or any assistant controller, the treasurer or any assistant treasurer, or the secretary or any assistant secretary of such Person; (b) of any Person that is a partnership (other than the Trustee), means any such officer of a corporate general partner of such Person or any individual general partner of such Person; (c) of any Person that is a limited liability company (other than the Trustee), means the chairman of the board of managers and any other person performing functions comparable to the functions of the officers enumerated in (a) of this definition); and (d) of the Trustee or the Collateral Agent, means (i) any officer in the Corporate Trust Office of the Trustee and (ii) any other officer of the Trustee to whom a matter is referred because of such officer's knowledge of and familiarity with such matter. "Restricted Global Notes" has the meaning set forth in Section 2.1 of the Indenture. "Restricted Payment" shall have the meaning set forth in Section 4.11 of the Indenture. "Restricted Period" means the period from the Closing Date through the 40th day after the Closing Date. "Rule 144A Transfer Certificate" means a certificate substantially in the form of Exhibit G to the Indenture. "Rule 144A Exchange Certificate" means a certificate substantially in the form of Exhibit J to the Indenture. "Salmon Creek" means Salmon Creek Corporation, a Delaware corporation, and any successor in interest thereto. "Scotia Pacific" means Scotia Pacific Holding Company, a Delaware corporation. "Scheduled Amortization" means, for any Class of Timber Notes, the amount of principal payments on the Timber Notes of such Class set forth for such Class under the column headed "Scheduled Amortization" in Schedule B to the Indenture. "Scheduled Amortization Amount" means, for any Class of Timber Notes, as of any date, the excess, if any, of: (i) the sum of all amounts specified with respect to such Class in Schedule B to the Indenture as Scheduled Amortization opposite the respective dates occurring on or before such date, over (ii) the aggregate principal amount that was paid on the Timber Notes of such Class prior to such date. "Scheduled Termination Date" means the date specified under the Line of Credit Agreement, as of which, at 5:00 p.m. New York City time or such other time as is stated in the Line of Credit Agreement, the Liquidity Providers thereunder cease to be required to make Advances (other than by reason of the occurrence of a Line of Credit Acceleration or a Termination Advance having been made), as such date may be extended from time to time. "SEC" means the Securities and Exchange Commission or any successor agency responsible for the administration of the Securities Act. "Second Pacific Lumber Grant Deed" has the meaning given to such term in the definition of "Conveyance Documents." "S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, or any successor to such division's business of rating securities. "Section 6.1 Notes" shall have the meaning given to such term in Section 6.1 of the Indenture. "Secured Obligations" means all indebtedness, liabilities and other obligations described or referred to in and provided to be secured by the Deed of Trust as set forth in the granting clause of the Deed of Trust. "Secured Parties" means any Persons who at any time or from time to time are holders of any of the Secured Obligations or any portion thereof. "Securities Act" means the Securities Act of 1933, as amended and in effect from time to time. "Securities Intermediary" means State Street Bank and Trust Company, acting in its capacity as a "securities intermediary" (as defined in Section 8-102(a)(14) of the Uniform Commercial Code, and any successor entity thereto. "Securities Legend" means the legend set forth in Section 2.6(b) of the Indenture. "Security Agreement" means the security agreement set forth in Article III of the Deed of Trust, covering and describing the Collateral Mortgaged Property and other rights and interests of the Issuer and securing payment of the Secured Obligations. "Security Entitlement" means "security entitlement" as defined in Section 8-102(a)(17) of the Uniform Commercial Code. "Services" has the meaning given to such term in the New Services Agreement. "Services Fee" means, for any month, the fee for such month payable by the Issuer to the Services Provider pursuant to Section 5.1(a)(i) of the New Services Agreement as partial compensation for the Services provided during such month by the Services Provider pursuant to the New Services Agreement. "Services Provider" means Pacific Lumber, as the initial service provider under the New Services Agreement, together with its successors in such capacity under the New Services Agreement. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Issuer pursuant to the provisions of Section 3 of the Registration Rights Agreement which covers some or all of the Registrable Securities or Exchange Timber Notes, as applicable, on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the SEC, amendments and supplements to such registration statement, including post-effective amendments, in each case including the prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "State" means any one of the 50 states of the United States of America (and any additional states that may be admitted after the Closing Date) or the District of Columbia. "Structured Harvest Quantity" shall mean 3,397,345 Mbfe. "Structuring Schedule" means the schedule attached to and incorporated in the Indenture as Schedule C. "Structuring Prices" means the prices per Mbfe set forth under Column C in the Structuring Schedule. "Subject Contracts" means (a) all presently existing and future contracts or leases relating in any manner to the purchase, sale, removal, regeneration, cutting, harvesting, hauling or storing of any Company Timber, including, without limitation, the New Master Purchase Agreement, (b) the New Services Agreement, (c) the Conveyance Documents, and (d) any other agreements entered into by the Issuer subsequent to the date of the Deed of Trust, whether or not of the same general nature as set forth in clauses (a) through (d). "Substitute Timber Property" means any parcel or parcels of land or any timber rights subjected to the Lien of Deed of Trust in accordance with Section 6.4 of the Indenture. "Supermajority Holders," at any date, means the Holders of 66 2/3% in aggregate outstanding principal amount of Timber Notes and any Additional Timber Notes at such date. "Supplemental Liquidity Provider Interest" means any interest payable under the Line of Credit Agreement to the extent, but only to the extent, that such interest is payable at a rate per annum that is in excess of the rate per annum for such interest payable under the terms of the Bank of America Credit Agreement as in effect on the Closing Date, it being understood that no amount of interest that is or becomes payable pursuant to the terms of the Bank of America Credit Agreement as in effect on the Closing Date (including by reason of any payments provided for in Article III thereof), whether or not such amount is actually payable on the Closing Date, shall constitute Supplemental Liquidity Provider Interest. "Takings Litigation" means any existing or future action brought by the Issuer alleging uncompensated taking, by any governmental authority, of Company Owned Timberlands or Company Timber Rights for public use, and seeking just compensation from or other relief against such governmental authority. "Targeted Monthly Deposit Amount" means, for any Monthly Deposit Date, the excess of (a) the sum of (i) the Debt Obligations as of such Monthly Deposit Date plus (ii) the Discounted Servicing Obligation as of such Monthly Deposit Date over (b) the sum of (i) the Total Collateral Value as of such Monthly Deposit Date plus (ii) all amounts then on deposit in the Payment Account, including interest earned thereon as of such Monthly Deposit Date (before giving effect to any deposits made in the Payment Account, or to any transactions effected pursuant to Section 5.7 of the Indenture, on such Monthly Deposit Date but after deducting the amount of any deposits made pursuant to Sections 5.3(c)(vi) and 5.3(c)(viii) of the Indenture after the immediately preceding Note Payment Date or, if the first Note Payment Date has not yet occurred, after the Closing Date); provided that in no event shall the Targeted Monthly Deposit Amount be less than the excess (if any) of (x) the amount of accrued and unpaid interest on the principal of the outstanding Timber Notes on such Monthly Deposit Date over (y) the balance in the Payment Account on such Monthly Deposit Date (before giving effect to any deposits made in the Payment Account, or to any transactions effected pursuant to Section 5.7 of the Indenture, on such Monthly Deposit Date but after deducting the amount of any deposits made pursuant to Sections 5.3(c)(vi) and 5.3(c)(viii) of the Indenture after the immediately preceding Note Payment Date or, if the first Note Payment Date has not yet occurred, after the Closing Date). "Tax Laws" means all applicable statutes, laws, ordinances, regulations, rules, rulings, orders, restrictions, requirements, writs, injunctions, decrees or other official acts relating to the reporting, imposition, rendition, collection, enforcement or other aspects of Issuer Taxes, of every kind or character now imposed or hereafter enacted by any Governmental Authority. "Taxes" means all Yield Taxes and all ad valorem, occupation, property and other taxes and assessments imposed with respect to the Company Owned Timberlands or Company Timber Rights subject to the Lien of the Deed of Trust (excluding income taxes and franchise taxes). "Termination Advance" means a Downgrade Advance or a Non-Renewal Advance, together with any Interest Advances outstanding on the date such Downgrade Advance or Non-Renewal Advance is made. "TIA" means the Trust Indenture Act of 1939, as amended and in effect from time to time. "Timber Harvesting Plans" means all permits, whether now existing or hereafter created, filed with any Governmental Authority with respect to the harvesting, cutting or severance of Timber. "Timber Laws" means all applicable statutes, laws, ordinances, regulations, rules, rulings, orders, restrictions, requirements, writs, injunctions, decrees or other official acts relating to the harvesting, cutting, severance, handling or transporting of Company Timber, and the maintenance, operation and management of the Company Timber Property, whether now or hereafter enacted or imposed by any Governmental Authority, including, without limitation, those relating to streams, waterways, wildlife habitat and endangered species, exclusive of Environmental Laws. "Timber Note" or "Note" means any of the Class A-1 Timber Notes, the Class A-2 Timber Notes and the Class A-3 Timber Notes. "Title Commitment" means the commitment for a Title Insurance Policy. "Title Defect" means any encumbrance, encroachment, irregularity, defect, or deficiency in or objection to the Issuer's title to any portion of the Company Owned Timberlands or Company Timber Rights subject to the Lien of the Deed of Trust (other than Permitted Encumbrances) that, alone or in combination with other defects, renders the Issuer's title to such Company Owned Timberlands or Company Timber Rights other than good and marketable title. "Title Insurance Policy" means any ALTA mortgagee's policy of title insurance in favor of the Trustee or the Collateral Agent in respect of the Company Owned Timberlands and Company Timber Rights subject to the Lien of the Deed of Trust. "Total Collateral Value" means, on any date, an amount equal to the lesser of (a) the Deemed Collateral Value for the Monthly Calculation Date immediately preceding such date and (b) the Structuring Collateral Value for the Monthly Calculation Date immediately preceding such date. "Transaction" has the meaning assigned to such term in Section 4.15 of the Indenture. "Transferee Letter" means a letter substantially in the form of Exhibit K to the Indenture. "Trapping Event" shall have the meaning given to such term in Section 5.3(d)(iii) of the Indenture. "Tribunal" means any court or any governmental department, commission, board, bureau, agency or instrumentality of the United States of America or of any State, commonwealth, territory, possession, county, parish, municipality or other governmental subdivision within the United States of America or under the jurisdiction of the United States of America, whether now or hereafter constituted or existing. "Triggering Event", at any time, has the meaning assigned to such term in the Line of Credit Agreement at such time. "Trustee" means the Person named as "Trustee" in the recitals to the Indenture, in its capacity as trustee under the Indenture, together with its successors in such capacity. "Trustee's Expenses" means any fees, expenses, and damages of, or compensation to, the Trustee (including, without limitation, the reasonable fees and disbursements of counsel to the Trustee) incurred pursuant to the Indenture or owing to the Trustee as part of the Secured Obligations. "Trustor" means the Issuer, as trustor under the Deed of Trust. "Unallocated Payment" has the meaning given to such term in Section 5.5 of the Indenture. "Uniform Commercial Code" means the Uniform Commercial Code as now or hereafter in effect in the State of California. "Unlegended Definitive Note" means a Definitive Note which does not bear the Securities Legend. "Unrestricted Global Notes" has the meaning ascribed to such term in Section 2.1 of the Indenture. "Up-Front Payment" has the meaning set forth in the definition of Pay-as-You-Harvest- Sale. "U.S. Government Obligations" shall have the meaning set forth in Section 8.4 of the Indenture. "Yield Taxes" means all yield, severance, excise, sales and other taxes imposed on the cutting, harvesting, severing or sale of Company Timber from the Company Owned Timberlands or the Company Timber Rights Property subject to the Lien of the Deed of Trust (excluding income taxes and franchise taxes). SCHEDULE B MINIMUM PRINCIPAL AMORTIZATION AND SCHEDULED AMORTIZATION SCHEDULES
CLASS A-1 TIMBER NOTES ------------------------------------------------------------------------------------ (in thousands) MINIMUM PRINCIPAL AMORTIZATION SCHEDULED AMORTIZATION ----------------------------------------- ----------------------------------------- Note Principal Principal Principal Principal Payment Date Year Payment Balance Payment Balance - ---------------------------- -------- ------------------- ------------------- ------------------- ------------------- Initial 0.0 ---- $152,600 ---- $152,600 January 20, 1999 0.5 $65 152,535 $4,964 147,636 July 20, 1999 1.0 72 152,464 2,183 145,454 January 20, 2000 1.5 9,686 142,777 12,564 132,889 July 20, 2000 2.0 32 142,746 2,515 130,374 January 20, 2001 2.5 9,632 133,114 12,726 117,649 July 20, 2001 3.0 96 133,018 2,811 114,838 January 20, 2002 3.5 9,718 123,300 13,058 101,779 July 20, 2002 4.0 316 122,984 3,291 98,489 January 20, 2003 4.5 10,006 112,979 13,624 84,864 July 20, 2003 5.0 1,674 111,304 4,906 79,958 January 20, 2004 5.5 11,751 99,553 15,630 64,328 July 20, 2004 6.0 2,274 97,279 5,808 58,520 January 20, 2005 6.5 12,503 84,776 16,702 41,817 July 20, 2005 7.0 3,817 80,959 7,645 34,172 January 20, 2006 7.5 14,457 66,502 18,948 15,225 July 20, 2006 8.0 5,514 60,989 9,643 5,581 January 20, 2007 8.5 16,581 44,408 5,581 0 July 20, 2007 9.0 7,375 37,032 0 0 January 20, 2008 9.5 18,890 18,142 0 0 July 20, 2008 10.0 1,300 16,842 0 0 January 20, 2009 10.5 10,837 6,005 0 0 July 20, 2009 11.0 2,598 3,406 0 0 January 20, 2010 11.5 3,406 0 0 0 July 20, 2010 12.0 0 0 0 0 January 20, 2011 12.5 0 0 0 0 July 20, 2011 13.0 0 0 0 0 January 20, 2012 13.5 0 0 0 0 July 20, 2012 14.0 0 0 0 0 January 20, 2013 14.5 0 0 0 0 July 20, 2013 15.0 0 0 0 0 January 20, 2014 15.5 0 0 0 0 July 20, 2014 16.0 0 0 0 0 January 20, 2015 16.5 0 0 0 0 July 20, 2015 17.0 0 0 0 0 January 20, 2016 17.5 0 0 0 0 July 20, 2016 18.0 0 0 0 0 January 20, 2017 18.5 0 0 0 0 July 20, 2017 19.0 0 0 0 0 January 20, 2018 19.5 0 0 0 0 July 20, 2018 20.0 0 0 0 0 January 20, 2019 20.5 0 0 0 0 July 20, 2019 21.0 0 0 0 0 January 20, 2020 21.5 0 0 0 0 July 20, 2020 22.0 0 0 0 0 January 20, 2021 22.5 0 0 0 0 July 20, 2021 23.0 0 0 0 0 January 20, 2022 23.5 0 0 0 0 July 20, 2022 24.0 0 0 0 0 January 20, 2023 24.5 0 0 0 0 July 20, 2023 25.0 0 0 0 0 January 20, 2024 25.5 0 0 0 0 July 20, 2024 26.0 0 0 0 0 January 20, 2025 26.5 0 0 0 0 July 20, 2025 27.0 0 0 0 0 January 20, 2026 27.5 0 0 0 0 July 20, 2026 28.0 0 0 0 0 January 20, 2027 28.5 0 0 0 0 July 20, 2027 29.0 0 0 0 0 January 20, 2028 29.5 0 0 0 0 July 20, 2028 30.0 0 0 0 0 ------------------- ------------------- Total $152,600 $152,600 =================== =================== Weighted Average Life 6.9 Years 5.0 Years =================== =================== CLASS A-2 TIMBER NOTES ------------------------------------------------------------------------------------ (in thousands) MINIMUM PRINCIPAL AMORTIZATION SCHEDULED AMORTIZATION ----------------------------------------- ----------------------------------------- Note Principal Principal Principal Principal Payment Date Year Payment Balance Payment Balance - ---------------------------- -------- ------------------- ------------------- ------------------- ------------------- Initial 0.0 ---- $218,400 ---- $218,400 January 20, 1999 0.5 $0 218,400 $0 218,400 July 20, 1999 1.0 0 218,400 0 218,400 January 20, 2000 1.5 0 218,400 0 218,400 July 20, 2000 2.0 0 218,400 0 218,400 January 20, 2001 2.5 0 218,400 0 218,400 July 20, 2001 3.0 0 218,400 0 218,400 January 20, 2002 3.5 0 218,400 0 218,400 July 20, 2002 4.0 0 218,400 0 218,400 January 20, 2003 4.5 0 218,400 0 218,400 July 20, 2003 5.0 0 218,400 0 218,400 January 20, 2004 5.5 0 218,400 0 218,400 July 20, 2004 6.0 0 218,400 0 218,400 January 20, 2005 6.5 0 218,400 0 218,400 July 20, 2005 7.0 0 218,400 0 218,400 January 20, 2006 7.5 0 218,400 0 218,400 July 20, 2006 8.0 0 218,400 0 218,400 January 20, 2007 8.5 0 218,400 15,784 202,616 July 20, 2007 9.0 0 218,400 11,810 190,806 January 20, 2008 9.5 0 218,400 23,959 166,847 July 20, 2008 10.0 0 218,400 5,710 161,136 January 20, 2009 10.5 0 218,400 15,808 145,328 July 20, 2009 11.0 0 218,400 7,374 137,955 January 20, 2010 11.5 9,107 209,293 17,850 120,105 July 20, 2010 12.0 4,011 205,282 9,174 110,931 January 20, 2011 12.5 14,377 190,905 20,089 90,842 July 20, 2011 13.0 5,627 185,278 11,189 79,654 January 20, 2012 13.5 16,413 168,866 22,508 57,145 July 20, 2012 14.0 7,406 161,460 13,379 43,766 January 20, 2013 14.5 18,630 142,830 25,110 18,656 July 20, 2013 15.0 9,361 133,469 15,753 2,903 January 20, 2014 15.5 21,044 112,425 2,903 0 July 20, 2014 16.0 11,508 100,917 0 0 January 20, 2015 16.5 23,670 77,247 0 0 July 20, 2015 17.0 13,863 63,384 0 0 January 20, 2016 17.5 26,525 36,859 0 0 July 20, 2016 18.0 16,441 20,418 0 0 January 20, 2017 18.5 20,418 0 0 0 July 20, 2017 19.0 0 0 0 0 January 20, 2018 19.5 0 0 0 0 July 20, 2018 20.0 0 0 0 0 January 20, 2019 20.5 0 0 0 0 July 20, 2019 21.0 0 0 0 0 January 20, 2020 21.5 0 0 0 0 July 20, 2020 22.0 0 0 0 0 January 20, 2021 22.5 0 0 0 0 July 20, 2021 23.0 0 0 0 0 January 20, 2022 23.5 0 0 0 0 July 20, 2022 24.0 0 0 0 0 January 20, 2023 24.5 0 0 0 0 July 20, 2023 25.0 0 0 0 0 January 20, 2024 25.5 0 0 0 0 July 20, 2024 26.0 0 0 0 0 January 20, 2025 26.5 0 0 0 0 July 20, 2025 27.0 0 0 0 0 January 20, 2026 27.5 0 0 0 0 July 20, 2026 28.0 0 0 0 0 January 20, 2027 28.5 0 0 0 0 July 20, 2027 29.0 0 0 0 0 January 20, 2028 29.5 0 0 0 0 July 20, 2028 30.0 0 0 0 0 ------------------- ------------------- Total $218,400 $218,400 =================== =================== Weighted Average Life 15.6 Years 12.0 Years =================== =================== CLASS A-3 TIMBER NOTES ------------------------------------------------------------------------------------ (in thousands) MINIMUM PRINCIPAL AMORTIZATION SCHEDULED AMORTIZATION ----------------------------------------- ----------------------------------------- Note Principal Principal Principal Principal Payment Date Year Payment Balance Payment Balance - ---------------------------- -------- ------------------- ------------------- ------------------- ------------------- Initial 0.0 ---- $489,000 ---- $489,000 January 20, 1999 0.5 $0 489,000 $0 489,000 July 20, 1999 1.0 0 489,000 0 489,000 January 20, 2000 1.5 0 489,000 0 489,000 July 20, 2000 2.0 0 489,000 0 489,000 January 20, 2001 2.5 0 489,000 0 489,000 July 20, 2001 3.0 0 489,000 0 489,000 January 20, 2002 3.5 0 489,000 0 489,000 July 20, 2002 4.0 0 489,000 0 489,000 January 20, 2003 4.5 0 489,000 0 489,000 July 20, 2003 5.0 0 489,000 0 489,000 January 20, 2004 5.5 0 489,000 0 489,000 July 20, 2004 6.0 0 489,000 0 489,000 January 20, 2005 6.5 0 489,000 0 489,000 July 20, 2005 7.0 0 489,000 0 489,000 January 20, 2006 7.5 0 489,000 0 489,000 July 20, 2006 8.0 0 489,000 0 489,000 January 20, 2007 8.5 0 489,000 0 489,000 July 20, 2007 9.0 0 489,000 0 489,000 January 20, 2008 9.5 0 489,000 0 489,000 July 20, 2008 10.0 0 489,000 0 489,000 January 20, 2009 10.5 0 489,000 0 489,000 July 20, 2009 11.0 0 489,000 0 489,000 January 20, 2010 11.5 0 489,000 0 489,000 July 20, 2010 12.0 0 489,000 0 489,000 January 20, 2011 12.5 0 489,000 0 489,000 July 20, 2011 13.0 0 489,000 0 489,000 January 20, 2012 13.5 0 489,000 0 489,000 July 20, 2012 14.0 0 489,000 0 489,000 January 20, 2013 14.5 0 489,000 0 489,000 July 20, 2013 15.0 0 489,000 0 489,000 January 20, 2014 15.5 0 489,000 489,000 0 July 20, 2014 16.0 0 489,000 0 0 January 20, 2015 16.5 0 489,000 0 0 July 20, 2015 17.0 0 489,000 0 0 January 20, 2016 17.5 0 489,000 0 0 July 20, 2016 18.0 0 489,000 0 0 January 20, 2017 18.5 9,210 479,790 0 0 July 20, 2017 19.0 19,262 460,529 0 0 January 20, 2018 19.5 33,002 427,526 0 0 July 20, 2018 20.0 6,240 421,286 0 0 January 20, 2019 20.5 15,427 405,859 0 0 July 20, 2019 21.0 7,657 398,202 0 0 January 20, 2020 21.5 17,213 380,989 0 0 July 20, 2020 22.0 9,206 371,783 0 0 January 20, 2021 22.5 19,148 352,635 0 0 July 20, 2021 23.0 10,899 341,736 0 0 January 20, 2022 23.5 21,243 320,493 0 0 July 20, 2022 24.0 12,747 307,746 0 0 January 20, 2023 24.5 23,511 284,235 0 0 July 20, 2023 25.0 14,762 269,473 0 0 January 20, 2024 25.5 25,965 243,509 0 0 July 20, 2024 26.0 16,957 226,551 0 0 January 20, 2025 26.5 28,619 197,933 0 0 July 20, 2025 27.0 19,348 178,585 0 0 January 20, 2026 27.5 31,488 147,097 0 0 July 20, 2026 28.0 21,948 125,149 0 0 January 20, 2027 28.5 34,589 90,561 0 0 July 20, 2027 29.0 24,775 65,786 0 0 January 20, 2028 29.5 37,939 27,846 0 0 July 20, 2028 30.0 27,846 0 0 0 ------------------- ------------------- Total $489,000 $489,000 =================== =================== Weighted Average Life 25.2 Years 15.5 Years =================== ===================
SCHEDULE C STRUCTURING SCHEDULE
A B C D E F G - ------------- ----------- ------------ --------- ----- --------------- ----------- Structuring Deemed Production Structuring Remaining Month Structuring Mbfe Harvest (Period Harvest Price Operating Yield Capital Quantity Ending) (Mbfe) ($ per Mbfe) Costs(1) Taxes Expenditures(2) (Mbfe)(3) - ------------- ----------- ------------ --------- ----- --------------- ----------- Initial (as of Closing) 3,397,801 Jul-98 6,743 $567 $195 $111 $203 3,391,058 Aug-98 19,969 567 526 329 553 3,371,089 Sep-98 17,287 567 526 284 553 3,353,801 Oct-98 15,464 567 526 254 553 3,338,338 Nov-98 6,742 567 526 111 553 3,331,595 Dec-98 3,178 567 526 52 553 3,328,417 Jan-99 1,998 619 540 36 566 3,326,419 Feb-99 4,031 619 540 72 566 3,322,387 Mar-99 7,128 619 540 128 566 3,315,259 Apr-99 17,195 619 540 309 566 3,298,064 May-99 15,954 619 540 286 566 3,282,110 Jun-99 18,728 619 540 336 566 3,263,382 Jul-99 18,391 619 540 330 566 3,244,992 Aug-99 19,969 619 540 358 566 3,225,022 Sep-99 17,287 619 540 310 566 3,207,735 Oct-99 15,464 619 540 277 566 3,192,272 Nov-99 6,742 619 540 121 566 3,185,529 Dec-99 3,178 619 540 57 566 3,182,351 Jan-00 1,998 618 566 36 595 3,180,353 Feb-00 4,031 618 566 72 595 3,176,321 Mar-00 7,128 618 566 128 595 3,169,193 Apr-00 17,195 618 566 308 595 3,151,998 May-00 15,954 618 566 286 595 3,136,044 Jun-00 18,728 618 566 336 595 3,117,316 Jul-00 18,391 618 566 330 595 3,098,925 Aug-00 19,969 618 566 358 595 3,078,956 Sep-00 17,287 618 566 310 595 3,061,669 Oct-00 15,464 618 566 277 595 3,046,205 Nov-00 6,742 618 566 121 595 3,039,463 Dec-00 3,178 618 566 57 595 3,036,284 Jan-01 1,998 619 595 36 624 3,034,286 Feb-01 4,031 619 595 72 624 3,030,255 Mar-01 7,128 619 595 128 624 3,023,127 Apr-01 17,195 619 595 309 624 3,005,931 May-01 15,954 619 595 286 624 2,989,978 Jun-01 18,728 619 595 336 624 2,971,250 Jul-01 18,391 619 595 330 624 2,952,859 Aug-01 19,969 619 595 358 624 2,932,890 Sep-01 17,287 619 595 310 624 2,915,602 Oct-01 15,464 619 595 278 624 2,900,139 Nov-01 6,742 619 595 121 624 2,893,397 Dec-01 3,178 619 595 57 624 2,890,218 Jan-02 1,998 623 624 36 656 2,888,220 Feb-02 4,031 623 624 73 656 2,884,188 Mar-02 7,128 623 624 129 656 2,877,060 Apr-02 17,195 623 624 311 656 2,859,865 May-02 15,954 623 624 288 656 2,843,911 Jun-02 18,728 623 624 338 656 2,825,183 Jul-02 18,391 623 624 332 656 2,806,793 Aug-02 19,969 623 624 361 656 2,786,823 Sep-02 17,287 623 624 312 656 2,769,536 Oct-02 15,464 623 624 279 656 2,754,073 Nov-02 6,742 623 624 122 656 2,747,330 Dec-02 3,178 623 624 57 656 2,744,152 Jan-03 1,998 645 655 37 688 2,742,154 Feb-03 4,031 645 655 75 688 2,738,122 Mar-03 7,128 645 655 133 688 2,730,994 Apr-03 17,195 645 655 321 688 2,713,799 May-03 15,954 645 655 298 688 2,697,845 Jun-03 18,728 645 655 350 688 2,679,117 Jul-03 18,391 645 655 344 688 2,660,726 Aug-03 19,969 645 655 373 688 2,640,757 Sep-03 17,287 645 655 323 688 2,623,470 Oct-03 15,464 645 655 289 688 2,608,006 Nov-03 6,742 645 655 126 688 2,601,264 Dec-03 3,178 645 655 59 688 2,598,086 Jan-04 1,998 653 688 38 723 2,596,087 Feb-04 4,031 653 688 76 723 2,592,056 Mar-04 7,128 653 688 135 723 2,584,928 Apr-04 17,195 653 688 326 723 2,567,733 May-04 15,954 653 688 302 723 2,551,779 Jun-04 18,728 653 688 355 723 2,533,051 Jul-04 18,391 653 688 348 723 2,514,660 Aug-04 19,969 653 688 378 723 2,494,691 Sep-04 17,287 653 688 327 723 2,477,404 Oct-04 15,464 653 688 293 723 2,461,940 Nov-04 6,742 653 688 128 723 2,455,198 Dec-04 3,178 653 688 60 723 2,452,019 Jan-05 1,998 676 722 39 759 2,450,021 Feb-05 4,031 676 722 79 759 2,445,990 Mar-05 7,128 676 722 140 759 2,438,862 Apr-05 17,195 676 722 337 759 2,421,666 May-05 15,954 676 722 313 759 2,405,712 Jun-05 18,728 676 722 367 759 2,386,984 Jul-05 18,391 676 722 360 759 2,368,594 Aug-05 19,969 676 722 391 759 2,348,625 Sep-05 17,287 676 722 339 759 2,331,337 Oct-05 15,464 676 722 303 759 2,315,874 Nov-05 6,742 676 722 132 759 2,309,131 Dec-05 3,178 676 722 62 759 2,305,953 Jan-06 1,998 699 758 41 797 2,303,955 Feb-06 4,031 699 758 82 797 2,299,923 Mar-06 7,128 699 758 145 797 2,292,795 Apr-06 17,195 699 758 349 797 2,275,600 May-06 15,954 699 758 324 797 2,259,646 Jun-06 18,728 699 758 380 797 2,240,918 Jul-06 18,391 699 758 373 797 2,222,527 Aug-06 19,969 699 758 405 797 2,202,558 Sep-06 17,287 699 758 351 797 2,185,271 Oct-06 15,464 699 758 314 797 2,169,807 Nov-06 6,742 699 758 137 797 2,163,065 Dec-06 3,178 699 758 64 797 2,159,887 Jan-07 1,998 724 796 42 837 2,157,888 Feb-07 4,031 724 796 85 837 2,153,857 Mar-07 7,128 724 796 150 837 2,146,729 Apr-07 17,195 724 796 361 837 2,129,534 May-07 15,954 724 796 335 837 2,113,580 Jun-07 18,728 724 796 393 837 2,094,852 Jul-07 18,391 724 796 386 837 2,076,461 Aug-07 19,969 724 796 419 837 2,056,492 Sep-07 17,287 724 796 363 837 2,039,205 Oct-07 15,464 724 796 325 837 2,023,741 Nov-07 6,742 724 796 142 837 2,016,999 Dec-07 3,178 724 796 67 837 2,013,820 Jan-08 1,627 749 792 35 809 2,012,193 Feb-08 3,283 749 792 71 809 2,008,911 Mar-08 5,804 749 792 126 809 2,003,107 Apr-08 14,001 749 792 304 809 1,989,105 May-08 12,990 749 792 282 809 1,976,115 Jun-08 15,249 749 792 331 809 1,960,866 Jul-08 14,975 749 792 325 809 1,945,891 Aug-08 16,260 749 792 353 809 1,929,631 Sep-08 14,076 749 792 306 809 1,915,555 Oct-08 12,591 749 792 274 809 1,902,964 Nov-08 5,490 749 792 119 809 1,897,474 Dec-08 2,588 749 792 56 809 1,894,886 Jan-09 1,627 776 831 37 850 1,893,259 Feb-09 3,283 776 831 74 850 1,889,977 Mar-09 5,804 776 831 131 850 1,884,173 Apr-09 14,001 776 831 315 850 1,870,171 May-09 12,990 776 831 292 850 1,857,181 Jun-09 15,249 776 831 343 850 1,841,932 Jul-09 14,975 776 831 337 850 1,826,957 Aug-09 16,260 776 831 366 850 1,810,697 Sep-09 14,076 776 831 317 850 1,796,621 Oct-09 12,591 776 831 283 850 1,784,030 Nov-09 5,490 776 831 123 850 1,778,540 Dec-09 2,588 776 831 58 850 1,775,952 Jan-10 1,627 803 873 38 892 1,774,325 Feb-10 3,283 803 873 76 892 1,771,042 Mar-10 5,804 803 873 135 892 1,765,238 Apr-10 14,001 803 873 326 892 1,751,237 May-10 12,990 803 873 302 892 1,738,247 Jun-10 15,249 803 873 355 892 1,722,997 Jul-10 14,975 803 873 349 892 1,708,023 Aug-10 16,260 803 873 378 892 1,691,763 Sep-10 14,076 803 873 328 892 1,677,687 Oct-10 12,591 803 873 293 892 1,665,096 Nov-10 5,490 803 873 128 892 1,659,606 Dec-10 2,588 803 873 60 892 1,657,018 Jan-11 1,627 831 916 39 937 1,655,391 Feb-11 3,283 831 916 79 937 1,652,108 Mar-11 5,804 831 916 140 937 1,646,304 Apr-11 14,001 831 916 337 937 1,632,303 May-11 12,990 831 916 313 937 1,619,312 Jun-11 15,249 831 916 367 937 1,604,063 Jul-11 14,975 831 916 361 937 1,589,089 Aug-11 16,260 831 916 392 937 1,572,829 Sep-11 14,076 831 916 339 937 1,558,753 Oct-11 12,591 831 916 303 937 1,546,161 Nov-11 5,490 831 916 132 937 1,540,671 Dec-11 2,588 831 916 62 937 1,538,083 Jan-12 1,627 860 962 41 983 1,536,456 Feb-12 3,283 860 962 82 983 1,533,174 Mar-12 5,804 860 962 145 983 1,527,370 Apr-12 14,001 860 962 349 983 1,513,369 May-12 12,990 860 962 324 983 1,500,378 Jun-12 15,249 860 962 380 983 1,485,129 Jul-12 14,975 860 962 373 983 1,470,154 Aug-12 16,260 860 962 405 983 1,453,894 Sep-12 14,076 860 962 351 983 1,439,818 Oct-12 12,591 860 962 314 983 1,427,227 Nov-12 5,490 860 962 137 983 1,421,737 Dec-12 2,588 860 962 65 983 1,419,149 Jan-13 1,627 890 1,010 42 1,033 1,417,522 Feb-13 3,283 890 1,010 85 1,033 1,414,240 Mar-13 5,804 890 1,010 150 1,033 1,408,436 Apr-13 14,001 890 1,010 361 1,033 1,394,434 May-13 12,990 890 1,010 335 1,033 1,381,444 Jun-13 15,249 890 1,010 394 1,033 1,366,195 Jul-13 14,975 890 1,010 386 1,033 1,351,220 Aug-13 16,260 890 1,010 420 1,033 1,334,960 Sep-13 14,076 890 1,010 363 1,033 1,320,884 Oct-13 12,591 890 1,010 325 1,033 1,308,293 Nov-13 5,490 890 1,010 142 1,033 1,302,803 Dec-13 2,588 890 1,010 67 1,033 1,300,215 Jan-14 1,627 921 1,060 43 1,084 1,298,588 Feb-14 3,283 921 1,060 88 1,084 1,295,305 Mar-14 5,804 921 1,060 155 1,084 1,289,501 Apr-14 14,001 921 1,060 374 1,084 1,275,500 May-14 12,990 921 1,060 347 1,084 1,262,510 Jun-14 15,249 921 1,060 407 1,084 1,247,261 Jul-14 14,975 921 1,060 400 1,084 1,232,286 Aug-14 16,260 921 1,060 434 1,084 1,216,026 Sep-14 14,076 921 1,060 376 1,084 1,201,950 Oct-14 12,591 921 1,060 336 1,084 1,189,359 Nov-14 5,490 921 1,060 147 1,084 1,183,869 Dec-14 2,588 921 1,060 69 1,084 1,181,281 Jan-15 1,627 953 1,113 45 1,138 1,179,654 Feb-15 3,283 953 1,113 91 1,138 1,176,371 Mar-15 5,804 953 1,113 160 1,138 1,170,567 Apr-15 14,001 953 1,113 387 1,138 1,156,566 May-15 12,990 953 1,113 359 1,138 1,143,575 Jun-15 15,249 953 1,113 422 1,138 1,128,326 Jul-15 14,975 953 1,113 414 1,138 1,113,352 Aug-15 16,260 953 1,113 450 1,138 1,097,092 Sep-15 14,076 953 1,113 389 1,138 1,083,016 Oct-15 12,591 953 1,113 348 1,138 1,070,425 Nov-15 5,490 953 1,113 152 1,138 1,064,935 Dec-15 2,588 953 1,113 72 1,138 1,062,347 Jan-16 1,627 987 1,169 47 1,195 1,060,720 Feb-16 3,283 987 1,169 94 1,195 1,057,437 Mar-16 5,804 987 1,169 166 1,195 1,051,633 Apr-16 14,001 987 1,169 401 1,195 1,037,632 May-16 12,990 987 1,169 372 1,195 1,024,641 Jun-16 15,249 987 1,169 436 1,195 1,009,392 Jul-16 14,975 987 1,169 428 1,195 994,418 Aug-16 16,260 987 1,169 465 1,195 978,158 Sep-16 14,076 987 1,169 403 1,195 964,081 Oct-16 12,591 987 1,169 360 1,195 951,490 Nov-16 5,490 987 1,169 157 1,195 946,000 Dec-16 2,588 987 1,169 74 1,195 943,412 Jan-17 1,627 1,021 1,227 48 1,255 941,785 Feb-17 3,283 1,021 1,227 97 1,255 938,503 Mar-17 5,804 1,021 1,227 172 1,255 932,699 Apr-17 14,001 1,021 1,227 415 1,255 918,697 May-17 12,990 1,021 1,227 385 1,255 905,707 Jun-17 15,249 1,021 1,227 452 1,255 890,458 Jul-17 14,975 1,021 1,227 443 1,255 875,483 Aug-17 16,260 1,021 1,227 482 1,255 859,223 Sep-17 14,076 1,021 1,227 417 1,255 845,147 Oct-17 12,591 1,021 1,227 373 1,255 832,556 Nov-17 5,490 1,021 1,227 163 1,255 827,066 Dec-17 2,588 1,021 1,227 77 1,255 824,478 Jan-18 1,080 1,057 1,148 33 1,095 823,398 Feb-18 2,179 1,057 1,148 67 1,095 821,220 Mar-18 3,852 1,057 1,148 118 1,095 817,368 Apr-18 9,292 1,057 1,148 285 1,095 808,076 May-18 8,621 1,057 1,148 264 1,095 799,454 Jun-18 10,120 1,057 1,148 310 1,095 789,334 Jul-18 9,938 1,057 1,148 305 1,095 779,395 Aug-18 10,791 1,057 1,148 331 1,095 768,604 Sep-18 9,342 1,057 1,148 286 1,095 759,262 Oct-18 8,356 1,057 1,148 256 1,095 750,906 Nov-18 3,644 1,057 1,148 112 1,095 747,262 Dec-18 1,718 1,057 1,148 53 1,095 745,545 Jan-19 1,080 1,094 1,205 34 1,149 744,465 Feb-19 2,179 1,094 1,205 69 1,149 742,286 Mar-19 3,852 1,094 1,205 122 1,149 738,434 Apr-19 9,292 1,094 1,205 295 1,149 729,142 May-19 8,621 1,094 1,205 274 1,149 720,521 Jun-19 10,120 1,094 1,205 321 1,149 710,400 Jul-19 9,938 1,094 1,205 315 1,149 700,462 Aug-19 10,791 1,094 1,205 342 1,149 689,671 Sep-19 9,342 1,094 1,205 296 1,149 680,329 Oct-19 8,356 1,094 1,205 265 1,149 671,973 Nov-19 3,644 1,094 1,205 116 1,149 668,329 Dec-19 1,718 1,094 1,205 54 1,149 666,611 Jan-20 1,080 1,132 1,265 35 1,207 665,532 Feb-20 2,179 1,132 1,265 72 1,207 663,353 Mar-20 3,852 1,132 1,265 126 1,207 659,501 Apr-20 9,292 1,132 1,265 305 1,207 650,209 May-20 8,621 1,132 1,265 283 1,207 641,587 Jun-20 10,120 1,132 1,265 332 1,207 631,467 Jul-20 9,938 1,132 1,265 326 1,207 621,529 Aug-20 10,791 1,132 1,265 354 1,207 610,737 Sep-20 9,342 1,132 1,265 307 1,207 601,396 Oct-20 8,356 1,132 1,265 274 1,207 593,039 Nov-20 3,644 1,132 1,265 120 1,207 589,396 Dec-20 1,718 1,132 1,265 56 1,207 587,678 Jan-21 1,080 1,172 1,328 37 1,267 586,598 Feb-21 2,179 1,172 1,328 74 1,267 584,420 Mar-21 3,852 1,172 1,328 131 1,267 580,568 Apr-21 9,292 1,172 1,328 316 1,267 571,275 May-21 8,621 1,172 1,328 293 1,267 562,654 Jun-21 10,120 1,172 1,328 344 1,267 552,534 Jul-21 9,938 1,172 1,328 338 1,267 542,595 Aug-21 10,791 1,172 1,328 367 1,267 531,804 Sep-21 9,342 1,172 1,328 317 1,267 522,462 Oct-21 8,356 1,172 1,328 284 1,267 514,106 Nov-21 3,644 1,172 1,328 124 1,267 510,462 Dec-21 1,718 1,172 1,328 58 1,267 508,745 Jan-22 1,080 1,213 1,395 38 1,331 507,665 Feb-22 2,179 1,213 1,395 77 1,331 505,486 Mar-22 3,852 1,213 1,395 135 1,331 501,634 Apr-22 9,292 1,213 1,395 327 1,331 492,342 May-22 8,621 1,213 1,395 303 1,331 483,721 Jun-22 10,120 1,213 1,395 356 1,331 473,600 Jul-22 9,938 1,213 1,395 350 1,331 463,662 Aug-22 10,791 1,213 1,395 380 1,331 452,871 Sep-22 9,342 1,213 1,395 329 1,331 443,529 Oct-22 8,356 1,213 1,395 294 1,331 435,172 Nov-22 3,644 1,213 1,395 128 1,331 431,529 Dec-22 1,718 1,213 1,395 60 1,331 429,811 Jan-23 1,080 1,255 1,464 39 1,397 428,731 Feb-23 2,179 1,255 1,464 79 1,397 426,553 Mar-23 3,852 1,255 1,464 140 1,397 422,701 Apr-23 9,292 1,255 1,464 338 1,397 413,409 May-23 8,621 1,255 1,464 314 1,397 404,787 Jun-23 10,120 1,255 1,464 368 1,397 394,667 Jul-23 9,938 1,255 1,464 362 1,397 384,729 Aug-23 10,791 1,255 1,464 393 1,397 373,937 Sep-23 9,342 1,255 1,464 340 1,397 364,595 Oct-23 8,356 1,255 1,464 304 1,397 356,239 Nov-23 3,644 1,255 1,464 133 1,397 352,595 Dec-23 1,718 1,255 1,464 63 1,397 350,878 Jan-24 1,080 1,299 1,537 41 1,467 349,798 Feb-24 2,179 1,299 1,537 82 1,467 347,620 Mar-24 3,852 1,299 1,537 145 1,467 343,768 Apr-24 9,292 1,299 1,537 350 1,467 334,475 May-24 8,621 1,299 1,537 325 1,467 325,854 Jun-24 10,120 1,299 1,537 381 1,467 315,733 Jul-24 9,938 1,299 1,537 374 1,467 305,795 Aug-24 10,791 1,299 1,537 407 1,467 295,004 Sep-24 9,342 1,299 1,537 352 1,467 285,662 Oct-24 8,356 1,299 1,537 315 1,467 277,306 Nov-24 3,644 1,299 1,537 137 1,467 273,662 Dec-24 1,718 1,299 1,537 65 1,467 271,945 Jan-25 1,080 1,345 1,614 42 1,540 270,865 Feb-25 2,179 1,345 1,614 85 1,540 268,686 Mar-25 3,852 1,345 1,614 150 1,540 264,834 Apr-25 9,292 1,345 1,614 362 1,540 255,542 May-25 8,621 1,345 1,614 336 1,540 246,921 Jun-25 10,120 1,345 1,614 395 1,540 236,800 Jul-25 9,938 1,345 1,614 388 1,540 226,862 Aug-25 10,791 1,345 1,614 421 1,540 216,071 Sep-25 9,342 1,345 1,614 364 1,540 206,729 Oct-25 8,356 1,345 1,614 326 1,540 198,372 Nov-25 3,644 1,345 1,614 142 1,540 194,729 Dec-25 1,718 1,345 1,614 67 1,540 193,011 Jan-26 1,080 1,392 1,695 44 1,617 191,931 Feb-26 2,179 1,392 1,695 88 1,617 189,753 Mar-26 3,852 1,392 1,695 155 1,617 185,901 Apr-26 9,292 1,392 1,695 375 1,617 176,609 May-26 8,621 1,392 1,695 348 1,617 167,987 Jun-26 10,120 1,392 1,695 408 1,617 157,867 Jul-26 9,938 1,392 1,695 401 1,617 147,929 Aug-26 10,791 1,392 1,695 436 1,617 137,137 Sep-26 9,342 1,392 1,695 377 1,617 127,795 Oct-26 8,356 1,392 1,695 337 1,617 119,439 Nov-26 3,644 1,392 1,695 147 1,617 115,795 Dec-26 1,718 1,392 1,695 69 1,617 114,078 Jan-27 1,080 1,441 1,779 45 1,698 112,998 Feb-27 2,179 1,441 1,779 91 1,698 110,819 Mar-27 3,852 1,441 1,779 161 1,698 106,967 Apr-27 9,292 1,441 1,779 388 1,698 97,675 May-27 8,621 1,441 1,779 360 1,698 89,054 Jun-27 10,120 1,441 1,779 423 1,698 78,933 Jul-27 9,938 1,441 1,779 415 1,698 68,995 Aug-27 10,791 1,441 1,779 451 1,698 58,204 Sep-27 9,342 1,441 1,779 390 1,698 48,862 Oct-27 8,356 1,441 1,779 349 1,698 40,506 Nov-27 3,644 1,441 1,779 152 1,698 36,862 Dec-27 1,718 1,441 1,779 72 1,698 35,144 Jan-28 1,080 1,491 1,868 47 1,783 34,065 Feb-28 2,179 1,491 1,868 94 1,783 31,886 Mar-28 3,852 1,491 1,868 167 1,783 28,034 Apr-28 9,292 1,491 1,868 402 1,783 18,742 May-28 8,621 1,491 1,868 373 1,783 10,120 Jun-28 10,120 1,491 1,868 438 1,783 0 ----------- Total 3,397,801 A H I J K L - --------------- ----------- ----------- ----------- ----------- --------------- Column I = Column J + Column K ------------------------------ Production Collateral Structuring Discounted Minimum Month Value Collateral Servicing Structuring Principal (Period Ending) Factor(4) Value Obligation Balance Amortization(5) - --------------- ----------- ----------- ----------- ----------- --------------- Initial (as of Closing 0.288676505 $980,865 $120,865 $860,000 Jul-98 0.290031776 983,515 121,421 862,093 $0 Aug-98 0.290521597 979,374 121,649 857,726 0 Sep-98 0.291193866 976,606 121,877 854,729 0 Oct-98 0.291992156 974,768 122,108 852,661 0 Nov-98 0.293449557 977,655 122,339 855,316 0 Dec-98 0.295187594 982,507 122,572 859,935 65 Jan-99 0.297002218 987,954 122,794 865,160 0 Feb-99 0.298651949 992,237 123,017 869,221 0 Mar-99 0.300039888 994,710 123,241 871,469 0 Apr-99 0.300539809 991,200 123,466 867,733 0 May-99 0.301134942 988,358 123,693 864,665 0 Jun-99 0.301461804 983,785 123,922 859,864 72 Jul-99 0.301901962 979,669 124,151 855,518 0 Aug-99 0.302183164 974,547 124,383 850,165 0 Sep-99 0.302680474 970,919 124,615 846,304 0 Oct-99 0.303326344 968,300 124,849 843,451 0 Nov-99 0.304762489 970,830 125,085 845,745 0 Dec-99 0.306534076 975,499 125,322 850,177 9,686 Jan-00 0.308435596 980,934 125,533 855,401 0 Feb-00 0.310172725 985,208 125,746 859,462 0 Mar-00 0.311648450 987,674 125,960 861,714 0 Apr-00 0.312235503 984,166 126,176 857,990 0 May-00 0.312918292 981,325 126,393 854,933 0 Jun-00 0.313332573 976,757 126,611 850,146 32 Jul-00 0.313864518 972,643 126,831 845,812 0 Aug-00 0.314237793 967,524 127,052 840,473 0 Sep-00 0.314827462 963,897 127,274 836,624 0 Oct-00 0.315566171 961,279 127,498 833,782 0 Nov-00 0.317096426 963,803 127,723 836,080 0 Dec-00 0.318963207 968,463 127,949 840,514 9,632 Jan-01 0.320960328 973,886 128,149 845,737 0 Feb-01 0.322792590 978,144 128,350 849,794 0 Mar-01 0.324363057 980,591 128,552 852,039 0 Apr-01 0.325041435 977,052 128,755 848,297 0 May-01 0.325816390 974,184 128,960 845,224 0 Jun-01 0.326321749 969,583 129,166 840,418 96 Jul-01 0.326949956 965,437 129,373 836,064 0 Aug-01 0.327419322 960,285 129,581 830,704 0 Sep-01 0.328106018 956,627 129,791 826,836 0 Oct-01 0.328942700 953,980 130,002 823,977 0 Nov-01 0.330574634 956,483 130,214 826,269 0 Dec-01 0.332545244 961,128 130,428 830,700 9,718 Jan-02 0.334646569 966,533 130,613 835,919 0 Feb-02 0.336581569 970,765 130,800 839,965 0 Mar-02 0.338252870 973,174 130,988 842,186 0 Apr-02 0.339023486 969,561 131,177 838,385 0 May-02 0.339892045 966,623 131,367 835,256 0 Jun-02 0.340488292 961,942 131,558 830,384 316 Jul-02 0.341213624 957,716 131,750 825,966 0 Aug-02 0.341778989 952,478 131,944 820,534 0 Sep-02 0.342563821 948,743 132,138 816,604 0 Oct-02 0.343500420 946,025 132,334 813,691 0 Nov-02 0.345240593 948,490 132,532 815,958 0 Dec-02 0.347323571 953,109 132,730 820,379 10,006 Jan-03 0.349527418 958,458 132,899 825,559 0 Feb-03 0.351551687 962,591 133,068 829,523 0 Mar-03 0.353291647 964,837 133,239 831,599 0 Apr-03 0.354060690 960,849 133,411 827,439 0 May-03 0.354934284 957,558 133,583 823,974 0 Jun-03 0.355513092 952,461 133,757 818,704 1,674 Jul-03 0.356231153 947,834 133,932 813,902 0 Aug-03 0.356775333 942,157 134,108 808,049 0 Sep-03 0.357555096 938,035 134,285 803,750 0 Oct-03 0.358497694 934,964 134,463 800,501 0 Nov-03 0.360307953 937,256 134,643 802,614 0 Dec-03 0.362488362 941,776 134,823 806,953 11,751 Jan-04 0.364809792 947,078 134,972 812,106 0 Feb-04 0.366947017 951,147 135,122 816,026 0 Mar-04 0.368793174 953,304 135,272 818,031 0 Apr-04 0.369643334 949,145 135,424 813,721 0 May-04 0.370600875 945,691 135,577 810,115 0 Jun-04 0.371255538 940,409 135,730 804,679 2,274 Jul-04 0.372058131 935,600 135,885 799,715 0 Aug-04 0.372682351 929,727 136,040 793,687 0 Sep-04 0.373547981 925,429 136,196 789,233 0 Oct-04 0.374580757 922,195 136,354 785,842 0 Nov-04 0.376504630 924,393 136,512 787,881 0 Dec-04 0.378809215 928,847 136,671 792,176 12,503 Jan-05 0.381248587 934,067 136,797 797,270 0 Feb-05 0.383488246 938,008 136,924 801,084 0 Mar-05 0.385412828 939,969 137,052 802,917 0 Apr-05 0.386259338 935,391 137,180 798,211 0 May-05 0.387220761 931,542 137,309 794,232 0 Jun-05 0.387852709 925,798 137,439 788,359 3,817 Jul-05 0.388645047 920,542 137,570 782,972 0 Aug-05 0.389242411 914,184 137,702 776,483 0 Sep-05 0.390099815 909,454 137,834 771,620 0 Oct-05 0.391137183 905,824 137,967 767,857 0 Nov-05 0.393141191 907,815 138,101 769,713 0 Dec-05 0.395558235 912,139 138,236 773,902 14,457 Jan-06 0.398121397 917,254 138,336 778,918 0 Feb-06 0.400467023 921,043 138,436 782,607 0 Mar-06 0.402470023 922,781 138,537 784,244 0 Apr-06 0.403300805 917,751 138,639 779,112 0 May-06 0.404254907 913,473 138,741 774,732 0 Jun-06 0.404848738 907,233 138,844 768,389 5,514 Jul-06 0.405616900 901,495 138,947 762,547 0 Aug-06 0.406170656 894,615 139,052 755,563 0 Sep-06 0.407005640 889,418 139,156 750,261 0 Oct-06 0.408035144 885,358 139,262 746,096 0 Nov-06 0.410118531 887,113 139,368 747,745 0 Dec-06 0.412652286 891,282 139,475 751,808 16,581 Jan-07 0.415345218 896,269 139,544 756,724 0 Feb-07 0.417799896 899,881 139,614 760,267 0 Mar-07 0.419879965 901,368 139,685 761,684 0 Apr-07 0.420678568 895,849 139,756 756,093 0 May-07 0.421609946 891,106 139,827 751,279 0 Jun-07 0.422144944 884,331 139,899 744,432 7,375 Jul-07 0.422869927 878,073 139,971 738,102 0 Aug-07 0.423357432 870,631 140,044 730,587 0 Sep-07 0.424150529 864,930 140,117 724,813 0 Oct-07 0.425154853 860,403 140,190 720,213 0 Nov-07 0.427315113 861,894 140,265 721,630 0 Dec-07 0.429969420 865,881 140,339 725,542 18,890 Jan-08 0.432817997 870,913 140,418 730,495 0 Feb-08 0.435453667 874,788 140,498 734,290 0 Mar-08 0.437758287 876,877 140,578 736,299 0 Apr-08 0.438924421 873,067 140,658 732,409 0 May-08 0.440216196 869,918 140,739 729,179 0 Jun-08 0.441163423 865,062 140,820 724,242 1,300 Jul-08 0.442286315 860,641 140,902 719,739 0 Aug-08 0.443208243 855,229 140,985 714,244 0 Sep-08 0.444408470 851,289 141,068 710,221 0 Oct-08 0.445802411 848,346 141,151 707,195 0 Nov-08 0.448217018 850,480 141,235 709,245 0 Dec-08 0.451069144 854,725 141,320 713,405 10,837 Jan-09 0.454080177 859,691 141,366 718,326 0 Feb-09 0.456861489 863,457 141,412 722,046 0 Mar-09 0.459286357 865,375 141,458 723,917 0 Apr-09 0.460484884 861,186 141,504 719,681 0 May-09 0.461817575 857,679 141,551 716,128 0 Jun-09 0.462777447 852,404 141,598 710,806 2,598 Jul-09 0.463928534 847,578 141,645 705,932 0 Aug-09 0.464861403 841,723 141,693 700,030 0 Sep-09 0.466092806 837,392 141,741 695,651 0 Oct-09 0.467532046 834,091 141,789 692,302 0 Nov-09 0.470073055 836,044 141,838 694,206 0 Dec-09 0.473086562 840,179 141,886 698,293 12,514 Jan-10 0.476271799 845,061 141,894 703,167 0 Feb-10 0.479209435 848,700 141,902 706,798 0 Mar-10 0.481762800 850,426 141,910 708,517 0 Apr-10 0.482990800 845,831 141,917 703,914 0 May-10 0.484361302 841,939 141,925 700,014 0 Jun-10 0.485325721 836,215 141,933 694,282 4,011 Jul-10 0.486497500 830,949 141,941 689,008 0 Aug-10 0.487429778 824,616 141,949 682,667 0 Sep-10 0.488681617 819,855 141,957 677,898 0 Oct-10 0.490155827 816,156 141,965 674,191 0 Nov-10 0.492823248 817,892 141,973 675,919 0 Dec-10 0.496003491 821,887 141,982 679,905 14,377 Jan-11 0.499371106 826,654 141,946 684,708 0 Feb-11 0.502469250 830,133 141,911 688,223 0 Mar-11 0.505150195 831,631 141,875 689,756 0 Apr-11 0.506391658 826,585 141,839 684,745 0 May-11 0.507785869 822,264 141,803 680,461 0 Jun-11 0.508736263 816,045 141,767 674,278 5,627 Jul-11 0.509913698 810,298 141,730 668,568 0 Aug-11 0.510827939 803,445 141,693 661,751 0 Sep-11 0.512087198 798,217 141,656 656,561 0 Oct-11 0.513586519 794,088 141,619 652,469 0 Nov-11 0.516385790 795,581 141,582 653,999 0 Dec-11 0.519744030 799,410 141,544 657,866 16,413 Jan-12 0.523306567 804,038 141,460 662,578 0 Feb-12 0.526574163 807,330 141,376 665,954 0 Mar-12 0.529386298 808,569 141,291 667,277 0 Apr-12 0.530626302 803,033 141,206 661,827 0 May-12 0.532030543 798,247 141,120 657,127 0 Jun-12 0.532946537 791,494 141,034 650,460 7,406 Jul-12 0.534112071 785,227 140,947 644,280 0 Aug-12 0.534986128 777,813 140,860 636,953 0 Sep-12 0.536234447 772,080 140,772 631,308 0 Oct-12 0.537743130 767,482 140,684 626,798 0 Nov-12 0.540677080 768,701 140,595 628,106 0 Dec-12 0.544224218 772,335 140,505 631,830 18,630 Jan-13 0.547995506 776,796 140,367 636,429 0 Feb-13 0.551441731 779,871 140,228 639,643 0 Mar-13 0.554387328 780,819 140,088 640,730 0 Apr-13 0.555604155 774,754 139,948 634,806 0 May-13 0.556998215 769,462 139,806 629,655 0 Jun-13 0.557850793 762,133 139,664 622,469 9,361 Jul-13 0.558978795 755,303 139,521 615,783 0 Aug-13 0.559780870 747,285 139,377 607,909 0 Sep-13 0.560991289 741,005 139,231 601,773 0 Oct-13 0.562485692 735,896 139,086 596,811 0 Nov-13 0.565555161 736,807 138,939 597,868 0 Dec-13 0.569302693 740,216 138,791 601,425 21,044 Jan-14 0.573298080 744,478 138,592 605,886 0 Feb-14 0.576932113 747,303 138,392 608,912 0 Mar-14 0.580011188 747,925 138,190 609,735 0 Apr-14 0.581172970 741,286 137,987 603,299 0 May-14 0.582526829 735,446 137,783 597,662 0 Jun-14 0.583274046 727,495 137,578 589,917 11,508 Jul-14 0.584326662 720,058 137,372 582,686 0 Aug-14 0.585010361 711,388 137,164 574,224 0 Sep-14 0.586142794 704,514 136,955 567,560 0 Oct-14 0.587587145 698,852 136,744 562,108 0 Nov-14 0.590789592 699,417 136,533 562,885 0 Dec-14 0.594749455 702,566 136,320 566,247 23,670 Jan-15 0.598986104 706,596 136,052 570,544 0 Feb-15 0.602816689 709,136 135,784 573,353 0 Mar-15 0.606025438 709,393 135,513 573,881 0 Apr-15 0.607084668 702,133 135,241 566,893 0 May-15 0.608353110 695,698 134,967 560,731 0 Jun-15 0.608933055 687,075 134,691 552,384 13,863 Jul-15 0.609853298 678,981 134,414 544,567 0 Aug-15 0.610349354 669,609 134,135 535,474 0 Sep-15 0.611342989 662,094 133,854 528,240 0 Oct-15 0.612682216 655,830 133,572 522,258 0 Nov-15 0.616009251 656,010 133,288 522,722 0 Dec-15 0.620193454 658,860 133,002 525,859 26,525 Jan-16 0.624690704 662,622 132,658 529,963 0 Feb-16 0.628725274 664,837 132,313 532,524 0 Mar-16 0.632053321 664,688 131,965 532,723 0 Apr-16 0.632937485 656,756 131,616 525,140 0 May-16 0.634050828 649,675 131,264 518,411 0 Jun-16 0.634369482 640,328 130,910 509,418 16,441 Jul-16 0.635069166 631,524 130,554 500,970 0 Aug-16 0.635270923 621,395 130,195 491,200 0 Sep-16 0.636030758 613,185 129,834 483,351 0 Oct-16 0.637177698 606,268 129,472 476,797 0 Nov-16 0.640610543 606,018 129,106 476,911 0 Dec-16 0.645030273 608,530 128,739 479,790 29,627 Jan-17 0.649810055 611,982 128,311 483,670 0 Feb-17 0.654053067 613,831 127,880 485,950 0 Mar-17 0.657478516 613,229 127,447 485,782 0 Apr-17 0.658073333 604,570 127,011 477,559 0 May-17 0.658920528 596,789 126,573 470,216 0 Jun-17 0.658829338 586,660 126,131 460,529 19,262 Jul-17 0.659166202 577,089 125,687 451,402 0 Aug-17 0.658901731 566,144 125,240 440,904 0 Sep-17 0.659272084 557,182 124,791 432,391 0 Oct-17 0.660081758 549,555 124,338 425,217 0 Nov-17 0.663580646 548,825 123,883 424,942 0 Dec-17 0.668242518 550,951 123,425 427,526 33,002 Jan-18 0.673291549 554,387 123,043 431,344 0 Feb-18 0.677914362 556,717 122,659 434,057 0 Mar-18 0.681911198 557,372 122,273 435,099 0 Apr-18 0.683726454 552,503 121,884 430,618 0 May-18 0.685775069 548,246 121,493 426,752 0 Jun-18 0.687144086 542,386 121,100 421,286 6,240 Jul-18 0.688869247 536,902 120,704 416,198 0 Aug-18 0.690189934 530,483 120,305 410,178 0 Sep-18 0.692035640 525,437 119,904 405,532 0 Oct-18 0.694250990 521,317 119,501 401,816 0 Nov-18 0.698476643 521,945 119,095 402,850 0 Dec-18 0.703573545 524,546 118,687 405,859 15,427 Jan-19 0.709008468 527,832 118,219 409,613 0 Feb-19 0.713971990 529,972 117,747 412,224 0 Mar-19 0.718244748 530,377 117,273 413,103 0 Apr-19 0.720108521 525,061 116,979 408,265 0 May-19 0.722226190 520,379 116,317 404,062 0 Jun-19 0.723586357 514,036 115,834 398,202 7,657 Jul-19 0.725347992 508,079 115,348 392,731 0 Aug-19 0.726655389 501,153 114,859 386,294 0 Sep-19 0.728538925 495,646 114,367 381,279 0 Oct-19 0.730828903 491,097 113,872 377,225 0 Nov-19 0.735356257 491,460 113,374 378,085 0 Dec-19 0.740855039 493,862 112,873 380,989 17,213 Jan-20 0.746732438 496,974 112,309 384,665 0 Feb-20 0.752083784 498,897 111,741 387,156 0 Mar-20 0.756666253 499,022 111,170 387,852 0 Apr-20 0.758564598 493,225 110,595 382,630 0 May-20 0.760740775 488,082 110,017 378,065 0 Jun-20 0.762063269 481,218 109,435 371,783 9,206 Jul-20 0.763842847 474,750 108,849 365,901 0 Aug-20 0.765105583 467,279 108,260 359,018 0 Sep-20 0.767005664 461,274 107,667 353,606 0 Oct-20 0.769356499 456,259 107,071 349,188 0 Nov-20 0.774226293 456,326 106,471 349,855 0 Dec-20 0.780192258 458,502 105,867 352,635 19,148 Jan-21 0.786587646 461,411 105,196 356,215 0 Feb-21 0.792389251 463,088 104,521 358,567 0 Mar-21 0.797325511 462,901 103,842 359,059 0 Apr-21 0.799236214 456,584 103,159 353,425 0 May-21 0.801453098 450,941 102,471 348,470 0 Jun-21 0.802693977 443,515 101,779 341,736 10,899 Jul-21 0.804461727 436,497 101,083 335,414 0 Aug-21 0.805631105 428,438 100,383 328,055 0 Sep-21 0.807512857 421,895 99,678 322,217 0 Oct-21 0.809900075 416,374 98,969 317,405 0 Nov-21 0.815167143 416,112 98,256 317,856 0 Dec-21 0.821691099 418,031 97,538 320,493 21,243 Jan-22 0.828710296 420,707 96,749 323,958 0 Feb-22 0.835049139 422,106 95,956 326,150 0 Mar-22 0.840399790 421,573 95,157 326,416 0 Apr-22 0.842287135 414,693 94,354 320,339 0 May-22 0.844514881 408,509 93,546 314,963 0 Jun-22 0.845604910 400,479 92,733 307,746 12,747 Jul-22 0.847311845 392,866 91,914 300,952 0 Aug-22 0.848309252 384,174 91,091 293,084 0 Sep-22 0.850113751 377,050 90,262 286,788 0 Oct-22 0.852493449 370,982 89,429 281,553 0 Nov-22 0.858236248 370,354 88,590 281,764 0 Dec-22 0.865452651 371,981 87,746 284,235 23,511 Jan-23 0.873253590 374,391 86,827 287,564 0 Feb-23 0.880258927 375,477 85,903 289,574 0 Mar-23 0.886113215 374,561 84,972 289,588 0 Apr-23 0.887918169 367,073 84,037 283,037 0 May-23 0.890105710 360,303 83,095 277,209 0 Jun-23 0.890930236 351,621 82,147 269,473 14,762 Jul-23 0.892491967 343,367 81,194 262,173 0 Aug-23 0.893182722 333,994 80,234 253,760 0 Sep-23 0.894804621 326,242 79,269 246,973 0 Oct-23 0.897094227 319,580 78,298 241,282 0 Nov-23 0.903434544 318,547 77,321 241,226 0 Dec-23 0.911559829 319,846 76,337 243,509 25,965 Jan-24 0.920398864 321,954 75,275 246,679 0 Feb-24 0.928280133 322,688 74,206 248,482 0 Mar-24 0.934782298 321,348 73,130 248,218 0 Apr-24 0.936402314 313,203 72,048 241,156 0 May-24 0.938457932 305,800 70,959 234,841 0 Jun-24 0.938812349 296,414 69,863 226,551 16,957 Jul-24 0.940071954 287,470 68,761 218,709 0 Aug-24 0.940203365 277,364 67,651 209,713 0 Sep-24 0.941435706 268,932 66,535 202,397 0 Oct-24 0.943464624 261,628 65,412 196,216 0 Nov-24 0.950614033 260,147 64,282 195,865 0 Dec-24 0.960039932 261,078 63,145 197,933 28,619 Jan-25 0.970385420 262,843 61,924 200,919 0 Feb-25 0.979525973 263,185 60,695 202,490 0 Mar-25 0.986942044 261,376 59,459 201,917 0 Apr-25 0.988184180 252,523 58,216 194,307 0 May-25 0.989928421 244,434 56,964 187,469 0 Jun-25 0.989402394 234,291 55,705 178,585 19,348 Jul-25 0.990028637 224,600 54,438 170,161 0 Aug-25 0.989051610 213,705 53,164 160,541 0 Sep-25 0.989417024 204,541 51,881 152,660 0 Oct-25 0.990766572 196,541 50,591 145,950 0 Nov-25 0.999159390 194,565 49,292 145,273 0 Dec-25 1.010734120 195,083 47,986 147,097 31,488 Jan-26 1.023612706 196,463 46,590 149,873 0 Feb-26 1.034859582 196,367 45,186 151,181 0 Mar-26 1.043792034 194,042 43,774 150,268 0 Apr-26 1.044244669 184,423 42,353 142,070 0 May-26 1.045271229 175,592 40,923 134,670 0 Jun-26 1.042860824 164,633 39,484 125,149 21,948 Jul-26 1.041974715 154,138 38,036 116,102 0 Aug-26 1.038330500 142,394 36,579 105,815 0 Sep-26 1.036332005 132,438 35,113 97,325 0 Oct-26 1.035549303 123,685 33,638 90,047 0 Nov-26 1.046365171 121,164 32,154 89,010 0 Dec-26 1.062622822 121,222 30,661 90,561 34,589 Jan-27 1.081168558 122,170 29,074 93,096 0 Feb-27 1.097164423 121,587 27,477 94,110 0 Mar-27 1.109615182 118,693 25,871 92,822 0 Apr-27 1.108231265 108,247 24,254 83,993 0 May-27 1.107357338 98,614 22,627 75,987 0 Jun-27 1.099357987 86,776 20,990 65,786 24,775 Jul-27 1.093022953 75,413 19,344 56,070 0 Aug-27 1.078197082 62,755 17,686 45,069 0 Sep-27 1.063108198 51,946 16,019 35,926 0 Oct-27 1.046200625 42,377 14,342 28,035 0 Nov-27 1.064956260 39,256 12,654 26,603 0 Dec-27 1.104052714 38,801 10,955 27,846 37,939 Jan-28 1.152693585 39,266 9,157 30,109 0 Feb-28 1.196231198 38,143 7,348 30.795 0 Mar-28 1.235048478 34,623 5,528 29,095 0 Apr-28 1.242405179 23,285 3,697 19,588 0 May-28 1.263344950 12,786 1,854 10,931 0 Jun-28 0.000000000 0 0 0 27,846 -------- 860,000 ALL DOLLARS IN THOUSANDS, EXCEPT FOR COLUMN C AND COLUMN H (1) Operating Costs include administrative expenses, property taxes, the Services Fee and certain amounts reimbursable under the New Services Agreement. (2) A portion of Capital Expenditures is reimbursable under the New Services Agreement. (3) The Structured Harvest Quantity is 3,397,801 Mbfe. In all subsequent periods the column represents the Deemed Remaining Harvest Quantity, which is equal to the previous period of Column G less current period Column B. (4) Amount in column I divided by amount in Column G., expressed in units of dollars (in thousands) per Mbfe. (5) Payments to Holders on Timber Notes are due on the 20th day of the subsequent month.
EXHIBIT A-1-1 (FORM OF FACE OF NOTE) UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE TRUSTEE OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. PRINCIPAL OF THIS NOTE IS PAYABLE IN INSTALLMENTS, AS SET FORTH HEREIN, WITHOUT SURRENDER OF THIS NOTE. ACCORDINGLY, THE UNPAID PRINCIPAL AMOUNT OF THIS NOTE AT ANY TIME MAY BE LESS THAN THE INITIAL PRINCIPAL AMOUNT SET FORTH BELOW (DUE TO PRINCIPAL PAYMENTS BEFORE OR AFTER THE DATE OF THIS NOTE). ANYONE ACQUIRING BENEFICIAL OWNERSHIP OF THIS NOTE MAY ASCERTAIN THE CURRENT PRINCIPAL AMOUNT BY INQUIRY OF THE TRUSTEE. No. A-1-__ $________ CUSIP No. U78476AA3 SCOTIA PACIFIC COMPANY LLC 6.55% Class A-1 Timber Collateralized Notes, due 2028 Scotia Pacific Company LLC, a Delaware limited liability company, promises to pay to ________, or registered assigns, the principal sum of _______ Dollars (or such other amount (not in excess of One Hundred Sixty Three Million Seven Hundred Thousand ($163,700,000) Dollars) as shall equal the unpaid principal amount of this Note) on July 20, 2028 (the "Final Maturity Date") and, on each Note Payment Date, such amounts as provided in the Indenture. Note Payment Dates: January 20th and July 20th Record Dates: January 5th and July 5th Note Rate: 6.55% Reference is made to the further provisions of this Note set forth on the reverse hereof, which further provisions are incorporated and shall for all purposes have the same effect as if set forth at this place. Capitalized terms used and not defined in this Note which are defined in the Indenture referred to herein have the meanings assigned to them in the Indenture. IN WITNESS WHEREOF, the Issuer has caused this Note to be signed manually or by facsimile by its duly authorized officers. Dated: ______,____ SCOTIA PACIFIC COMPANY LLC By________________________________ President or Vice President By________________________________ Secretary or Assistance Secretary TRUSTEE'S CERTIFICATE OF AUTHENTICATION STATE STREET BANK AND TRUST COMPANY as Trustee, certifies that this is one of the Class A-1 Timber Notes referred to in the Indenture. by________________________________ Authorized Signatory 6.55% Class A-1 Timber Collateralized Notes, due 2028 1. Interest; Principal; Premium SCOTIA PACIFIC COMPANY LLC, a Delaware limited liability company (such limited liability company, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Issuer"), promises to pay to the registered Holder hereof, or to its registered assigns, the initial principal amount indicated on the face hereof (or such lesser amount as shall equal the unpaid principal amount of this Note) on the Final Maturity Date indicated on the face hereof and, on each Note Payment Date that precedes the Final Maturity Date, (i) the principal amount required to be paid on such date by Sections 2.11 and 5.7 of the Indenture, (ii) interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal balance hereof, from and including the most recent Note Payment Date on which interest has been duly paid to but excluding such Note Payment Date at the rate per annum indicated on the face hereof, (iii) without duplication of any amount payable pursuant to clause (ii), interest (computed on the basis of a 360-day year of twelve 30-day months) on any principal of this Note, and, to the extent lawful, interest payable under the foregoing clause (ii), that is not paid on the date such principal or interest becomes due and payable, for the period from and including the date such principal or interest becomes due and payable to but excluding the date such principal or interest is paid in full, at the Default Rate, (iv) any Premium required to be paid on such date by Sections 2.12 and 5.7 of the Indenture, and (v) any interest (computed on the basis of a 360-day year of twelve 30-day months) required to be paid on such date by Sections 2.12 and 5.7 of the Indenture on any Premium payable on this Note. If the date scheduled to be a Note Payment Date is not a Business Day, the next succeeding day that is a Business Day shall be the Note Payment Date, but all calculations of interest and other items will be as of the 20th day of the applicable month. As provided in Section 2.12(b) of the Indenture, for the purposes of Sections 2.11(e), 2.12(b), 2.12(c) and 2.12(d) of the Indenture, if any portion of the principal amount of any Note remains unpaid after the final Maturity Date, and, if the Notes shall not have been accelerated pursuant to Section 7.2 of the Indenture, the last day of each month that occurs after such Final Maturity Date and prior to the date on which the entire unpaid principal amount of such Note is paid shall be deemed to constitute a Note Payment Date. 2. Method of Payment The Issuer will pay the amounts payable on the Notes on each Note Payment Date to the persons who are registered Holders of Notes at the close of business on the fifth day of the month in which such Note Payment Date occurs (the "Record Date"), even if Notes are canceled after the Record Date and on or before such Note Payment Date. Holders need not surrender Notes to a Paying Agent to collect principal or other amounts payable in respect of the Notes, except that Notes must be surrendered to a Paying Agent after due notice to collect the final installment of principal thereon. The Issuer will pay all amounts payable on the Notes in money of the United States that at the time of payment is legal tender for payment of public and private debts. Payments on Definitive Notes will be made (i) by a U.S. dollar check drawn on a bank in New York City or Boston, Massachusetts mailed to the Holder at such Holder's registered address or (ii) upon application by a Holder of at least U.S. $5,000,000 in principal amount of Definitive Notes to a Paying Agent not later than five Business Days prior to the related Record Date, by wire transfer in immediately available funds to a U.S. dollar account maintained by such Holder with a bank in New York City or Boston, Massachusetts. Payments to Holders of the Global Notes will be made (i) by a U.S. dollar check drawn on a bank in New York City or Boston, Massachusetts delivered to the registered owner of such Global Notes, at its registered address or (ii) by wire transfer in immediately available funds to a U.S. dollar account maintained by such registered owner with a bank in New York City or Boston, Massachusetts. However, the final distribution with respect to each Class of Timber Notes will be made only against surrender of the Timber Notes of such Class at the corporate trust office of a Paying Agent, in Boston, Massachusetts or New York, New York. 3. Paying Agent and Registrar The Trustee, together with its affiliate, State Street Bank and Trust Company, N.A. will initially act as sole Paying Agents and the Trustee, initially, will act as Registrar. The Issuer may appoint and change any Registrar without notice. The Issuer may act as Registrar. The Issuer may appoint one or more other paying agents. 4. Indenture; Deed of Trust The Issuer has issued the Notes under an Indenture dated as of July 20, 1998 (the "Indenture"), between the Issuer and State Street Bank and Trust Company, a Massachusetts trust company, as Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. SectionSection 77aaa-77bbbb) as in effect on the date of the Indenture (the "TIA"). The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the TIA for a statement of those terms. The Notes and the obligations of the Issuer pursuant to the Indenture and the Deed of Trust are secured by a Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Proceeds dated on or prior to July 20, 1998 (the "Deed of Trust") by the Issuer, as trustor, in favor of a trustee under the Deed of Trust, for the benefit of State Street Bank and Trust Company, in its capacity as collateral agent for the Holders of the Timber Notes and the Liquidity Providers pursuant to the Deed of Trust. Noteholders are referred to the Deed of Trust for a statement of the terms thereof. Subject to certain exceptions set forth in the Deed of Trust, (i) the Deed of Trust may be amended with the written consent of the Majority Secured Parties (as defined in the Deed of Trust) and Rating Agency Confirmation or with the written consent of the Supermajority Holders (after notice of the Rating Agency Evaluation) and Rating Agency Evaluation and (ii) any default or noncompliance with any provision may be waived with the written consent of the Majority Secured Parties. Subject to certain exceptions set forth in the Deed of Trust, the Collateral Agent and the Issuer may amend the Deed of Trust to cure any ambiguity, omission, defect or inconsistency, to add to the covenants of the Issuer for the benefit of the Collateral Agent or the Secured Parties or to surrender any right or power conferred upon the Issuer or to make any change that does not adversely affect the rights of any Noteholder or any Liquidity Provider. The Indenture and the Deed of Trust impose certain restrictions upon, among other things, the ability of the Issuer to incur Indebtedness, to enter into agreements other than the Operative Documents, to create Liens on the Mortgaged Property, and to enter into transactions with Affiliates. 5. Collateral Pursuant to the Deed of Trust, the Issuer has pledged the Mortgaged Property. Upon the satisfaction of certain conditions set forth in the Indenture, the Issuer may issue Additional Timber Notes that will be equally and ratably secured with the Notes by the Mortgaged Property. The Notes do not constitute obligations of The Pacific Lumber Company ("Pacific Lumber"), and the Notes are not guaranteed by Pacific Lumber or any other Person. 6. Optional Redemption or Prepayment The Issuer may redeem the Notes of any Class, in whole, but not in part, at any time, provided that no Notes of a Class having an earlier Scheduled Maturity Date (or, in the case of redemption of the Class A-3 Notes, no Notes) remain outstanding (after giving effect to all principal payments (including payments of principal in the redemption) occurring on the redemption date) following such redemption, at a redemption price equal to (i) all unpaid principal amounts thereof as of the redemption date, (ii) all accrued and unpaid Premium thereon as of the redemption date, (iii) all accrued and unpaid Regular Interest, Default Interest and interest on Premium thereon as of the redemption date and (iv) a redemption premium computed as provided in the definition of Prepayment Premium Amount in Schedule A to the Indenture, as if the excess of (a) the aggregate outstanding principal amount of the Notes of such Class to be redeemed over (b) the Scheduled Amortization Amount for such Class of Notes as of the redemption date, constituted an "Excess Payment" as set forth in such definition. The issuer may also make optional partial or total prepayments of principal on any Note Payment Date as provided in the Indenture. 7. Notice of Redemption Notice of redemption will be mailed at least 15 days (or 30 days if legally required by DTC) but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at his or her registered address. If money sufficient to pay the redemption price of all Notes called for redemption is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after the redemption date interest shall cease to accrue on the Notes called for redemption. 8. Denominations; Transfer; Exchange The Notes are in registered form without coupons in denominations of $100,000 original principal amount or any integral multiple of $1,000 in excess thereof. A Holder may transfer or exchange Notes for Notes of the same Class in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate certificates, opinions, endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not transfer or exchange (i) any Notes called for redemption or (ii) any Notes for a period of 15 days before a Note Payment Date. 9. Persons Deemed Owners The registered Holder of this Note may be treated as the owner of it for all purposes. 10. Unclaimed Money If money for the payment of principal of, Premium, if any, or interest on any Note remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Issuer at its request unless an abandoned property law designates another person. After any such payment, Holders entitled to the money must look only to the Issuer and not to the Trustee for payment. 11. Amendment; Waiver Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Majority Holders and Rating Agency Confirmation or with the written consent of the Supermajority Holders (after notice of the Rating Agency Evaluation) and Rating Agency Evaluation and (ii) any default or noncompliance with any provision may be waived with the written consent of the Majority Holders. Subject to certain exceptions set forth in the Indenture, without the consent of any Noteholder, the Issuer and the Trustee may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, to make any change that does not adversely affect the rights of any Noteholder, to add to the covenants of the Issuer for the benefit of the Holders or to surrender any right or power conferred upon the Issuer, to comply with the TIA, to comply with the provisions of Section 4.13 of the Indenture (in connection with certain consolidations or mergers), to provide for uncertificated Notes in addition to or in place of certificated Notes and, subject to certain limitations set forth in the Indenture, in connection with the issuance of any Additional Timber Notes. 12. Defaults and Remedies The occurrence of any of the events enumerated in Section 7.1 of the Indenture shall constitute an Event of Default. If an Event of Default under Section 7.1(11) of the Indenture shall occur, the Indenture provides that an amount equal to all amounts payable with respect to the Notes and any Additional Timber Notes shall, without any demand, presentment or notice, become immediately due any payable. If any Event of Default described in any of Section 7.1(1) through (5) shall occur and be continuing, the Trustee may, or, if the Holders of 25% in aggregate outstanding principal amount of the Notes and any Additional Timber Notes so elect, shall, declare all amounts payable with respect to the Notes and any Additional Timber Notes to be immediately due and payable, and upon any such declaration of acceleration such amount shall become immediately due and payable. If any Event of Default described in causes (6) through (10) or in clause (12) of Section 7.1 of the Indenture shall occur and be continuing, if the Majority Holders so elect, the Trustee shall declare all amounts payable with respect to the Notes and any Additional Timber Notes to be immediately due and payable, and upon any such declaration of acceleration such amount shall become immediately due and payable. If certain conditions set forth in Section 7.1(d) of the Indenture have been satisfied, the Majority Holders may rescind and annul a declaration of acceleration. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Notes and any Additional Timber Notes may direct the Trustee in its exercise of any trust or power; provided, however, that the Liquidity Providers have the right to vote pro rata (as provided in the Indenture) with the Holders of the Notes and any Additional Timber Notes in directing the Trustee or the Collateral Agent with respect to whether and how to exercise rights against the Mortgaged Property under the Deed of Trust. The Trustee may withhold from Noteholders notice of any continuing Default known to the Trustee (except a Default in payment of principal or interest) if it determines that withholding notice is in their interest. Acceptance of this Note constitutes the waiver of certain rights of setoff, banker's lien, or the like against property of, or any amounts owing to, the Company as set forth in Section 7.9 of the Indenture. 13. Trustee Dealings with the Issuer Subject to certain limitations imposed by the TIA if and when the Indenture is qualified under the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Issuer or its Affiliates and may otherwise deal with the Issuer of its Affiliates with the same rights it would have if it were not Trustee. 14. No Recourse Against Others A director, manager, officer, employee, member or stockholder, as such, of the Issuer or the Trustee shall not have any liability for any obligations of the Issuer or the Trustee under the Notes or the Indenture or the Deed of Trust or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 15. Authentication This Note shall not be valid until an authorized signatory of the Trustee (or an authenticating agent appointed by the Trustee and acceptable to the Issuer) manually signs the certificate of authentication on the other side of this Note. 16. Abbreviations Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 17. CUSIP Numbers Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Issuer has caused CUSIP numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Noteholders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Issuer will furnish to any Noteholder upon written request and without charge a copy of the Indenture, the Deed of Trust, the New Services Agreement and the New Master Purchase Agreement. Requests may be made to: Scotia Pacific Company LLC 5847 San Felipe Suite 2610 Houston, Texas 77257 Attention: Secretary 18. Transfer Restrictions TRANSFERS AND EXCHANGES OF THIS NOTE ARE SUBJECT TO RESTRICTIONS AS PROVIDED IN THE INDENTURE UNTIL THE EXPIRATION OF THE RESTRICTED PERIOD (AS DEFINED IN THE INDENTURE.) ASSIGNMENT FORM To assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint___________________________________ attorney or agent to transfer this Note on the books of the Issuer. The attorney or agent may substitute another to act for him. ___________________________________________________________________________ Date: Your Signature:_________________________________________________________________ Sign exactly as your name appears on the other side of this Note. Signature Guarantee:_______________________________________________________ (Signature must be guaranteed by a member firm of the New York Stock Exchange, commercial bank or trust company or another entity with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15.) IMPORTANT NOTICE: WHEN YOU SIGN YOUR NAME TO THIS ASSIGNMENT FROM WITHOUT FILLING IN THE NAME OF YOUR "ASSIGNEE" OR "ATTORNEY OR AGENT", THIS NOTE BECOMES FULLY NEGOTIABLE, SIMILAR TO A CHECK ENDORSED IN BLANK. THEREFORE, TO SAFEGUARD A SIGNED NOTE, IT IS RECOMMENDED THAT YOU EITHER (i) FILL IN THE NAME OF THE NEW OWNER IN THE "ASSIGNEE" BLANK, OR (ii) IF YOU ARE SENDING THE SIGNED NOTE TO YOUR BANK OR BROKER, FILL IN THE NAME OF THE BANK OR BROKER IN THE "ATTORNEY OR AGENT" BLANK. ALTERNATIVELY, INSTEAD OF USING THIS ASSIGNMENT FORM, YOU MAY SIGN A SEPARATE "POWER OF ATTORNEY" FORM AND THEN MAIL THE UNSIGNED NOTE AND THE SIGNED "POWER OF ATTORNEY" IN SEPARATE ENVELOPES. FOR ADDED PROTECTION, USE CERTIFIED OR REGISTERED MAIL FOR A NOTE. EXHIBIT A-2-1 (FORM OF FACE OF NOTE) UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE TRUSTEE OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. PRINCIPAL OF THIS NOTE IS PAYABLE IN INSTALLMENTS, AS SET FORTH HEREIN, WITHOUT SURRENDER OF THIS NOTE. ACCORDINGLY, THE UNPAID PRINCIPAL AMOUNT OF THIS NOTE AT ANY TIME MAY BE LESS THAN THE INITIAL PRINCIPAL AMOUNT SET FORTH BELOW (DUE TO PRINCIPAL PAYMENTS BEFORE OR AFTER THE DATE OF THIS NOTE). ANYONE ACQUIRING BENEFICIAL OWNERSHIP OF THIS NOTE MAY ASCERTAIN THE CURRENT PRINCIPAL AMOUNT BY INQUIRY OF THE TRUSTEE. No. A-2-__ $________ CUSIP No. U78476AB1 SCOTIA PACIFIC COMPANY LLC 7.11% Class A-2 Timber Collateralized Notes, due 2028 Scotia Pacific Company LLC, a Delaware limited liability company, promises to pay to _________, or registered assigns, the principal sum of _________ Dollars (or such other amount (not in excess of Two Hundred Forty Three Million Two Hundred Thousand ($243,200,000) Dollars) as shall equal the unpaid principal amount of this Note) on July 20, 2028 (the "Final Maturity Date") and, on each Note Payment Date, such amounts as provided in the Indenture. Note Payment Dates: January 20th and July 20th Record Dates: January 5th and July 5th Note Rate: 7.11% Reference is made to the further provisions of this Note set forth on the reverse hereof, which further provisions are incorporated and shall for all purposes have the same effect as if set forth at this place. Capitalized terms used and not defined in this Note which are defined in the Indenture referred to herein have the meanings assigned to them in the Indenture. IN WITNESS WHEREOF, the Issuer has caused this Note to be signed manually or by facsimile by its duly authorized officers. Dated: ________,_____ SCOTIA PACIFIC COMPANY LLC By___________________________________________ President or Vice President By___________________________________________ Secretary or Assistance Secretary TRUSTEE'S CERTIFICATE OF AUTHENTICATION STATE STREET BANK AND TRUST COMPANY as Trustee, certifies that this is one of the Class A-2 Timber Notes referred to in the Indenture. by__________________________________ Authorized Signatory 7.11% Class A-2 Timber Collateralized Notes, due 2028 1. Interest; Principal; Premium SCOTIA PACIFIC COMPANY LLC, a Delaware limited liability company (such limited liability company, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Issuer"), promises to pay to the registered Holder hereof, or to its registered assigns, the initial principal amount indicated on the face hereof (or such lesser amount as shall equal the unpaid principal amount of this Note) on the Final Maturity Date indicated on the face hereof and, on each Note Payment Date that precedes the Final Maturity Date, (i) the principal amount required to be paid on such date by Sections 2.11 and 5.7 of the Indenture, (ii) interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal balance hereof, from and including the most recent Note Payment Date on which interest has been duly paid to but excluding such Note Payment Date at the rate per annum indicated on the face hereof, (iii) without duplication of any amount payable pursuant to clause (ii), interest (computed on the basis of a 360-day year of twelve 30-day months) on any principal of this Note, and, to the extent lawful, interest payable under the foregoing clause (ii), that is not paid on the date such principal or interest becomes due and payable, for the period from and including the date such principal or interest becomes due and payable to but excluding the date such principal or interest is paid in full, at the Default Rate, (iv) any Premium required to be paid on such date by Sections 2.12 and 5.7 of the Indenture, and (v) any interest (computed on the basis of a 360-day year of twelve 30-day months) required to be paid on such date by Sections 2.12 and 5.7 of the Indenture on any Premium payable on this Note. If the date scheduled to be a Note Payment Date is not a Business Day, the next succeeding day that is a Business Day shall be the Note Payment Date, but all calculations of interest and other items will be as of the 20th day of the applicable month. As provided in Section 2.12(b) of the Indenture, for the purposes of Sections 2.11(e), 2.12(b), 2.12(c) and 2.12(d) of the Indenture, if any portion of the principal amount of any Note remains unpaid after the final Maturity Date, and, if the Notes shall not have been accelerated pursuant to Section 7.2 of the Indenture, the last day of each month that occurs after such Final Maturity Date and prior to the date on which the entire unpaid principal amount of such Note is paid shall be deemed to constitute a Note Payment Date. 2. Method of Payment The Issuer will pay the amounts payable on the Notes on each Note Payment Date to the persons who are registered Holders of Notes at the close of business on the fifth day of the month in which such Note Payment Date occurs (the "Record Date"), even if Notes are canceled after the Record Date and on or before such Note Payment Date. Holders need not surrender Notes to a Paying Agent to collect principal or other amounts payable in respect of the Notes, except that Notes must be surrendered to a Paying Agent after due notice to collect the final installment of principal thereon. The Issuer will pay all amounts payable on the Notes in money of the United States that at the time of payment is legal tender for payment of public and private debts. Payments on Definitive Notes will be made (i) by a U.S. dollar check drawn on a bank in New York City or Boston, Massachusetts mailed to the Holder at such Holder's registered address or (ii) upon application by a Holder of at least U.S. $5,000,000 in principal amount of Definitive Notes to a Paying Agent not later than five Business Days prior to the related Record Date, by wire transfer in immediately available funds to a U.S. dollar account maintained by such Holder with a bank in New York City or Boston, Massachusetts. Payments to Holders of the Global Notes will be made (i) by a U.S. dollar check drawn on a bank in New York City or Boston, Massachusetts delivered to the registered owner of such Global Notes, at its registered address or (ii) by wire transfer in immediately available funds to a U.S. dollar account maintained by such registered owner with a bank in New York City or Boston, Massachusetts. However, the final distribution with respect to each Class of Timber Notes will be made only against surrender of the Timber Notes of such Class at the corporate trust office of a Paying Agent, in Boston, Massachusetts or New York, New York. 3. Paying Agent and Registrar The Trustee, together with its affiliate, State Street Bank and Trust Company, N.A. will initially act as sole Paying Agents and the Trustee, initially, will act as Registrar. The Issuer may appoint and change any Registrar without notice. The Issuer may act as Registrar. The Issuer may appoint one or more other paying agents. 4. Indenture; Deed of Trust The Issuer has issued the Notes under an Indenture dated as of July 20, 1998 (the "Indenture"), between the Issuer and State Street Bank and Trust Company, a Massachusetts trust company, as Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. SectionSection 77aaa-77bbbb) as in effect on the date of the Indenture (the "TIA"). The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the TIA for a statement of those terms. The Notes and the obligations of the Issuer pursuant to the Indenture and the Deed of Trust are secured by a Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Proceeds dated on or prior to July 20, 1998 (the "Deed of Trust") by the Issuer, as trustor, in favor of a trustee under the Deed of Trust, for the benefit of State Street Bank and Trust Company, in its capacity as collateral agent for the Holders of the Timber Notes and the Liquidity Providers pursuant to the Deed of Trust. Noteholders are referred to the Deed of Trust for a statement of the terms thereof. Subject to certain exceptions set forth in the Deed of Trust, (i) the Deed of Trust may be amended with the written consent of the Majority Secured Parties (as defined in the Deed of Trust) and Rating Agency Confirmation or with the written consent of the Supermajority Holders (after notice of the Rating Agency Evaluation) and Rating Agency Evaluation and (ii) any default or noncompliance with any provision may be waived with the written consent of the Majority Secured Parties. Subject to certain exceptions set forth in the Deed of Trust, the Collateral Agent and the Issuer may amend the Deed of Trust to cure any ambiguity, omission, defect or inconsistency, to add to the covenants of the Issuer for the benefit of the Collateral Agent or the Secured Parties or to surrender any right or power conferred upon the Issuer or to make any change that does not adversely affect the rights of any Noteholder or any Liquidity Provider. The Indenture and the Deed of Trust impose certain restrictions upon, among other things, the ability of the Issuer to incur Indebtedness, to enter into agreements other than the Operative Documents, to create Liens on the Mortgaged Property, and to enter into transactions with Affiliates. 5. Collateral Pursuant to the Deed of Trust, the Issuer has pledged the Mortgaged Property. Upon the satisfaction of certain conditions set forth in the Indenture, the Issuer may issue Additional Timber Notes that will be equally and ratably secured with the Notes by the Mortgaged Property. The Notes do not constitute obligations of The Pacific Lumber Company ("Pacific Lumber"), and the Notes are not guaranteed by Pacific Lumber or any other Person. 6. Optional Redemption or Prepayment The Issuer may redeem the Notes of any Class, in whole, but not in part, at any time, provided that no Notes of a Class having an earlier Scheduled Maturity Date (or, in the case of redemption of the Class A-3 Notes, no Notes) remain outstanding (after giving effect to all principal payments (including payments of principal in the redemption) occurring on the redemption date) following such redemption, at a redemption price equal to (i) all unpaid principal amounts thereof as of the redemption date, (ii) all accrued and unpaid Premium thereon as of the redemption date, (iii) all accrued and unpaid Regular Interest, Default Interest and interest on Premium thereon as of the redemption date and (iv) a redemption premium computed as provided in the definition of Prepayment Premium Amount in Schedule A to the Indenture, as if the excess of (a) the aggregate outstanding principal amount of the Notes of such Class to be redeemed over (b) the Scheduled Amortization Amount for such Class of Notes as of the redemption date, constituted an "Excess Payment" as set forth in such definition. The issuer may also make optional partial or total prepayments of principal on any Note Payment Date as provided in the Indenture. 7. Notice of Redemption Notice of redemption will be mailed at least 15 days (or 30 days if legally required by DTC) but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at his or her registered address. If money sufficient to pay the redemption price of all Notes called for redemption is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after the redemption date interest shall cease to accrue on the Notes called for redemption. 8. Denominations; Transfer; Exchange The Notes are in registered form without coupons in denominations of $100,000 original principal amount or any integral multiple of $1,000 in excess thereof. A Holder may transfer or exchange Notes for Notes of the same Class in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate certificates, opinions, endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not transfer or exchange (i) any Notes called for redemption or (ii) any Notes for a period of 15 days before a Note Payment Date. 9. Persons Deemed Owners The registered Holder of this Note may be treated as the owner of it for all purposes. 10. Unclaimed Money If money for the payment of principal of, Premium, if any, or interest on any Note remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Issuer at its request unless an abandoned property law designates another person. After any such payment, Holders entitled to the money must look only to the Issuer and not to the Trustee for payment. 11. Amendment; Waiver Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Majority Holders and Rating Agency Confirmation or with the written consent of the Supermajority Holders (after notice of the Rating Agency Evaluation) and Rating Agency Evaluation and (ii) any default or noncompliance with any provision may be waived with the written consent of the Majority Holders. Subject to certain exceptions set forth in the Indenture, without the consent of any Noteholder, the Issuer and the Trustee may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, to make any change that does not adversely affect the rights of any Noteholder, to add to the covenants of the Issuer for the benefit of the Holders or to surrender any right or power conferred upon the Issuer, to comply with the TIA, to comply with the provisions of Section 4.13 of the Indenture (in connection with certain consolidations or mergers), to provide for uncertificated Notes in addition to or in place of certificated Notes and, subject to certain limitations set forth in the Indenture, in connection with the issuance of any Additional Timber Notes. 12. Defaults and Remedies The occurrence of any of the events enumerated in Section 7.1 of the Indenture shall constitute an Event of Default. If an Event of Default under Section 7.1(11) of the Indenture shall occur, the Indenture provides that an amount equal to all amounts payable with respect to the Notes and any Additional Timber Notes shall, without any demand, presentment or notice, become immediately due any payable. If any Event of Default described in any of Section 7.1(1) through (5) shall occur and be continuing, the Trustee may, or, if the Holders of 25% in aggregate outstanding principal amount of the Notes and any Additional Timber Notes so elect, shall, declare all amounts payable with respect to the Notes and any Additional Timber Notes to be immediately due and payable, and upon any such declaration of acceleration such amount shall become immediately due and payable. If any Event of Default described in causes (6) through (10) or in clause (12) of Section 7.1 of the Indenture shall occur and be continuing, if the Majority Holders so elect, the Trustee shall declare all amounts payable with respect to the Notes and any Additional Timber Notes to be immediately due and payable, and upon any such declaration of acceleration such amount shall become immediately due and payable. If certain conditions set forth in Section 7.1(d) of the Indenture have been satisfied, the Majority Holders may rescind and annul a declaration of acceleration. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Notes and any Additional Timber Notes may direct the Trustee in its exercise of any trust or power; provided, however, that the Liquidity Providers have the right to vote pro rata (as provided in the Indenture) with the Holders of the Notes and any Additional Timber Notes in directing the Trustee or the Collateral Agent with respect to whether and how to exercise rights against the Mortgaged Property under the Deed of Trust. The Trustee may withhold from Noteholders notice of any continuing Default known to the Trustee (except a Default in payment of principal or interest) if it determines that withholding notice is in their interest. Acceptance of this Note constitutes the waiver of certain rights of setoff, banker's lien, or the like against property of, or any amounts owing to, the Company as set forth in Section 7.9 of the Indenture. 13. Trustee Dealings with the Issuer Subject to certain limitations imposed by the TIA if and when the Indenture is qualified under the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Issuer or its Affiliates and may otherwise deal with the Issuer of its Affiliates with the same rights it would have if it were not Trustee. 14. No Recourse Against Others A director, manager, officer, employee, member or stockholder, as such, of the Issuer or the Trustee shall not have any liability for any obligations of the Issuer or the Trustee under the Notes or the Indenture or the Deed of Trust or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 15. Authentication This Note shall not be valid until an authorized signatory of the Trustee (or an authenticating agent appointed by the Trustee and acceptable to the Issuer) manually signs the certificate of authentication on the other side of this Note. 16. Abbreviations Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 17. CUSIP Numbers Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Issuer has caused CUSIP numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Noteholders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Issuer will furnish to any Noteholder upon written request and without charge a copy of the Indenture, the Deed of Trust, the New Services Agreement and the New Master Purchase Agreement. Requests may be made to: Scotia Pacific Company LLC 5847 San Felipe Suite 2610 Houston, Texas 77257 Attention: Secretary 18. Transfer Restrictions TRANSFERS AND EXCHANGES OF THIS NOTE ARE SUBJECT TO RESTRICTIONS AS PROVIDED IN THE INDENTURE UNTIL THE EXPIRATION OF THE RESTRICTED PERIOD (AS DEFINED IN THE INDENTURE.) ASSIGNMENT FORM To assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint ___________________________________ attorney or agent to transfer this Note on the books of the Issuer. The attorney or agent may substitute another to act for him. Date: Your Signature:____________________________________________________________ Sign exactly as your name appears on the other side of this Note. Signature Guarantee:_______________________________________________________ (Signature must be guaranteed by a member firm of the New York Stock Exchange, commercial bank or trust company or another entity with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15.) IMPORTANT NOTICE: WHEN YOU SIGN YOUR NAME TO THIS ASSIGNMENT FROM WITHOUT FILLING IN THE NAME OF YOUR "ASSIGNEE" OR "ATTORNEY OR AGENT", THIS NOTE BECOMES FULLY NEGOTIABLE, SIMILAR TO A CHECK ENDORSED IN BLANK. THEREFORE, TO SAFEGUARD A SIGNED NOTE, IT IS RECOMMENDED THAT YOU EITHER (i) FILL IN THE NAME OF THE NEW OWNER IN THE "ASSIGNEE" BLANK, OR (ii) IF YOU ARE SENDING THE SIGNED NOTE TO YOUR BANK OR BROKER, FILL IN THE NAME OF THE BANK OR BROKER IN THE "ATTORNEY OR AGENT" BLANK. ALTERNATIVELY, INSTEAD OF USING THIS ASSIGNMENT FORM, YOU MAY SIGN A SEPARATE "POWER OF ATTORNEY" FORM AND THEN MAIL THE UNSIGNED NOTE AND THE SIGNED "POWER OF ATTORNEY" IN SEPARATE ENVELOPES. FOR ADDED PROTECTION, USE CERTIFIED OR REGISTERED MAIL FOR A NOTE. EXHIBIT A-3-1 (FORM OF FACE OF NOTE) UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE TRUSTEE OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. PRINCIPAL OF THIS NOTE IS PAYABLE IN INSTALLMENTS, AS SET FORTH HEREIN, WITHOUT SURRENDER OF THIS NOTE. ACCORDINGLY, THE UNPAID PRINCIPAL AMOUNT OF THIS NOTE AT ANY TIME MAY BE LESS THAN THE INITIAL PRINCIPAL AMOUNT SET FORTH BELOW (DUE TO PRINCIPAL PAYMENTS BEFORE OR AFTER THE DATE OF THIS NOTE). ANYONE ACQUIRING BENEFICIAL OWNERSHIP OF THIS NOTE MAY ASCERTAIN THE CURRENT PRINCIPAL AMOUNT BY INQUIRY OF THE TRUSTEE. No. A-3-__ $_______ CUSIP No. U78476AC9 SCOTIA PACIFIC COMPANY LLC 7.71% Class A-3 Timber Collateralized Notes, due 2028 Scotia Pacific Company LLC, a Delaware limited liability company, promises to pay to ________, or registered assigns, the principal sum of ___________ Dollars (or such other amount (not in excess of Four Hundred Sixty Three Million Three Hundred Forty Eight Thousand ($463,348,000) Dollars) as shall equal the unpaid principal amount of this Note) on July 20, 2028 (the "Final Maturity Date") and, on each Note Payment Date, such amounts as provided in the Indenture. Note Payment Dates: January 20th and July 20th Record Dates: January 5th and July 5th Note Rate: 7.71% Reference is made to the further provisions of this Note set forth on the reverse hereof, which further provisions are incorporated and shall for all purposes have the same effect as if set forth at this place. Capitalized terms used and not defined in this Note which are defined in the Indenture referred to herein have the meanings assigned to them in the Indenture. IN WITNESS WHEREOF, the Issuer has caused this Note to be signed manually or by facsimile by its duly authorized officers. Dated: ________,_____ SCOTIA PACIFIC COMPANY LLC By _________________________________ President or Vice President By _________________________________ Secretary or Assistance Secretary TRUSTEE'S CERTIFICATE OF AUTHENTICATION STATE STREET BANK AND TRUST COMPANY as Trustee, certifies that this is one of the Class A-3 Timber Notes referred to in the Indenture. by _________________________________ Authorized Signatory 7.71% Class A-3 Timber Collateralized Notes, due 2028 1. Interest; Principal; Premium SCOTIA PACIFIC COMPANY LLC, a Delaware limited liability company (such limited liability company, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Issuer"), promises to pay to the registered Holder hereof, or to its registered assigns, the initial principal amount indicated on the face hereof (or such lesser amount as shall equal the unpaid principal amount of this Note) on the Final Maturity Date indicated on the face hereof and, on each Note Payment Date that precedes the Final Maturity Date, (i) the principal amount required to be paid on such date by Sections 2.11 and 5.7 of the Indenture, (ii) interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal balance hereof, from and including the most recent Note Payment Date on which interest has been duly paid to but excluding such Note Payment Date at the rate per annum indicated on the face hereof, (iii) without duplication of any amount payable pursuant to clause (ii), interest (computed on the basis of a 360-day year of twelve 30-day months) on any principal of this Note, and, to the extent lawful, interest payable under the foregoing clause (ii), that is not paid on the date such principal or interest becomes due and payable, for the period from and including the date such principal or interest becomes due and payable to but excluding the date such principal or interest is paid in full, at the Default Rate, (iv) any Premium required to be paid on such date by Sections 2.12 and 5.7 of the Indenture, and (v) any interest (computed on the basis of a 360-day year of twelve 30-day months) required to be paid on such date by Sections 2.12 and 5.7 of the Indenture on any Premium payable on this Note. If the date scheduled to be a Note Payment Date is not a Business Day, the next succeeding day that is a Business Day shall be the Note Payment Date, but all calculations of interest and other items will be as of the 20th day of the applicable month. As provided in Section 2.12(b) of the Indenture, for the purposes of Sections 2.11(e), 2.12(b), 2.12(c) and 2.12(d) of the Indenture, if any portion of the principal amount of any Note remains unpaid after the final Maturity Date, and, if the Notes shall not have been accelerated pursuant to Section 7.2 of the Indenture, the last day of each month that occurs after such Final Maturity Date and prior to the date on which the entire unpaid principal amount of such Note is paid shall be deemed to constitute a Note Payment Date. 2. Method of Payment The Issuer will pay the amounts payable on the Notes on each Note Payment Date to the persons who are registered Holders of Notes at the close of business on the fifth day of the month in which such Note Payment Date occurs (the "Record Date"), even if Notes are canceled after the Record Date and on or before such Note Payment Date. Holders need not surrender Notes to a Paying Agent to collect principal or other amounts payable in respect of the Notes, except that Notes must be surrendered to a Paying Agent after due notice to collect the final installment of principal thereon. The Issuer will pay all amounts payable on the Notes in money of the United States that at the time of payment is legal tender for payment of public and private debts. Payments on Definitive Notes will be made (i) by a U.S. dollar check drawn on a bank in New York City or Boston, Massachusetts mailed to the Holder at such Holder's registered address or (ii) upon application by a Holder of at least U.S. $5,000,000 in principal amount of Definitive Notes to a Paying Agent not later than five Business Days prior to the related Record Date, by wire transfer in immediately available funds to a U.S. dollar account maintained by such Holder with a bank in New York City or Boston, Massachusetts. Payments to Holders of the Global Notes will be made (i) by a U.S. dollar check drawn on a bank in New York City or Boston, Massachusetts delivered to the registered owner of such Global Notes, at its registered address or (ii) by wire transfer in immediately available funds to a U.S. dollar account maintained by such registered owner with a bank in New York City or Boston, Massachusetts. However, the final distribution with respect to each Class of Timber Notes will be made only against surrender of the Timber Notes of such Class at the corporate trust office of a Paying Agent, in Boston, Massachusetts or New York, New York. 3. Paying Agent and Registrar The Trustee, together with its affiliate, State Street Bank and Trust Company, N.A. will initially act as sole Paying Agents and the Trustee, initially, will act as Registrar. The Issuer may appoint and change any Registrar without notice. The Issuer may act as Registrar. The Issuer may appoint one or more other paying agents. 4. Indenture; Deed of Trust The Issuer has issued the Notes under an Indenture dated as of July 20, 1998 (the "Indenture"), between the Issuer and State Street Bank and Trust Company, a Massachusetts trust company, as Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. SectionSection 77aaa-77bbbb) as in effect on the date of the Indenture (the "TIA"). The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the TIA for a statement of those terms. The Notes and the obligations of the Issuer pursuant to the Indenture and the Deed of Trust are secured by a Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Proceeds dated on or prior to July 20, 1998 (the "Deed of Trust") by the Issuer, as trustor, in favor of a trustee under the Deed of Trust, for the benefit of State Street Bank and Trust Company, in its capacity as collateral agent for the Holders of the Timber Notes and the Liquidity Providers pursuant to the Deed of Trust. Noteholders are referred to the Deed of Trust for a statement of the terms thereof. Subject to certain exceptions set forth in the Deed of Trust, (i) the Deed of Trust may be amended with the written consent of the Majority Secured Parties (as defined in the Deed of Trust) and Rating Agency Confirmation or with the written consent of the Supermajority Holders (after notice of the Rating Agency Evaluation) and Rating Agency Evaluation and (ii) any default or noncompliance with any provision may be waived with the written consent of the Majority Secured Parties. Subject to certain exceptions set forth in the Deed of Trust, the Collateral Agent and the Issuer may amend the Deed of Trust to cure any ambiguity, omission, defect or inconsistency, to add to the covenants of the Issuer for the benefit of the Collateral Agent or the Secured Parties or to surrender any right or power conferred upon the Issuer or to make any change that does not adversely affect the rights of any Noteholder or any Liquidity Provider. The Indenture and the Deed of Trust impose certain restrictions upon, among other things, the ability of the Issuer to incur Indebtedness, to enter into agreements other than the Operative Documents, to create Liens on the Mortgaged Property, and to enter into transactions with Affiliates. 5. Collateral Pursuant to the Deed of Trust, the Issuer has pledged the Mortgaged Property. Upon the satisfaction of certain conditions set forth in the Indenture, the Issuer may issue Additional Timber Notes that will be equally and ratably secured with the Notes by the Mortgaged Property. The Notes do not constitute obligations of The Pacific Lumber Company ("Pacific Lumber"), and the Notes are not guaranteed by Pacific Lumber or any other Person. 6. Optional Redemption or Prepayment The Issuer may redeem the Notes of any Class, in whole, but not in part, at any time, provided that no Notes of a Class having an earlier Scheduled Maturity Date (or, in the case of redemption of the Class A-3 Notes, no Notes) remain outstanding (after giving effect to all principal payments (including payments of principal in the redemption) occurring on the redemption date) following such redemption, at a redemption price equal to (i) all unpaid principal amounts thereof as of the redemption date, (ii) all accrued and unpaid Premium thereon as of the redemption date, (iii) all accrued and unpaid Regular Interest, Default Interest and interest on Premium thereon as of the redemption date and (iv) a redemption premium computed as provided in the definition of Prepayment Premium Amount in Schedule A to the Indenture, as if the excess of (a) the aggregate outstanding principal amount of the Notes of such Class to be redeemed over (b) the Scheduled Amortization Amount for such Class of Notes as of the redemption date, constituted an "Excess Payment" as set forth in such definition. The issuer may also make optional partial or total prepayments of principal on any Note Payment Date as provided in the Indenture. 7. Notice of Redemption Notice of redemption will be mailed at least 15 days (or 30 days if legally required by DTC) but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at his or her registered address. If money sufficient to pay the redemption price of all Notes called for redemption is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after the redemption date interest shall cease to accrue on the Notes called for redemption. 8. Denominations; Transfer; Exchange The Notes are in registered form without coupons in denominations of $100,000 original principal amount or any integral multiple of $1,000 in excess thereof. A Holder may transfer or exchange Notes for Notes of the same Class in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate certificates, opinions, endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not transfer or exchange (i) any Notes called for redemption or (ii) any Notes for a period of 15 days before a Note Payment Date. 9. Persons Deemed Owners The registered Holder of this Note may be treated as the owner of it for all purposes. 10. Unclaimed Money If money for the payment of principal of, Premium, if any, or interest on any Note remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Issuer at its request unless an abandoned property law designates another person. After any such payment, Holders entitled to the money must look only to the Issuer and not to the Trustee for payment. 11. Amendment; Waiver Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Majority Holders and Rating Agency Confirmation or with the written consent of the Supermajority Holders (after notice of the Rating Agency Evaluation) and Rating Agency Evaluation and (ii) any default or noncompliance with any provision may be waived with the written consent of the Majority Holders. Subject to certain exceptions set forth in the Indenture, without the consent of any Noteholder, the Issuer and the Trustee may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, to make any change that does not adversely affect the rights of any Noteholder, to add to the covenants of the Issuer for the benefit of the Holders or to surrender any right or power conferred upon the Issuer, to comply with the TIA, to comply with the provisions of Section 4.13 of the Indenture (in connection with certain consolidations or mergers), to provide for uncertificated Notes in addition to or in place of certificated Notes and, subject to certain limitations set forth in the Indenture, in connection with the issuance of any Additional Timber Notes. 12. Defaults and Remedies The occurrence of any of the events enumerated in Section 7.1 of the Indenture shall constitute an Event of Default. If an Event of Default under Section 7.1(11) of the Indenture shall occur, the Indenture provides that an amount equal to all amounts payable with respect to the Notes and any Additional Timber Notes shall, without any demand, presentment or notice, become immediately due any payable. If any Event of Default described in any of Section 7.1(1) through (5) shall occur and be continuing, the Trustee may, or, if the Holders of 25% in aggregate outstanding principal amount of the Notes and any Additional Timber Notes so elect, shall, declare all amounts payable with respect to the Notes and any Additional Timber Notes to be immediately due and payable, and upon any such declaration of acceleration such amount shall become immediately due and payable. If any Event of Default described in causes (6) through (10) or in clause (12) of Section 7.1 of the Indenture shall occur and be continuing, if the Majority Holders so elect, the Trustee shall declare all amounts payable with respect to the Notes and any Additional Timber Notes to be immediately due and payable, and upon any such declaration of acceleration such amount shall become immediately due and payable. If certain conditions set forth in Section 7.1(d) of the Indenture have been satisfied, the Majority Holders may rescind and annul a declaration of acceleration. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Notes and any Additional Timber Notes may direct the Trustee in its exercise of any trust or power; provided, however, that the Liquidity Providers have the right to vote pro rata (as provided in the Indenture) with the Holders of the Notes and any Additional Timber Notes in directing the Trustee or the Collateral Agent with respect to whether and how to exercise rights against the Mortgaged Property under the Deed of Trust. The Trustee may withhold from Noteholders notice of any continuing Default known to the Trustee (except a Default in payment of principal or interest) if it determines that withholding notice is in their interest. Acceptance of this Note constitutes the waiver of certain rights of setoff, banker's lien, or the like against property of, or any amounts owing to, the Company as set forth in Section 7.9 of the Indenture. 13. Trustee Dealings with the Issuer Subject to certain limitations imposed by the TIA if and when the Indenture is qualified under the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Issuer or its Affiliates and may otherwise deal with the Issuer of its Affiliates with the same rights it would have if it were not Trustee. 14. No Recourse Against Others A director, manager, officer, employee, member or stockholder, as such, of the Issuer or the Trustee shall not have any liability for any obligations of the Issuer or the Trustee under the Notes or the Indenture or the Deed of Trust or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 15. Authentication This Note shall not be valid until an authorized signatory of the Trustee (or an authenticating agent appointed by the Trustee and acceptable to the Issuer) manually signs the certificate of authentication on the other side of this Note. 16. Abbreviations Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 17. CUSIP Numbers Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Issuer has caused CUSIP numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Noteholders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Issuer will furnish to any Noteholder upon written request and without charge a copy of the Indenture, the Deed of Trust, the New Services Agreement and the New Master Purchase Agreement. Requests may be made to: Scotia Pacific Company LLC 5847 San Felipe Suite 2610 Houston, Texas 77257 Attention: Secretary 18. Transfer Restrictions TRANSFERS AND EXCHANGES OF THIS NOTE ARE SUBJECT TO RESTRICTIONS AS PROVIDED IN THE INDENTURE UNTIL THE EXPIRATION OF THE RESTRICTED PERIOD (AS DEFINED IN THE INDENTURE.) ASSIGNMENT FORM To assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint ___________________________________ attorney or agent to transfer this Note on the books of the Issuer. The attorney or agent may substitute another to act for him. Date: Your Signature:____________________________________________________________ Sign exactly as your name appears on the other side of this Note. Signature Guarantee:_______________________________________________________ (Signature must be guaranteed by a member firm of the New York Stock Exchange, commercial bank or trust company or another entity with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15.) IMPORTANT NOTICE: WHEN YOU SIGN YOUR NAME TO THIS ASSIGNMENT FROM WITHOUT FILLING IN THE NAME OF YOUR "ASSIGNEE" OR "ATTORNEY OR AGENT", THIS NOTE BECOMES FULLY NEGOTIABLE, SIMILAR TO A CHECK ENDORSED IN BLANK. THEREFORE, TO SAFEGUARD A SIGNED NOTE, IT IS RECOMMENDED THAT YOU EITHER (i) FILL IN THE NAME OF THE NEW OWNER IN THE "ASSIGNEE" BLANK, OR (ii) IF YOU ARE SENDING THE SIGNED NOTE TO YOUR BANK OR BROKER, FILL IN THE NAME OF THE BANK OR BROKER IN THE "ATTORNEY OR AGENT" BLANK. ALTERNATIVELY, INSTEAD OF USING THIS ASSIGNMENT FORM, YOU MAY SIGN A SEPARATE "POWER OF ATTORNEY" FORM AND THEN MAIL THE UNSIGNED NOTE AND THE SIGNED "POWER OF ATTORNEY" IN SEPARATE ENVELOPES. FOR ADDED PROTECTION, USE CERTIFIED OR REGISTERED MAIL FOR A NOTE. EXHIBIT B-1 TO INDENTURE FORM OF REPORT OF INDEPENDENT ACCOUNTANTS [Letterhead of Accountants] ____________, _______ State Street Bank and Trust Company as Trustee under the Indenture referred to below Two International Place, 4th Floor Boston, Massachusetts 02110 Scotia Pacific Company LLC P.O. Box 712 Scotia, California 95565 Ladies and Gentlemen: This letter is delivered pursuant to Section 4.6(a) of the Indenture dated as of July 20, 1998 (as amended, supplemented and otherwise modified and in effect on the date of this letter, the "Indenture") between Scotia Pacific Company LLC, a Delaware limited liability company (the "Issuer"), and State Street Bank and Trust Company, as trustee. Capitalized terms used but not defined herein have the respective meanings given to such terms in the Indenture. We confirm that we are independent public accountants with respect to the Issuer, within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 and the applicable rules and regulations thereunder. We have read such provisions of the Indenture, the Deed of Trust and the New Services Agreement as we have deemed necessary for the purposes of delivering this letter. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of the Issuer as of December 31, ____ [insert last date of most recent fiscal year] and the related statements of operations, cash flows and changes in member's capital for [relevant period described] [insert last date of most recently audited balance sheet] and have issued our report thereon dated __________, ____. We have not audited any financial statements of the Issuer as of any date or for any period subsequent to December 31, ___ [insert last day of most recent fiscal year]. The sufficiency of the agreed-upon procedures we have been requested to perform, as set forth in subsequent paragraphs of this report, is the sole responsibility of the Issuer and the Trustee. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purposes for which this report has been requested or for any other purpose. Further, we make no representations regarding questions of legal interpretation, nor do we provide any assurance as to any matters relating to the Issuer's solvency, adequacy of capital or ability to pay its debts. Pursuant to Section 4.6(a) of the Indenture, we have performed the procedures enumerated below: 1. We read the Monthly Trustee Certificates (which are attached hereto as Annex A) and the Note Payment Trustee Certificates (which are attached hereto as Annex B) issued by the Issuer to the Trustee in respect of the Monthly Periods from [insert first day of the fiscal year referred to above except with respect to its fiscal year 1998, insert July 20, 1998] through [insert last day of fiscal year referred to above]. For each such Certificate, we recalculated the amounts deposited in and withdrawn from the Collection Account, the Expense Reserve, the Liquidity Account, if any, and the Payment Account, which were established pursuant to the Indenture and found them to be mathematically correct. Our recalculations of such amounts was based on the procedures provided by the Issuer and set forth in Annex C hereto. 2. We compared our recalculations of the amounts described above to the amounts set forth in Annex A and Annex B and found them to be in agreement[, except as described below]. 3. We compared the amounts indicated in the Monthly Trustee Certificates with respect to Mbfe of Timber sold by the Issuer during the Monthly Periods covered by each such Monthly Trustee Certificate to the Issuer's books and records for such Monthly Period (including records with respect to MBF, net Scribner Scale, of Company Timber sold), and found them to be in agreement, [except as described below]. 4. We did not perform any procedures with respect to portions of the Monthly Trustee Certificates, which contain the Issuer's estimates of amounts to be deposited or interest that will be earned in succeeding months. [list exceptions, if any] Because the procedures described above do not constitute an audit made in accordance with generally accepted auditing standards, we do not express an opinion on any of the items referred to above. In addition, we make no representations, and express no opinion as to, (a) questions of legal interpretation of the Operative Documents, (b) the sufficiency of the foregoing procedures for your purposes, (c) the sufficiency of the requirements set forth in Section 4.6(a) of the Indenture, (d) the methodology set forth in the Indenture or (e) the assumptions set forth in the attached Annex C. Had we performed additional procedures, or had we made an audit in accordance with generally accepted auditing standards, other matters might have come to our attention that would have been reported to you. This letter is intended solely for the management of the Issuer and the Trustee, and should not be used for any other purpose. We have no responsibility to update this report to reflect any events or circumstances occurring after the date of this letter. We also understand that the Issuer will be providing a copy of this letter to various Rating Agencies pursuant to Section 4.6(a) of the Indenture. Our work was specifically performed to satisfy the requirements of the Indenture, and accordingly, we make no representation regarding the sufficiency of the procedures performed for the Rating Agencies' purposes. Distribution of this letter to the Rating Agencies does not establish any privity between our Firm and them. Very truly yours, Annex C to Exhibit B-1 to Indenture Agreed Upon Procedures I. Monthly Trustee Certificate Procedures 1. Compared the opening balances in the Collection Account, the Payment Account, the Liquidity Account, if any, and the Expense Reserve to amounts shown on bank statements from the Trustee. 2. Compared the amount deposited in the Expense Reserve to (i) accrued and unpaid Yield Taxes as reflected on the Issuer's books and records and (ii) additional known expenses reflected on a schedule prepared by the Issuer. Compared the Services Fee included in clause (ii) of this Item 2 to the amount payable under the New Services Agreement, including recomputation of the adjustment provided in Section 5.1(a) of the New Services Agreement. 3. Compared the Trustee's, Collateral Agent's and Liquidity Providers' Expenses to the amounts payable under the fee agreement between the Trustee and the Issuer, the fee agreement between the Collateral Agent and the Issuer and the Line of Credit Agreement, respectively. 4. Recomputed the Required Liquidity Amount. Compared the opening balance in the Liquidity Account to amounts reflected on bank statements from the Trustee. Recomputed the amount required to be deposited to or released from the Liquidity Account and compared the amount deposited or released to such recomputed amount. Recomputed the amount of deposit with respect to the Line of Credit Agreement as provided in clause (vi) of Section 5.3(c) of the Indenture and compared the amount deposited to the Payment Account in respect of clause (vi) of Section 5.3(c) of the Indenture to such recomputed amount. [This Item 4 is applicable only if there is a Termination Advance under a Line of Credit Agreement which has not been replaced.] 5. Recomputed the Targeted Monthly Deposit Amount and compared the amount deposited to the Payment Account in respect of the Targeted Monthly Deposit Amount to such recomputed amount. 6. Recomputed the Premium Provision and compared the amount deposited to the Payment Account in respect of the Premium Provision to such recomputed amount. 7. Recomputed the interest and principal payment to the Liquidity Providers pursuant to clause (vi) of Section 5.3(c) and compared the amount withdrawn from the Collection Account in respect thereof to such recomputed amount. 8. Made inquiries of Responsible Officers of the Issuer as to whether or not a Cash Retention Event or Trapping Event existed on (or a Line of Credit Acceleration occurred prior to) such Monthly Deposit Date. 9. Recomputed the amount of Excess Funds. If the Monthly Trustee Certificate reflected any Additional Liquidity Provider Fees or Supplemental Liquidity Provider Interest owing, recomputed the amount thereof and compared such recomputed amount to the amount withdrawn from the Collection Account in respect thereof. If any Section 6.1 Notes were in existence on such Monthly Deposit Date, recomputed the amount of Excess Funds as if such Section 6.1 Notes were cash, and compared the amount of such recomputed Excess Funds (based on such assumption) to the amount of such Section 6.1 Notes. Compared the amount released to the Issuer (or, if any Section 6.1 Notes were in existence, the sum of the amount released to the Issuer and the face amount of and accrued interest on such Section 6.1 Notes distributed to the Issuer) to such recomputed amounts. Compared the amount, if any, paid by Pacific Lumber to the Issuer in respect of any Section 6.1 Notes to such recomputed amounts. 10. Reviewed the Monthly Production reports delivered by Pacific Lumber pursuant to the New Master Purchase Agreement for the Monthly Periods for which Monthly Trustee Certificates were reviewed. Compared the net Scribner scale production data in the Monthly Production Reports to a schedule prepared by Pacific Lumber. Recomputed the Mbfe production data in the Monthly Production Reports. Compared the Mbfe production data in each Monthly Trustee Certificate to the Mbfe production data in the related Monthly Production Report. II. Note Payment Trustee Certificate Procedures. 1. Compared the opening balances in the Liquidity Account and the Payment Account to amounts shown on bank statements of the Trustee. 2. Recomputed the amount required to be deposited to or released from the Liquidity Account and deposited to the Payment Account in respect thereof to such recomputed amount. [This Item 2 is applicable only if there is a Termination Advance under a Line of Credit Agreement which has not been replaced.] 3. Compared the amount indicated in the Note Payment Certificate as an optional deposit to the Payment Account to amounts shown on bank statements of the Trustee. 4. Recomputed the amounts of interest (including interest on past due principal and interest but excluding interest on Premium) payable on the Timber Notes and to the Liquidity Providers and compared the amount withdrawn from the Payment Account in respect thereof to such recomputed amount. 5. Recomputed the Minimum Principal Amortization Amount and compared the amount withdrawn from the Payment Account in respect thereof to such recomputed amount. 6. Recomputed the Line of Credit Amortization Amount, if any, and compared the amount withdrawn from the Payment Account in respect thereof. [This Item 6 is applicable only if there is a Termination Advance under a Line of Credit Agreement which has not been replaced.] 7. Recomputed the Depletion Amortization Amount and compared the amount withdrawn from the Payment Account in respect thereof to such recomputed amount. 8. Recomputed the Required Liquidity Amount (after giving effect to principal payments being made on such date). Recomputed the amount, if any, required to be deposited to the Liquidity Account and compared the amount deposited to the Liquidity Account from the Payment Account to such recomputed amount. [This Item 8 is applicable only if there is a Termination Advance under a Line of Credit Agreement which has not been replaced.] 9. Recomputed the amount of interest on Premium payable on the Timber Notes and compared the amount withdrawn from the Payment Account in respect thereof to such recomputed amount. 10. Recomputed the Premium payable on the Timber Notes and compared the amount withdrawn from the Payment Account to such recomputed amount. 11. Made inquiries of Responsible Officer's of the Issuer as to whether or not a Cash Retention Event or a Trapping Event existed on such Note Payment Date. 12. Recomputed the amount distributable pursuant to clause (ix) or (x) of Section 5.7(b). Compared the amounts distributed pursuant to such clauses to such recomputed amount. III. General Provisions 1. Terms used but not defined in this Annex C shall have the meaning set forth in Schedule A to the Indenture. 2. This Annex C may be modified by the Issuer, the independent accountants and the Trustee if (i) such modification has been approved by a resolution of the Board of Managers of the Issuer, including all Independent Managers and (ii) either (A) such modification is (1) to cure any ambiguity, omission, defect or inconsistency in the agreed upon procedures, or to add additional procedures or (2) is necessary to take account of the issuance of Additional Timber Notes (provided, that no such modification may adversely affect the interests of Noteholders) or (B) such modification shall have received Rating Agency Approval and (iii) the Issuer shall have delivered to the Trustee an Officer's Certificate as to compliance with the preceding clauses (i) and (ii). EXHIBIT B-2 TO INDENTURE FORM OF REPORT OF INDEPENDENT ACCOUNTANTS [Letterhead of Accountants] __________, ______ State Street Bank and Trust Company as Trustee under the Indenture referred to below Two International Place, 4th Floor Boston, Massachusetts 02110 Scotia Pacific Company LLC P.O. Box 712 Scotia, California 95565 Ladies and Gentlemen: This letter is delivered pursuant to Section 4.6(a) of the Indenture dated as of July 20, 1998 (as amended, supplemented and otherwise modified and in effect on the date of this letter, the "Indenture") between Scotia Pacific Company LLC, a Delaware limited liability company (the "Issuer"), and State Street Bank and Trust Company, as trustee (the "Trustee"). We confirm that we are independent public accountants with respect to the Issuer, within the meaning of the Securities Act of 1933 and the Securities Act of 1934 and the applicable rules and regulations thereunder. We have audited, in accordance with generally accepted auditing standards, the balance sheet of the Issuer as of December 31, ____ [insert last day of most recent fiscal year] and the related statements of operations, cash flows and changes in members' capital for the year then ended [describe period covered] [date of most recent audited balance sheet] and have issued our report thereon dated __________, ____. In connection with out audit, nothing came to our attention that caused us to believe that the Issuer was not in compliance with any of the terms, covenants, provisions or conditions of Section 7.1 of Article Seven of the Indenture, insofar as they relate to accounting matters, [except as described below]. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. [describe exceptions, if any] This letter is intended solely for the management of the Issuer and the Trustee and shall not be used for any other purposes. We have no responsibility to update this report to reflect any events or circumstances occurring after the date of this letter. We also understand that the Issuer will be providing a copy of this letter to various Rating Agencies pursuant to Section 4.6(a) of the Indenture. Our work was specifically performed to satisfy the requirements of the Indenture, and accordingly, we make no representation regarding the sufficiency of the procedures performed for the Rating Agencies' purposes. Distribution of this letter to the Rating Agencies does not establish any privity between our Firm and them. Very truly yours, EX-4 3 EXHIBIT 4.2 TO MAXXAM 2ND QTR 10-Q RECORDING REQUESTED BY AND WHEN RECORDED RETURN TO: Skadden, Arps, Slate, Meagher & Flom LLP 300 South Grand Avenue, 34th Floor Los Angeles, California 90071 Attention: Howard N. Weinberg - --------------------------------------------------------------------------- DEED OF TRUST, SECURITY AGREEMENT, FINANCING STATEMENT, FIXTURE FILING AND ASSIGNMENT OF PROCEEDS Dated July 20, 1998 From SCOTIA PACIFIC COMPANY LLC (Trustor and Debtor) Mailing Address: P.0. Box 712 Scotia, California 95565 To FIDELITY NATIONAL TITLE INSURANCE COMPANY (Deed of Trust Trustee) Mailing Address: 17911 Von Karman Avenue, Suite 300 Irvine, California 92614 Attn: Senior Underwriter For the Benefit of STATE STREET BANK AND TRUST COMPANY (Beneficiary and Collateral Agent for the Secured Parties) Mailing Address: Two International Place, 4th Floor Boston, MA 02110 Attn: Corporate Trust Administration (Scotia Pacific Company LLC - Timber Collateralized Notes) THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS. [ATTENTION OF RECORDING OFFICERS: This instrument is a Deed of Trust and Assignment of both real and personal property and is, among other things, a Security Agreement, Financing Statement and Fixture Filing under the Uniform Commercial Code. This instrument covers timber, among other things. This instrument creates a lien on rights in, or relating to, lands of the Trustor, Pacific Lumber Company, Salmon Creek Corporation and City Garbage of Eureka that are described in the Real Property Description (as set forth in Exhibit A to this instrument) and, where applicable, is to be indexed with respect to all lands described in said Real Property Description.] TABLE OF CONTENTS PAGE ARTICLE I--DEFINITIONS 3 Section 1.1 Certain Defined Terms 3 Section 1.2 Certain References 3 ARTICLE II--ASSIGNMENT OF PROCEEDS 3 Section 2.1 Assignment 3 Section 2.2 Certain Covenants of the Trustor 4 Section 2.3 Assigned Proceeds Paid to the Trustor 5 Section 2.4 Trust Funds 6 Section 2.5 Cumulative Rights 6 Section 2.6 Funds Received 6 ARTICLE III--SECURITY AGREEMENT 7 Section 3.1 Grant of Security Interest 7 Section 3.2 Certain Covenants of the Trustor 7 ARTICLE IV--CONDEMNATION AND CASUALTY LOSS 10 Section 4.1 Condemnation 10 Section 4.2 Casualty Loss 11 ARTICLE V--CERTAIN RELEASES 12 Section 5.1 Dispositions With Express Release 12 Section 5.2 Dispositions Without Express Release 13 ARTICLE VI--REPRESENTATIONS AND WARRANTIES 15 Section 6.1 Representations and Warranties 15 Section 6.2 Warranties Survive 19 ARTICLE VII--COVENANTS 20 Section 7.1 Affirmative Covenants 20 Section 7.2 Negative Covenants 28 Section 7.3 Covenants Survive 28 Section 7.4 Obligations of the Services Provider under the New Services Agreement 29 ARTICLE VIII--REMEDIES; POWER OF SALE 29 Section 8.1 Events of Breach 29 Section 8.2 Right to Cure 29 Section 8.3 Power of Sale; Foreclosure 30 Section 8.4 Bid at Sale 33 Section 8.5 Sale of Mortgaged Property; Application of Proceeds 33 Section 8.6 Right to Possession 35 Section 8.7 Remedies Cumulative 37 Section 8.8 Non-Waiver 37 Section 8.9 Power of Attorney 38 Section 8.10 Voluntary Appearance; Receivers 38 Section 8.11 Retention of Possession 39 Section 8.12 Suits by Collateral Agent 39 Section 8.13 Waiver of Certain Rights 39 Section 8.14 Limitation on Indemnities 40 ARTICLE IX--THE DEED OF TRUST TRUSTEE 40 Section 9.1 Certain Rights of the Deed of Trust Trustee 40 Section 9.2 Compensation and Indemnity 41 Section 9.3 Removal or Substitution of the Deed of Trust Trustee 41 ARTICLE X--MISCELLANEOUS 43 Section 10.1 Severability 43 Section 10.2 Captions 43 Section 10.3 Service of Notices and Demands 43 Section 10.4 Governing Law; Submission to Jurisdiction; Waiver of Objection to Venue 44 Section 10.5 Effect of Other Security, Releases 44 Section 10.6 No Election of Remedies 45 Section 10.7 Binding Effect; Collateral Agent 45 Section 10.8 Amendments 45 Section 10.9 General Provisions as to Certificates and Opinions 47 Section 10.10 Certificates and Opinions as Conditions Precedent 49 Section 10.11 Recordation 49 Section 10.12 Partial Releases 50 Section 10.13 Counterpart Execution 50 Section 10.14 Limitations on Bankruptcy Petition Against the Trustor 50 Section 10.15 Attorneys' Fees 50 Section 10.16 Entire Agreement 50 Section 10.17 When Timber Notes Disregarded 50 Section 10.18 No Recourse Against Others 50 Section 10.19 Benefits of Deed of Trust 51 Section 10.20 Indenture 51 Schedule A Definitions Exhibit A Real Property Description DEED OF TRUST, SECURITY AGREEMENT, FINANCING STATEMENT, FIXTURE FILING AND ASSIGNMENT OF PROCEEDS THIS DEED OF TRUST, SECURITY AGREEMENT, FINANCING STATEMENT, FIXTURE FILING AND ASSIGNMENT, dated as of July 20, 1998 (herein, together with all amendments and supplements hereto, called this "Deed of Trust"), is made by Scotia Pacific Company LLC, a Delaware limited liability company, having an address at P.O. Box 712, 125 Main Street, Second Floor, Scotia, California 95565 (herein, together with any entity succeeding thereto by merger, consolidation or acquisition of its assets substantially as an entirety, called the "Trustor"), to Fidelity National Title Insurance Company, a California corporation, having an address at 17911 Von Karman Avenue Suite 300, Irvine, California 92614 Attn: Senior Underwriter (herein, together with its successors and assigns, called the "Deed of Trust Trustee"), as trustee, for the benefit of State Street Bank and Trust Company, a Massachusetts trust company, having an office at Two International Place, 4th Floor, Boston, MA 02110, Attn: Corporate Trust Administration (Scotia Pacific Company LLC Timber Collateralized Notes) (herein, together with its successors and assigns, called the "Collateral Agent"), as beneficiary hereunder and collateral agent for the benefit of the Secured Parties. W I T N E S S E T H: NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS, that the Trustor, in consideration of the premises and to secure the Secured Obligations hereinafter set forth, and for other good and valuable consideration (including, without limitation, the extensions of credit to the Trustor evidenced by the Timber Notes, any Additional Timber Notes, the Line of Credit Agreement), the receipt and sufficiency of which are hereby acknowledged, has bargained, sold, granted, mortgaged, warranted, conveyed, transferred and assigned, and by these presents does hereby covenant, agree, grant, warrant, bargain, sell, convey, assign, transfer, mortgage, pledge, set over and confirm unto the Deed of Trust Trustee, and its successors and assigns forever, in trust with the power of sale and right of entry, for the benefit and security of the Collateral Agent, as collateral agent for the Secured Parties, all of Trustor's estate, right, title and interest in, to and under any and all of the Mortgaged Property, whether now owned or hereafter acquired. TO HAVE AND TO HOLD the Mortgaged Property, unto the Deed of Trust Trustee and its successors and assigns, IN TRUST FOREVER, with power of sale and right of entry, upon the terms and trusts herein set forth, for the benefit and security of the Collateral Agent, as collateral agent for the Secured Parties, and each of them, in accordance with the terms of this Deed of Trust; and the Trustor does hereby bind itself and its successors, assigns and judicially appointed legal representatives to warrant and forever defend title to all and singular the Mortgaged Property unto the Deed of Trust Trustee and the Collateral Agent against every Person whomsoever lawfully claiming or to claim the same, or any part thereof, subject only to Permitted Encumbrances. PROVIDED, and these presents are upon the condition, that if the Trustor shall perform and pay or cause to be performed and paid, in full, or shall provide, as provided in Section 13.1 (Discharge) or Article 8 (Defeasance or Covenant Defeasance) of the Indenture and as provided in the Line of Credit Agreement, for the payment or performance in full of the Secured Obligations, then this Deed of Trust and the lien of this Deed of Trust and the estate and rights hereby granted shall cease, terminate, be void and be of no further effect and shall be released at the Trustor's cost and expense; provided that the Trustor's obligation to indemnify and hold harmless the Deed of Trust Trustee and the Collateral Agent (and their respective agents, successors and assigns) and the Secured Parties pursuant to the provisions hereof shall survive any such termination. FOR THE PURPOSE OF SECURING the payment or performance in full when due, whether at stated maturity, by acceleration or otherwise, of all indebtedness, liabilities and obligations of Trustor whether now existing or hereafter arising, under, with respect to, or in connection with any of the following (collectively, the "Secured Obligations"): (a) the indebtedness evidenced by the Timber Notes and any Additional Timber Notes (including, without limitation, all payments of principal of, premium or interest on and any other amounts owing with respect to the Timber Notes and any Additional Timber Notes); (b) the indebtedness evidenced by the Line of Credit Agreement (including, without limitation, all payments of principal of, premium or interest on and any other amounts owing with respect to the Line of Credit Agreement); (c) any and all amounts, indebtedness, liabilities, covenants, agreements and obligations arising, or for which or for the performance of which the Trustor may become indebted or obligated, under or pursuant to the provisions of this Deed of Trust, the Timber Notes, any Additional Timber Notes, the Line of Credit Agreement, or the Indenture (including, without limitation, all obligations to pay costs and expenses as provided herein); and (d) any and all renewals, amendments, substitutions, replacements, rearrangements and extensions of any of the foregoing items. The initial principal amount of obligations secured by this Deed of Trust is Nine Hundred Thirty Million Seven Hundred and Eighty Nine Thousand Five Hundred Dollars ($930,789,500.00). As provided above, this Deed of Trust secures all future advances and obligations constituting Secured Obligations. The total amount of Secured Obligations may decrease or increase from time to time. ARTICLE I--DEFINITIONS Section 1.1 Certain Defined Terms. Each term defined in Schedule A attached hereto is incorporated herein by reference and shall, when used herein, unless the context otherwise requires, have the meaning therein specified, with such definition to be applicable to the masculine, feminine and neuter gender, and the singular and the plural forms of such term. Section 1.2 Certain References. All references in this Deed of Trust to an "Article" or "Section" shall be to an Article or Section of this Deed of Trust, unless the context otherwise requires. Unless the context otherwise requires, the words "this Deed of Trust", "hereof," "hereunder," "herein," "hereby" and words of similar import shall refer to this Deed of Trust as a whole and not to a particular Article, Section, clause or other subdivision hereof. The term "Trustor" as used herein shall include not only Scotia Pacific Company LLC, but also its successors, judicially appointed legal representatives and assigns. ARTICLE II--ASSIGNMENT OF PROCEEDS Section 2.1 Assignment. Without limiting any of the other provisions of this Deed of Trust, additionally to secure the payment or performance when due of the Secured Obligations and to provide an additional means of paying the Secured Obligations, the Trustor, effective as of the date hereof, has assigned, transferred, pledged, granted, set over and conveyed, absolutely and unconditionally, and does hereby assign, transfer, pledge, grant, set over and convey, absolutely and unconditionally, primarily and on parity with all other Mortgaged Property, and not secondarily, unto the Collateral Agent, as collateral agent for the Secured Parties, all of the Trustor's right, title and interest in and to all the following (collectively, the "Assigned Proceeds"): (a) all Harvested Timber and all Proceeds now or hereafter receivable, owing, deliverable or otherwise attributable to, from or on account of any of the Company Timber; (b) all Proceeds now or hereafter receivable, owing, deliverable, performable or otherwise attributable to, from or on account of the rights, titles and interests of the Trustor under the Subject Contracts; (c) the Accounts and all monies, investments and securities from time to time held by the Collateral Agent in any Account under the terms of this Deed of Trust or the Indenture, all interest and Proceeds derived from such monies, investments and securities and all the Trustor's rights in any monies held in any Account; (d) the right, power and authority to make claim and demand for and receive performance and payment on, under or pursuant to any of the Subject Contracts, to bring actions and proceedings thereunder for the enforcement thereof and to exercise all remedies, powers, privileges and options and to do any and all things that the Trustor is or may become entitled to do under the Subject Contracts; (e) (i) all rents, issues, profits, revenues, royalties, bonuses, rights and benefits due, payable or accruing, including, without limitation, all amounts payable pursuant to any Purchase Agreement or Lump Sum Sale or Pay-As-You-Harvest Sale, all deposits of money as advance rent, for security or as earnest money or a down payment for the purchase of all or any part of the Company Timber, under any and all present and future leases, contracts or other agreements related to the harvesting, ownership, occupancy or use of the Company Owned Timberlands or the Company Timber Rights (collectively, the "Agreements"), and (ii) all such Agreements; and (f) all other Proceeds now or hereafter receivable, owing, deliverable, performable, produced, processed or otherwise attributable to, from, under or on account of any of the Mortgaged Property. Collateral Agent hereby grants to the Trustor the right, except that such right may be suspended by written notice from the Collateral Agent to the Trustor given during the continuance of a Trapping Event, to demand, collect, receive and perform the Assigned Proceeds as and when the same become due and payable, to endorse and deposit any checks and drafts payable to the Trustor received from or in connection with the Assigned Proceeds and to execute any direction, certificate, release, receipt, payment order, transfer order, relinquishment or other instrument that may be required, necessary or appropriate to collect and receive the Assigned Proceeds. Notwithstanding the foregoing, the existence of the foregoing right in favor of Trustor shall not operate to subordinate this assignment to any subsequent assignment, in whole or in part, by Trustor, and any such subsequent assignment shall be subject to the rights of the Deed of Trust Trustee and Collateral Agent under this Deed of Trust. Section 2.2 Certain Covenants of the Trustor. The Trustor covenants and agrees with the Deed of Trust Trustee and the Collateral Agent as follows: (a) Trustor shall execute such assignments of the Assigned Proceeds as Collateral Agent from time to time may reasonably request in order to effect the provisions of Section 2.1. (b) During the continuance of a Trapping Event, after notice from the Collateral Agent to the Trustor, the Trustor hereby irrevocably authorizes and directs all Assigned Proceeds Obligors, upon receipt by them of written notice from the Collateral Agent (with a copy to the Trustor), to pay, perform and deliver all Assigned Proceeds directly to the Collateral Agent at the Collateral Agent's address referred to in the preamble hereof or to such other location as the Collateral Agent may from time to time direct. All orders, receipts and other instruments that the Collateral Agent may from time to time execute and deliver for the purpose of collecting or giving receipt for such Assigned Proceeds may be relied upon in all respects by all Assigned Proceeds Obligors and the same shall be binding upon the Trustor. No Assigned Proceeds Obligor paying, performing, or delivering any Assigned Proceeds to the Collateral Agent pursuant to the written directions of the Collateral Agent shall have any responsibility to review the application of any Assigned Proceeds paid, performed or delivered to the Collateral Agent but shall be fully protected for the same. (c) Without limiting any other provision of this Article II, during the continuance of a Trapping Event, after notice from the Collateral Agent to the Trustor, (i) the Trustor shall promptly execute, upon demand by the Collateral Agent, all necessary, convenient or appropriate instruments (including, without limitation, transfer orders, and payment orders) as may be requested by the Collateral Agent incident to having all Assigned Proceeds paid, performed or delivered directly to the Collateral Agent; (ii) the Collateral Agent is irrevocably authorized, to collect, receive and give receipt for all such Assigned Proceeds; and (iii) the Collateral Agent may bring suit against any third party for collection of any Assigned Proceeds, either in its own name or in the name of the Trustor. Section 2.3 Assigned Proceeds Paid to the Trustor. Any Assigned Proceeds Obligor may continue to pay, perform, and deliver Assigned Proceeds on a current basis to the Trustor until such time as written demand has been made upon such Assigned Proceeds Obligor by the Collateral Agent (following notice to the Trustor from the Collateral Agent during the continuance of a Trapping Event) that payment, performance, and delivery of Assigned Proceeds be made directly to the Collateral Agent. The failure to give any such notification shall not in any way waive the right of the Collateral Agent to receive any payments, performance, and delivery not theretofore paid, performed, or delivered to the Trustor before the giving of written notice or affect or impair the security interest herein granted in the Mortgaged Property, including, without limitation, the Assigned Proceeds. In the event any Assigned Proceeds Obligor makes payment, performance or delivery of Assigned Proceeds directly to the Collateral Agent, and then, at the request of the Collateral Agent, payment, performance and delivery of Assigned Proceeds are, for a period or periods of time thereafter, made to the Trustor, the Collateral Agent shall nevertheless have the right, effective upon written notice to such Assigned Proceeds Obligor (following notice from the Collateral Agent to the Trustor during the continuance of a Trapping Event) to require that future payments, performance and delivery of Assigned Proceeds be again made to the Collateral Agent. Section 2.4 Trust Funds. If under any Subject Contract any Assigned Proceeds are required to be paid directly to the Trustor by a purchaser of Company Timber or other Assigned Proceeds Obligor so that under such Subject Contract payment cannot be made directly to the Collateral Agent (after the Collateral Agent has given the written notice contemplated by Section 2.3 hereof) in the absence of foreclosure, or if for any other reason any Assigned Proceeds are paid to the Trustor (after the Collateral Agent has given the written notice contemplated by Section 2.3 hereof), then the Trustor's interest in all Assigned Proceeds under such Subject Contract and in all other Assigned Proceeds that for any reason may be paid to the Trustor, when received by the Trustor, shall constitute trust funds in the Trustor's hands to be held by the Trustor separate and apart from its other property (and the Trustor grants to the Collateral Agent, as beneficiary for the benefit of the Secured Parties, a security interest in all the Trustor's interest in such Assigned Proceeds) and shall be immediately paid over to the Collateral Agent for deposit in the appropriate Account. Section 2.5 Cumulative Rights. Nothing herein contained shall detract from or limit the absolute obligation of the Trustor to make payment of or to perform when due the Secured Obligations, regardless of whether the Assigned Proceeds are sufficient to pay the same, and the rights, remedies and security provided under this Article II shall be cumulative of all other rights, remedies and security of any and every character now or hereafter existing under this Deed of Trust or otherwise to secure the payment or performance when due of the Secured Obligations. Section 2.6 Funds Received. The Collateral Agent shall (except as otherwise provided in Section 7.7 of the Indenture) deposit into the Collection Account all funds (i.e., cash, checks, wired funds, demand deposits or other cash equivalents) received by the Collateral Agent from any purchaser of Company Timber or other Assigned Proceeds Obligor. ARTICLE III--SECURITY AGREEMENT Section 3.1 Grant of Security Interest. Without limiting any of the other provisions of this Deed of Trust and additionally to secure the payment or performance when due of the Secured Obligations, and cumulative of any and all other rights and remedies herein provided, the Trustor, as debtor, hereby expressly grants to the Collateral Agent for the benefit of the Secured Parties, a security interest in and to all the Collateral Mortgaged Property. To the extent any property covered by this Deed of Trust consists of rights in action or personal property covered by the Uniform Commercial Code, this Deed of Trust constitutes a security agreement and financing statement and is intended upon recordation to create a perfected security interest in such property in favor of the Collateral Agent. This Deed of Trust also constitutes a security agreement, fixture filing and financing statement pursuant to the Uniform Commercial Code in the Official Records of Humboldt County, California with respect to any and all fixtures included within the term Mortgaged Property, including, without limitation, Company Timber to be cut, and with respect to any goods or any other personal property that may now or hereafter become fixtures, and is intended when recorded to create a perfected security interest in such property in favor of the Collateral Agent for the benefit of the Secured Parties. Section 3.2 Certain Covenants of the Trustor. The Trustor covenants and agrees with the Deed of Trust Trustee and the Collateral Agent, for the benefit of the Secured Parties, that: (a) In addition to any other remedies granted in this Deed of Trust to the Deed of Trust Trustee and the Collateral Agent (including specifically, but not limited to, the right to proceed against all the Mortgaged Property, both real and personal property, in accordance with the rights and remedies in respect of those portions of the Mortgaged Property that are real property pursuant to Section 9-501(4) of the Uniform Commercial Code), if a Trapping Event has occurred and is continuing and if an Acceleration Event exists the Collateral Agent may proceed under the Uniform Commercial Code as to all or any part of the Collateral Mortgaged Property, and shall have and may exercise with respect to the Collateral Mortgaged Property all the rights, remedies and powers of a secured party under the Uniform Commercial Code, including, without limitation, the right and power to sell, at one or more public or private sales, or otherwise dispose of, lease or utilize the Collateral Mortgaged Property and any part or parts thereof in any manner authorized or permitted under the Uniform Commercial Code after default by a debtor, and to apply the Proceeds thereof, first, to payment of any costs and expenses and attorneys' fees, charges and disbursements thereby incurred by the Collateral Agent, and, second (except as otherwise provided in Section 7.7 of the Indenture), as a deposit to the Collection Account. (b) If a Trapping Event has occurred and is continuing and if an Acceleration Event exists, the Collateral Agent, after notice to the Trustor, shall have the right, by any lawful means, to take possession of the Collateral Mortgaged Property or any part thereof and to enter, in any lawful manner, upon any premises where same may be situated for such purpose and to take any lawful action deemed necessary or appropriate or desirable by the Collateral Agent, at its option and in its discretion, to repair, refurbish or otherwise prepare the Collateral Mortgaged Property for sale, lease or other use or disposition as herein authorized. (c) To the fullest extent permitted by law (except as otherwise provided in this Deed of Trust or in the Indenture), the Trustor expressly and irrevocably waives (i) any notice of sale or other disposition of the Collateral Mortgaged Property, (ii) any other rights or remedies of a debtor or formalities prescribed by law relative to (A) the sale or disposition of the Collateral Mortgaged Property or (B) exercise of any other right or remedy of the Collateral Agent existing if a Trapping Event has occurred and is continuing and if an Acceleration Event exists, and, to the extent any such notice is required and cannot be waived, the Trustor agrees that to the fullest extent permitted by law, if such notice is mailed or otherwise given to the Trustor in accordance with Section 10.3 hereof at least 10 days prior to the time of the sale or disposition, such notice shall be deemed reasonable and shall fully satisfy any requirement for giving of said notice. (d) Without limiting the present assignment to the Collateral Agent of Assigned Proceeds pursuant to Article II hereof, if a Trapping Event has occurred and is continuing and if an Acceleration Event exists, the Collateral Agent, after notice to the Trustor, is hereby granted the express right, at its option, to transfer to itself or to its nominee the Collateral Mortgaged Property, or any part thereof, to notify any obligor or account debtor in respect of any Collateral Mortgaged Property to make payment directly to the Collateral Agent and to receive the Proceeds attributable or accruing thereto and to apply such Proceeds, first, to payment of any costs and expenses and attorneys' fees, charges and disbursements thereby incurred by the Collateral Agent, and, second (except as otherwise provided in Section 7.7 of the Indenture), as a deposit to the Collection Account. With respect to the Collateral Mortgaged Property, the Trustor, for itself, its successors, assigns and legal representatives, to the fullest extent permitted by law, hereby expressly and specifically waives all rights to a marshaling of the assets of the Trustor, including the Collateral Mortgaged Property, or to a sale in inverse order of alienation. (e) To the fullest extent permitted by applicable law, all recitals in any instrument of assignment or any other instrument executed by the Collateral Agent or made by the Collateral Agent incident to the sale, transfer, assignment, lease or other disposition or utilization of the Collateral Mortgaged Property or any part thereof hereunder and in accordance herewith shall be full proof of the matters stated therein, no other proof shall be requisite to establish full legal propriety of the sale or other action or of any fact, condition or thing incident thereto, and all prerequisites of such sale or other action and of any fact, condition or thing incident thereto shall be presumed conclusively to have been performed or to have occurred. (f) If a Trapping Event has occurred and is continuing and if an Acceleration Event exists, the Collateral Agent may, upon notice to the Trustor require the Trustor to assemble such portion of the Collateral Mortgaged Property as can be physically assembled without material damage to such Collateral Mortgaged Property and make them available to the Collateral Agent at a place to be reasonably designated by the Collateral Agent. The Trustor shall be fully liable for all expenses of retaking, holding, preparing for sale, lease or other use or disposition, selling, leasing or otherwise using or disposing of the Collateral Mortgaged Property that are incurred or paid by the Collateral Agent as authorized or permitted hereunder, including, without limitation, all reasonable attorneys' fees, charges and disbursements, all of which expenses and costs shall constitute a part of the Secured Obligations. (g) Certain of the Mortgaged Property is or may become "fixtures" (as that term is defined in the Uniform Commercial Code) on the real estate included in the Mortgaged Property, and this Deed of Trust upon being filed for record in the real estate records shall operate also as a financing statement upon such of the Mortgaged Property that are or may become fixtures. This Deed of Trust covers Company Timber to be cut and Harvested Timber, as well as Accounts resulting from the sale thereof, and this Deed of Trust, upon being recorded in the real estate records, shall operate also as a financing statement upon such of the Mortgaged Property as constitute or may constitute Company Timber to be cut and Harvested Timber, as well as accounts resulting from the sale thereof, in accordance with Sections 9-402 and 9-403 of the Uniform Commercial Code. The Company Timber subject to this Deed of Trust, including any Company Timber to be cut and Harvested Timber, was grown, is now growing or is to be grown on the land more particularly described in Exhibit A to this Deed of Trust. The record owner of the Company Timber and the land described in Units 1 through 48 of Exhibit A is Scotia Pacific Company LLC, whose address is as set forth on the cover page of this instrument. The record owner of the land described in Units 50 through 66 of Exhibit A upon which some of the Company Timber was grown, is now growing or is to be grown is The Pacific Lumber Company, whose address is 125 Main Street, Scotia, California 95565. The record owner of the land described in Unit 67 of Exhibit A upon which some of the Company Timber was grown, is now growing or is to be grown is Salmon Creek Corporation, whose address is 125 Main Street, Scotia, California 95565. The record owner of the land described in Unit 49 of Exhibit A upon which some of the Company Timber was grown, is now growing or is to be grown is City Garbage of Eureka, whose address is 949 West Hawthorne St., Eureka, California 95501. (h) Any copy of this Deed of Trust signed by the Trustor or any photographic or other reproduction of this Deed of Trust may also serve as a financing statement under the Uniform Commercial Code by the Trustor, whose address is set forth in the preamble of this Deed of Trust, as debtor, in favor of the Collateral Agent for the benefit of the Secured Parties, as secured party, whose address is set forth in the preamble of this Deed of Trust. (i) The Collateral Agent is authorized to file, in jurisdictions where this authorization will be given effect, a financing statement signed only by the Collateral Agent covering the Collateral Mortgaged Property. At the request of the Collateral Agent, the Trustor will join the Collateral Agent in executing one or more financing statements covering the Collateral Mortgaged Property pursuant to the Uniform Commercial Code in form satisfactory to the Collateral Agent. The Trustor will pay the cost of filing or refiling any such financing statement (and any continuation statement relating thereto) and of filing or refiling or recording or rerecording this Deed of Trust as a financing statement in all public offices at any time and from time to time whenever and wherever filing or recording of any financing statement or of this Deed of Trust is deemed by the Collateral Agent to be necessary or desirable. ARTICLE IV--CONDEMNATION AND CASUALTY LOSS Section 4.1 Condemnation. If the Mortgaged Property, or any part thereof, shall be condemned or taken for public use under the power of eminent domain (excluding any sale to any governmental entity made pursuant to the Headwaters Agreement [as defined in the Offering Memorandum] but including any payment by a governmental entity in respect of an Agreement Not to Cut and including the proceeds of any settlement, compromise or adjustment between the condemning authority and Trustor and the proceeds of any recovery by Trustor in any Takings Litigation) or if a settlement, compromise or adjustment is consummated with the condemning authority, the Collateral Agent shall be paid and shall have the right to demand and to receive and give receipt for, in the name of the Trustor or in the name of the Collateral Agent, all awards and damages for such taking of or injury to the Mortgaged Property ("Condemnation Proceeds"). Upon receipt of Condemnation Proceeds by the Collateral Agent, the Collateral Agent shall deposit such funds into the Collection Account. Condemnation Proceeds, together with any interest thereon, shall be transferred from the Collection Account, on the next succeeding Monthly Deposit Date, as follows: (1) on receipt of an Officer's Certificate from the Trustor, as directed in such Officer's Certificate to pay or reimburse the Trustor (to the extent of such Condemnation Proceeds) for any direct expenses incurred by the Trustor in connection with such condemnation proceeding; and (2) such proceeds, together with any interest earned thereon, less any of such proceeds or interest earned thereon distributed pursuant to clause (1), shall be included in the Collection Account Disbursement Funds to be withdrawn from (or reserved in) the Collection Account as part of the Collection Account Disbursement on such Monthly Deposit Date in accordance with the provisions of Section 5.3(c) of the Indenture. Notwithstanding the foregoing provisions of this Section 4.1, except during the continuance of an Event of Breach after notice from the Collateral Agent to the Trustor, the Trustor may, in its discretion, settle, compromise and adjust any and all claims or rights arising under or in connection with any condemnation or eminent domain proceeding relating to the Mortgaged Property, or any part thereof; provided, however, that the proceeds of any such settlement, compromise or adjustment payable to Trustor shall be paid to the Collateral Agent as contemplated by the foregoing provisions of this Section 4.1. Nothing in the foregoing paragraph shall be construed to limit the right of Trustor and its affiliates, either before or after an Event of Breach, to make all decisions concerning any settlement or compromise of any Takings Litigation then pending. Section 4.2 Casualty Loss. Should all or any portion of the Mortgaged Property be destroyed, lost or damaged by an insured casualty, or should insurance proceeds become payable to the Trustor for damage to or loss or diminution in value of or income from any of the Mortgaged Property, the Collateral Agent shall be paid and shall have the right to collect, receive and give receipt for, in the name of the Trustor or the Collateral Agent, any and all monies that may be payable to or collectable by the Trustor upon any policy of insurance by reason of such damage, loss, destruction or loss or diminution in value of or income from any of the Mortgaged Property (including the proceeds of any settlement, compromise or adjustment of any claim in respect of such insurance coverage). Upon receipt of any such monies by the Collateral Agent, the Collateral Agent shall deposit such funds into the Collection Account for distribution as provided in the Indenture on the next succeeding Monthly Deposit Date. Such proceeds, together with any interest earned thereon, shall be included in the Collection Account Disbursement Funds to be withdrawn from (or reserved in) the Collection Account as part of the Collection Account Disbursement on such Monthly Deposit Date in accordance with the provisions of Section 5.3(c) of the Indenture. Notwithstanding the foregoing provisions of this Section 4.2, except during the continuance of an Event of Breach after notice from the Collateral Agent to the Trustor, the Trustor may, in its discretion, settle, compromise and adjust any and all claims or rights arising under or in connection with any insured casualty or any insurance proceeds for damage to or loss or diminution in value of or income from any of the Mortgaged Property, or any part thereof; provided, however, that the proceeds of any such settlement, compromise or adjustment shall be paid to the Collateral Agent as contemplated by the foregoing provisions of this Section 4.2. ARTICLE V--CERTAIN RELEASES Section 5.1 Dispositions With Express Release. The Trustor shall be permitted to do any of the following: (a) sell or otherwise dispose of any Company Owned Timberlands or Company Timber Rights only as provided in Section 6.1 of the Indenture (including, without limitation, delivery by Trustor to Collateral Agent of the Release Notice and satisfaction of all conditions set forth in Section 6.1 of the Indenture); (b) enter into a Lump Sum Sale only as provided in Section 6.1 of the Indenture (including, without limitation, delivery by Trustor to Collateral Agent of the Release Notice and satisfaction of all conditions set forth in Section 6.1 of the Indenture); (c) sell or otherwise dispose of any Pacific Lumber Timber Rights Property only as provided in Sections 6.3 of the Indenture (including, without limitation, delivery by Trustor to Collateral Agent of the Pacific Lumber Timber Rights Property Release Notice and satisfaction of all conditions set forth in Section 6.3 of the Indenture); and (d) sell or otherwise dispose of Company Owned Timberlands (or timber rights therein) or Company Timber Rights in exchange for Substitute Timber Property, only as provided in Section 6.4 of the Indenture (including, without limitation, delivery by Trustor to Collateral Agent of the Release and Substitution Notice and satisfaction of all conditions set forth in Section 6.4 of the Indenture). Upon receipt of the notices required to be delivered pursuant to the preceding sentence, the Collateral Agent shall direct the Deed of Trust Trustee to release from the lien of this Deed of Trust (a) that portion of the Company Owned Timberlands and/or the Company Timber Rights, as the case may be, to be sold or otherwise disposed of as provided in this Section 5.1 and/or (b) the Company Timber to be cut pursuant to a Lump Sum Sale as provided in this Section 5.1. Upon direction by the Collateral Agent, the Deed of Trust Trustee shall execute and deliver to the Trustor, or to such entity as the Trustor shall direct, any and all instruments reasonably required to release and to evidence the release of such Company Owned Timberlands, Company Timber Rights and/or Company Timber. Section 5.2 Dispositions Without Express Release. In addition to its rights under Sections 6.2 and 6.3 of the Indenture, the Trustor shall have the right from time to time to do any of the following (except that such right may be suspended by written notice from the Collateral Agent to the Trustor given during the continuance of a Trapping Event) without any release from or consent by the Collateral Agent, but subject to compliance with all requirements, terms and conditions of this Section 5.2: (a) Sell portions of the Company Owned Timberlands or Company Timber Rights; provided that (i) the aggregate Mbfe of Company Timber on Company Owned Timberlands, or subject to Company Timber Rights, sold pursuant to this clause (a) shall not exceed 2,000 Mbfe and (ii) all sales of Company Owned Timberlands or Company Timber Rights pursuant to this clause (a) shall be for money which shall be, forthwith upon its receipt by the Trustor, deposited in the Collection Account and will be included in Collection Account Disbursement Funds to be withdrawn from (or reserved in) the Collection Account as part of the Collection Account Disbursement on the next succeeding Monthly Deposit Date in accordance with the provisions of Section 5.3(c) of the Indenture. (b) Abandon, surrender, terminate, release or amend any right-of-way, easement, boundary agreement, license, permit, franchise, certificate of public convenience and necessity, lease or similar right or privilege subject to the lien of this Deed of Trust if (i) such right or privilege is no longer necessary for (x) the cutting, harvesting, severing, sale, marketing or disposal of Company Timber or (y) compliance by the Trustor with, and will not materially adversely affect the ability of the Trustor to perform, its covenants and obligations under this Deed of Trust, the Timber Notes, any Additional Timber Notes, the Line of Credit Agreement, or the Indenture or (ii) in the case of an amendment, the amendment of such right or privilege will not materially adversely affect the ability of the Trustor to perform its covenants and obligations under this Deed of Trust, the Timber Notes, any Additional Timber Notes, the Line of Credit Agreement, or the Indenture; provided that any amended right or privilege shall forthwith, without further action, become subject to the lien of this Deed of Trust to the same extent as those previously existing. If the Trustor shall receive any money or property as consideration or compensation for such abandonment, surrender, termination, release or amendment, such money or property shall be subjected to the lien of this Deed of Trust and such money, forthwith upon its receipt by the Trustor, except for De Minimus Receipts, shall be deposited in the Collection Account and shall be included in the Collection Account Disbursement Funds to be withdrawn from (or reserved in) the Collection Account as part of the Collection Account Disbursement on the next succeeding Monthly Deposit Date in accordance with the provisions of Section 5.3(c) of the Indenture. (c) Abandon, surrender, terminate, release or amend any Subject Contract, if the abandonment, surrender, termination, release or amendment of such Subject Contract will not materially adversely affect the ability of the Trustor to perform its covenants and obligations under this Deed of Trust, the Timber Notes, any Additional Timber Notes, the Line of Credit Agreement or the Indenture; provided that (i) all right, title and interest of Trustor in and to any amended Subject Contract shall forthwith, without further action, become subject to the lien of this Deed of Trust to the same extent as those previously existing and (ii) if the Trustor shall receive any money or property as consideration or compensation for such abandonment, surrender, termination, release or amendment, such money or property shall be subject to the lien of this Deed of Trust and such money, forthwith upon its receipt by the Trustor, shall be deposited in the Collection Account and shall be included in the Collection Account Disbursement Funds to be withdrawn from (or reserved in) the Collection Account as part of the Collection Account Disbursement on the next succeeding Monthly Deposit Date in accordance with the provisions of Section 5.3(c) of the Indenture. Notwithstanding the foregoing, amendments to the New Master Purchase Agreement, the New Services Agreement, and the Conveyance Documents shall be governed in accordance with Section 4.12 of the Indenture. (d) Sell, abandon or otherwise dispose of, or alter or modify, any Data Processing Equipment, any other machinery, equipment or other tangible personal property (other than Company Timber, to which other provisions of this Deed of Trust apply), any fixtures or improvements now or hereafter situated upon any part of the Company Owned Timberlands, any Data Processing Information, any other information, programs, know-how, methods, methodology, or other intangible personal property (other than the Subject Contracts, to which Section 5.2(c) of this Deed of Trust applies, and the Accounts, to which the provisions of the Indenture apply), if the sale, abandonment or other disposition, or the alteration or modification, of the same will not materially adversely affect the ability of the Trustor to perform its covenants and obligations under this Deed of Trust, the Timber Notes, any Additional Timber Notes or the Indenture; provided that (i) all right, title and interest of the Trustor in any new, altered or modified Mortgaged Property shall forthwith, without further action, become subject to the lien of this Deed of Trust to the same extent as those previously existing and (ii) if the Trustor shall receive any money or property as consideration or compensation for such sale, abandonment or other disposition, or alteration or modification, such money or property shall be subject to the lien of this Deed of Trust and such money, forthwith upon its receipt by the Trustor, shall be deposited in the Collection Account and shall be included in the Collection Account Disbursement Funds to be withdrawn from (or reserved in) the Collection Account as part of the Collection Account Disbursement on the next succeeding Monthly Deposit Date in accordance with the provisions of Section 5.3(c) of the Indenture. Subject to satisfaction of all of the "Release Conditions" (defined below), the Collateral Agent (a) shall execute and deliver to the Trustor, from time to time, if requested by the Trustor, a written instrument confirming that the Trustor is entitled to take an action permitted to be taken by the Trustor under this Section 5.2 and to release any Mortgaged Property from the lien of this Deed of Trust as contemplated by the provisions of this Section 5.2 and (b) shall instruct the Deed of Trust Trustee to execute partial reconveyances of the applicable portions of the Mortgaged Property to be released pursuant to Section 5.2 of this Deed of Trust; provided, however, that nothing in this paragraph shall require the Trustor to obtain any such instrument. As used in this Deed of Trust, "Release Conditions" means, with respect to the release of any portion of the Mortgaged Property, receipt by Collateral Agent of all of the following: (i) a written application from the Trustor requesting a written instrument confirming that the Trustor is entitled to release such portion of the Mortgaged Property from the lien of this Deed of Trust and specifying the action to be taken; (ii) all money required to be deposited or paid to the Collateral Agent in connection with such action by the Trustor; (iii) all supplements and other documentation necessary to subject to the lien of this Deed of Trust any money, additions, and other property received, made or acquired by the Trustor in connection with such action; (iv) an Officer's Certificate from the Trustor stating that said action was duly taken in conformity with a designated provision of this Section 5.2; and (v) an Opinion of Counsel stating that all conditions precedent and other requirements under this Deed of Trust and under the Indenture relating to the taking of such action by the Trustor have been complied with. ARTICLE VI--REPRESENTATIONS AND WARRANTIES Section 6.1 Representations and Warranties. The Trustor represents and warrants as of the Closing Date to the Collateral Agent, for the benefit of the Secured Parties, as follows: (a) The chief executive office of the Trustor is, and all material business records relating to the Mortgaged Property are located at 125 Main Street, Second Floor, Scotia, California 95565, except that certain business records relating to the Mortgaged Property may be located at 5847 San Felipe, Suite 2610, Houston, Texas 77057. (b) The Trustor has the lawful authority under its organizational documents and applicable law to execute and deliver this Deed of Trust and, on the Closing Date, to grant, bargain, sell, mortgage, pledge, assign, transfer and convey all the Mortgaged Property and all rights, titles, interests, estates, remedies, powers and privileges appurtenant or incident thereto, in the manner and form hereby done or provided to be done herein. (c) The Trustor has good and marketable fee simple title to, and is lawfully possessed of, the Mortgaged Property, subject only to (i) the lien of this Deed of Trust and (ii) Permitted Encumbrances. This Deed of Trust creates and constitutes a valid and enforceable first priority Lien on the Mortgaged Property, subject only to Permitted Encumbrances. (d) All payments and obligations due and payable or performable at or prior to the Closing Date under or on account of the Mortgaged Property have been duly paid, performed or provided for, except in each case where the failure to do so would not have a Material Adverse Effect. Except for Permitted Encumbrances, all Trustor Taxes due and payable at or prior to the Closing Date have been duly paid, and all returns and reports required under any Tax Law with respect thereto have been duly and timely filed except where such failure would not have a Material Adverse Effect. (e) Each of the New Master Purchase Agreement, the New Services Agreement, the Conveyance Documents, and each other material Subject Contract is presently valid, existing and in full force and effect, the Trustor has no knowledge of material default or claimed material default thereunder, and the Trustor has no knowledge of any event or circumstance that with notice or passage of time or both is likely to constitute a material default thereunder. The Mortgaged Property is currently being held, used, harvested, operated and maintained in compliance in all material respects with the Subject Contracts. (f) The Trustor is not in violation of, and the consummation of the transactions contemplated by the Operative Documents do not cause the Trustor or the Mortgaged Property to be, in violation of any term of any agreement, instrument, Environmental Law, General Law or Timber Law applicable to the Trustor or any part of the Mortgaged Property, or the cutting, harvesting, severing, sale, marketing, disposal or other handling of Company Timber, materials, products, wastes or other substances in, on, from, or attributable to any of the Mortgaged Property, that, individually or in the aggregate, has or is likely to have a Material Adverse Effect; the execution, delivery and performance by the Trustor of this Deed of Trust and the other Operative Documents executed and delivered by the Trustor and compliance by the Trustor with each provision hereof and thereof applicable to the Trustor does not (i) violate or conflict with or constitute a default under any such term, the non-compliance with which would have a Material Adverse Effect, or (ii) create any Lien (other than the Lien of the Deed of Trust or Permitted Encumbrances) upon any of the Mortgaged Property pursuant to any such term. (g) The Company Timber, taken as a whole, is in good condition, is (except for sub-merchantable Company Timber) marketable, and is substantially free from pests, blight, fungus, disease or other condition which would have a Material Adverse Effect, and, other than as disclosed in the Offering Memorandum, the Company Timber has not been subjected in any material respect to damage or injury due to fire or other catastrophic events during the past five (5) years. The Mortgaged Property has been maintained, operated, harvested and developed in all material respects in accordance with sound forestry practices for properties of the same nature. (h) The execution, delivery and performance of this Deed of Trust and the other Operative Documents executed and delivered by the Trustor have been duly authorized by all necessary limited liability company action on its part and on the part of its members; and this Deed of Trust and other Operative Documents executed and delivered by the Trustor have been duly and validly executed and delivered by the Trustor and each constitutes the legal, valid and binding obligation of the Trustor, enforceable in accordance with its terms, except as such enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors' rights and (ii) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Except for (A) the recording of this Deed of Trust and filing and/or recording of related financing statements with or in the appropriate recording filing offices (which shall be completed), and (B) filing with the California Department of Forestry of a notice of transfer and/or amendments to Pacific Lumber's Timber Harvesting Plans being transferred to the Trustor (which shall be completed), no consent, approval or authorization of or registration, qualification, designation, declaration or filing with any Tribunal is required, and no consent, approval, authorization, waiver or notification of creditors or other nongovernmental Persons is required on the part of the Trustor (other than those which have been obtained or made and other than those which may be required under state securities or blue sky laws), as a condition to (a) the offer, issue, sale and delivery by the Trustor of the Timber Notes and any Additional Timber Notes or (b) the execution, delivery, and performance by the Trustor of this Deed of Trust, the Line of Credit Agreement and the other Operative Documents. (i) Except as disclosed or referred to in the Offering Memorandum, and except for Permitted Encumbrances, there are no claims, demands, suits, actions, proceedings or investigations pending or, to the Trustor's knowledge, information or belief, threatened before any Tribunal that is likely to result in an impairment or loss of the Trustor's title to any part of the Mortgaged Property or that is likely to have a Material Adverse Effect on the Trustor's use, maintenance or operation of any of the Mortgaged Property or the harvesting, cutting, severing, transportation or marketing of any material amount of Company Timber. (j) Except as disclosed or referred to in the Offering Memorandum, including matters alleged in the existing Takings Litigation and other similar allegations that may affect portions of the Mortgaged Property to which the existing Takings Litigation does not currently relate, the Trustor has no knowledge or notice of any Agreement Not to Cut or any actual or threatened condemnation or taking by eminent domain (whether permanent, temporary, whole or partial) of all or any part of any Mortgaged Property or of any estate in the lands affected by any Mortgaged Property. (k) Except as disclosed or referred to in the Offering Memorandum, there are no claims, demands, suits, actions, proceedings or investigations with respect to the Trustor or the Mortgaged Property that are likely to result in a judgment, decree or order having, individually or in the aggregate, a Material Averse Effect. (l) The Trustor is not an "investment company" or a company "controlled" by a company required to register as an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (m) (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, the Trustor is and has been in compliance in all material respects with all Environmental Laws in connection with its ownership and use of the Mortgaged Property and the harvesting, cutting, severing and marketing of Company Timber and the disposal or handling of any materials, products, wastes or other substances in, on, from or attributable to the Mortgaged Property; (ii) 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, the Trustor has not received (from Governmental Authorities or private parties) any citations, complaints, consent orders, compliance schedules or other similar enforcement orders, or any other written notice or communication, that indicates or alleges that the Company Owned Timberlands are or may be subject to any response, remedial action, penalty or fine or is not or may not be (or that Pacific Lumber on the effective date of its conveyance of any Company Owned Timberlands to the Trustor was not or may not have been with respect to any such Company Owned Timberlands) in material compliance with any such Environmental Laws; and (iii) as of the Closing Date, except for matters that have not had, and are not likely to have, a Material Adverse Effect (including without limitation any Incidental Waste Disposal) and any suspected or known Hazardous Materials Contamination on lands retained by Pacific Lumber adjoining the Company Owned Timberlands, which are set forth on Schedule 1 to the New Environmental Indemnification Agreement, 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 Owned Timberlands 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 Collateral Agent prior to the Closing Date and (iii) disclosed to all appropriate Governmental Authorities if required under any Environmental Law to be disclosed. (n) Except for Hazardous Materials contained in commercial products used in the ordinary course of business and which are 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 Owned Timberlands or any part thereof which could have a Material Adverse Effect; (ii) no part of any of the Company Owned Timberlands is being used or, to the best of the Trustor'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 Owned Timberlands affected by any Hazardous Materials Contamination, other than (x) such as do not, individually or in the aggregate, have a Material Adverse Effect, (including without limitation any Incidental Waste Disposal) and (y) suspected or known Hazardous Materials Contamination on lands retained by Pacific Lumber adjoining the Company Owned Timberlands, which are set forth on Schedule 1 to the New Environmental Indemnification Agreement; (iii) to the best knowledge and belief of the Trustor, no property adjoining any Company Owned Timberlands is being used, or has ever been used at any previous time, for the disposal, storage, treatment, processing or other handling of any Hazardous Material nor is any property adjoining any Company Owned Timberlands affected by Hazardous Materials Contamination, other than (x) such as do not, individually or in the aggregate, have a Material Adverse Effect (including without limitation any Incidental Waste Disposal), and (y) suspected or known Hazardous Materials Contamination on lands retained by Pacific Lumber adjoining the Company Owned Timberlands, which are set forth on Schedule 1 to the New Environmental Indemnification Agreement; (iv) each Disposal Site now being used, or, to the best of the Trustor'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 the Trustor's knowledge, investigation, with respect to Hazardous Materials or Hazardous Materials Contamination is in existence or, to the best of the Trustor's knowledge, proposed, threatened or anticipated, with respect to any of the Company Owned Timberlands. No part of any Company Owned Timberlands is currently on, and to the Trustor's knowledge has ever been on, CERCLA's Information System or National Priority's List, or any other Federal or State "Superfund" or "Superlien" list. The Trustor has not received any notice that any Disposal Site is currently on, and to the Trustor's knowledge has ever been on, CERCLA's Information System or National Priority's List, or any other Federal or State "Superfund" or "Superlien" list. Section 6.2 Warranties Survive. Without limiting any other provision of this Deed of Trust, all representations and warranties contained in this Article VI shall survive the execution and delivery of this Deed of Trust and any exercise of any power of sale or foreclosure sale (whether judicial or nonjudicial) under this Deed of Trust or conveyance in lieu of foreclosure, but shall terminate upon the repayment in full of the Secured Obligations and the full and final release and discharge of this Deed of Trust and any other instruments now or hereafter securing the Secured Obligations. ARTICLE VII--COVENANTS Section 7.1 Affirmative Covenants. As further assurance with regard to the Secured Obligations, the Trustor hereby covenants, warrants and agrees in favor of the Collateral Agent, for the benefit of the Secured Parties, as follows: (a) The Trustor shall perform the Secured Obligations required to be performed by the Trustor pursuant to this Deed of Trust and shall pay when due the Secured Obligations under the Line of Credit Agreement, the Timber Notes, any Additional Timber Notes and the Indenture to be paid by the Trustor including, without limitation, the principal of, and the interest due under the Timber Notes, any Additional Timber Notes and the Line of Credit Agreement; all charges, fees and other sums to be paid by the Trustor as provided in the Operative Documents, the principal of and interest on any future advances secured by this Deed of Trust, and the principal of and interest on any other indebtedness secured by this Deed of Trust. (b) The Trustor, except for any matters as would not have a Material Adverse Effect, (i) shall keep the Collateral Mortgaged Property in good condition and repair (ordinary wear and tear excepted); (ii) shall comply with all laws, statutes, ordinances, regulations, covenants, conditions and restrictions now or hereafter affecting the Collateral Mortgaged Property or any part thereof or requiring any alterations or improvements; (iii) shall not commit, or permit, any waste or deterioration of the Collateral Mortgaged Property; and (iv) shall not commit, suffer or permit any act to be done in or upon the Collateral Mortgaged Property in violation of any law, ordinance or regulation except where such violation would not have a Material Adverse Effect. (c) The Trustor will, at the Trustor's own expense, record and re-record, file and re-file and register and re-register this Deed of Trust and every other instrument in addition and supplemental hereto that may be required by applicable law in order to perfect and maintain the priority of the lien, assignment and security interest created hereby, in such manner and places and within such times as shall be necessary or desirable to perfect and maintain the priority of such lien, assignment and security interest and to preserve and protect the rights and remedies of the Deed of Trust Trustee and the Collateral Agent hereunder, and will furnish evidence of each such recording, filing and registration to the Collateral Agent. (d) Without affecting the Trustor's obligations under Section 7.1(c) hereof, promptly following the request of the Collateral Agent, the Trustor will, at its expense, correct any defect or error that may be discovered in the contents of this Deed of Trust or in the execution or acknowledgment hereof, and will execute and deliver such further instruments and do such further acts and things as may be reasonably requested by the Collateral Agent (i) to carry out more effectively the purposes of this Deed of Trust, (ii) to subject to the lien, assignment and security interests created hereby any of the Mortgaged Property, and (iii) to perfect and maintain the priority of such lien, assignment and security interests, subject only to Permitted Encumbrances, until such Mortgaged Property is released by the Collateral Agent from the lien of this Deed of Trust. (e) The Trustor binds itself and its successors, assigns and legal representatives to warrant and forever defend unto the Collateral Agent and its successors and assigns, all the Mortgaged Property and any portion thereof and to maintain the lien of this Deed of Trust on and in the Mortgaged Property, free and clear of all defects, irregularities of title, liens, security interests, charges or other encumbrances other than (i) those created by this Deed of Trust and (ii) Permitted Encumbrances; and if a Responsible Officer of the Trustor has knowledge that the title to the Mortgaged Property or the lien of this Deed of Trust has been or is being challenged, directly or indirectly, or if any legal proceedings are instituted against the Trustor, the Collateral Agent or any past or present Collateral Agent in connection with any such challenge, the Trustor will promptly give notice thereof to the Collateral Agent and, at the Trustor's cost and expense, will (i) diligently act to cure, or cause to be cured, any defect with respect to Mortgaged Property that may have developed or be claimed and that could reasonably be expected to have a Material Adverse Effect and take all necessary and proper steps for the defense of the title of the Collateral Agent to the Mortgaged Property and the lien of this Deed of Trust thereon, (ii) subject to Section 8.14 hereof, indemnify and hold the Collateral Agent and the past or present Collateral Agents harmless from and against any and all losses suffered by any such indemnified Person resulting from any failure of or defect in title (other than Permitted Encumbrances) to the Mortgaged Property or the lien of this Deed of Trust, (iii) take such legal action as is reasonably appropriate to the defense thereof, including but not limited to, the employment of counsel, the prosecution and defense of litigation and the compromise or release and discharge of any adverse claims made and (iv) promptly give notice to the Collateral Agent upon the Trustor's obtaining knowledge of any defect or irregularity of title (other than Permitted Encumbrances) or any claim that could give rise to a defect or irregularity of title (other than Permitted Encumbrances). (f) With such exceptions as do not, and are not likely to, have a Material Adverse Effect, the Trustor will, at the Trustor's expense, promptly take or cause to be taken all such action as is within its control and may be reasonably required from time to time to enforce or secure the observance or performance in all material respects of all terms, covenants, agreements or conditions to be observed or performed by any third parties under any material Subject Contract or other material instrument or agreement, or any Environmental Law, General Law or Timber Law, applicable to any of the Mortgaged Property, and, upon the occurrence and during the continuance of a Trapping Event, upon the request of the Collateral Agent, to exercise any of its rights, remedies, powers and privileges under any such Subject Contract or other instrument or agreement or any Environmental Law, General Law or Timber Law, all in accordance with the respective terms thereof. (g) The Trustor will, at the Trustor's expense, comply with all Environmental Laws, General Laws and Timber Laws applicable to the Trustor or the Mortgaged Property, the non-compliance with which would have a Material Adverse Effect. (h) At the Trustor's cost and expense, the Trustor will perform, or the Trustor will arrange for the performance of, the services (pursuant to the New Services Agreement or otherwise) consistent with the standards set forth in Section 2.3 of the New Services Agreement as in effect on the date hereof. (1) the Trustor shall ensure that each contract for the sale of Company Timber (other than (i) the New Master Purchase Agreement and related log purchase agreements or (ii) any agreements for Lump Sum Sales or Pay-As-You-Harvest Sales pursuant to Sections 6.1 and 6.2 of the Indenture) shall (a) permit verification by an independent third party or by the Trustor of the scaling and measuring of the amount of Company Timber or Harvested Timber sold in a manner substantially similar to Section 6.3 of the Master Purchase Agreement; (b) expressly state that such contract and all rights of the counterparty thereunder are fully subordinate to this Deed of Trust; (c) contain a non-petition agreement substantially similar to that included in the Master Purchase Agreement; (d) contain provisions substantially similar to Section 4.2 of the Master Purchase Agreement; and (e) not contain provisions in violation of the Indenture or this Deed of Trust. The Trustor shall, consistent with good business practice, maintain orderly files relating to each contract for the sale of Company Timber, correspondence and other records, documents and papers pertaining to the Company Timber and the operations and maintenance thereof. Upon request of the Collateral Agent, the Trustor shall deliver to the Collateral Agent copies, certified as true and correct by a Responsible Officer of the Trustor, of all Purchase Agreements with third parties then in effect that pertain to the sale of the Company Timber. (2) Unless and while the same constitutes a Permitted Encumbrance, or unless non-payment is otherwise permitted by the Indenture, the Deed of Trust, the Line of Credit Agreement or other Operative Documents, or is not material, the Trustor shall cause all liabilities of the Trustor incurred with respect to or affecting the Mortgaged Property to be paid when due. (3) Unless and while the same constitutes a Permitted Encumbrance, the Trustor shall cause all Trustor Taxes to be paid punctually before the same become delinquent, together with any interest and penalty payable in connection therewith. (4) The Trustor shall comply (in accordance with the terms thereof) with any final order, judgment or other non-appealable direction of any Tribunal requiring the removal, treatment or disposal by the Trustor of any Hazardous Materials or Hazardous Materials Contamination with respect or attributable to any of the Mortgaged Property or any Disposal Site, and the Trustor shall provide the Collateral Agent with satisfactory evidence of such compliance. The Trustor shall comply, or shall cause compliance with, the covenants and agreements in paragraph (1) of this paragraph (h) in a manner consistent in all material respects with prudent business practices, determined in the reasonable judgment of Trustor, (i) which are consistent with then current applicable industry standards, (ii) do not, individually or in the aggregate, have a Material Adverse Effect and (iii) which are in compliance, in all material respects, with applicable Timber Laws. (i) The Trustor will insure and keep insured (or cause to be insured or be kept insured) all of the material Mortgaged Property (other than Company Timber and Harvested Timber) of an insurable nature in accordance with prudent standards then being followed by other companies engaged in the same or similar lines of business and in the same general area; provided, without limiting the generality of the foregoing, the Trustor will maintain or cause to be maintained: (i) 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 workers' compensation or similar insurance as may be required by applicable laws, provided that the Trustor may self- insure any or all workers' compensation liabilities. To the extent that any of the insurance required by this clause (i) ceases to be available at commercially reasonable rates, the Trustor 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 and in the same general area. In the event that the Trustor wishes to effect replacement coverage pursuant to the preceding sentence, it will (i) notify the Collateral Agent of such intent as soon as reasonably practicable, and (ii) not less than five (5) Business Days prior to the termination of the coverage for which replacement is to be made, furnish the Collateral Agent with a report of the Trustor describing in reasonable detail the nature of such replacement coverage and the reasons why the Trustor believes that such replacement coverage is appropriate. The Trustor shall deliver to the Collateral Agent evidence of such policies of insurance together with all renewals thereof. Each such casualty insurance policy shall provide by way of endorsements, riders or otherwise that proceeds will be payable to the Collateral Agent, as its interest may appear. The Trustor will cause the Collateral Agent to be named as an additional insured under the public liability policies of the Trustor, and each such policy will be endorsed to provide that the policy shall not be canceled or materially changed by the insurer before the expiration of 30 days, or 10 days in the event of nonpayment of premium, after receipt by the Collateral Agent of written notice; and that the Collateral Agent may, but shall not be obligated to, make premium payments to prevent any such cancellation, or alteration, which payments will be accepted by the insurer. In the event that the Collateral Agent makes any such premium payments in order to avoid a lapse in insurance coverage required hereunder, the Trustor shall promptly reimburse the Collateral Agent therefor. Any such payment not reimbursed shall become part of the Secured Obligations. Evidence of a renewal policy shall be furnished to the Collateral Agent not less than 15 days prior to the expiration of the initial or preceding renewal policy. (j) At any and all reasonable times, upon request of the Collateral Agent, the Trustor will permit the Collateral Agent or its designated representatives to enter upon the Mortgaged Property or any part thereof for the purpose of inspecting the condition and operation thereof. (k) The Trustor shall, following any exercise of any power of sale or any foreclosure sale of the Mortgaged Property pursuant to this Deed of Trust, be a mere tenant at sufferance of the purchaser of the property at said sale, and such purchaser shall be entitled to immediate possession thereof, and, if the Trustor fails to vacate such property immediately, such purchaser may and shall have the right to go into any court of competent jurisdiction, and file an action to obtain possession of such properties, which action shall lie against the Trustor as a tenant at sufferance. (l) The Trustor will, upon a Responsible Officer of the Trustor having knowledge thereof, give the Collateral Agent prompt notice of (i) any material casualty loss, notice of intended condemnation or taking, condemnation or taking with respect to any of the Mortgaged Property, (ii) the termination of any Purchase Agreement by any purchaser of a material portion of the Company Timber, or any reduction or renegotiation by any such purchaser of the sales price or the amount of the Company Timber required to be purchased under any Purchase Agreement relating to a material portion of the Company Timber, (iii) any inquiry or proceeding of any Tribunal with respect to any Hazardous Material in, on, from or attributable to any of the Mortgaged Property, (iv) the presence of any Hazardous Materials Contamination with respect to or attributable to any of the Mortgaged Property, in each case, in quantities which could have a Material Adverse Effect, with a full description thereof, (v) every claim or demand made or proceeding instituted by any Person that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect and (vi) the occurrence of any other event or circumstance that has had or could reasonably be expected to have a Material Adverse Effect. (m) The Trustor will pay all appraisal or consulting fees, filing or recording fees, mortgage registration fees, Trustor Taxes, abstract fees, landman and/or title examiner fees, attorneys' fees, charges and disbursements and all other costs and expenses of every character incurred by the Trustor in connection with the making, closing and servicing of the Secured Obligations and will reimburse the Collateral Agent for all expenses, including, without limitation, reasonable attorneys' fees and court costs, incurred by it in enforcing or collecting the Secured Obligations or otherwise in enforcing its rights under this Deed of Trust. In the event that the Collateral Agent should pay directly any such costs and expenses, the Trustor shall promptly reimburse the Collateral Agent for all such sums reasonably incurred. Any such sums not reimbursed shall become part of the Secured Obligations. (n) Subject to Section 8.14 hereof, the Trustor shall indemnify, protect, defend and hold the Collateral Agent, the Trustee, the Deed of Trust Trustee and each present or past Collateral Agent, Trustee and Deed of Trust Trustee, and their respective directors, officers, employees, attorneys and agents (collectively referred to as the "Indemnified Parties" in paragraphs (n) and (o) of this Section 7.1) harmless 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, charges and disbursements and remedial costs), suits, costs of any settlement or judgement and claims of any and every kind whatsoever (including, without limitation, those arising under CERCLA and 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 this Deed of Trust, or whether before or after any exercise of any power of sale, any foreclosure sale, judicial or non- judicial, under this 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, the actual or threatened presence in, on or under, or the actual or threatened escape, seepage, leakage, spillage, discharge, emission or release from, any of the Mortgaged 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 and provided, in the event of a foreclosure of this Deed of Trust or a conveyance by the Trustor in lieu of foreclosure, such liability arises from events occurring prior to such foreclosure or conveyance by deed in lieu. (o) Subject to Section 8.14 hereof, without limiting any other provision hereof, the Trustor further agrees to indemnify, protect, defend and hold the Indemnified Parties harmless from and against any and all liabilities (including, without limitation, strict liability), actions, claims, judgments, demands, orders, costs, expenses, charges, suits, costs of settlements or judgments and claims of any kind whatsoever (including, without limitation, reasonable attorneys' fees, charges and disbursements) incurred by or claimed, brought, rendered or charged against any Indemnified Parties (either before or after payment in full of the Secured Obligations, either before or after any final and full release of this Deed of Trust, or either before or after any foreclosure sale, whether judicial or nonjudicial, under this Deed of Trust or conveyance in lieu of foreclosure) (1) under or by reason of this Deed of Trust or the exercise of any rights or remedies hereunder in accordance with the terms hereof, (2) resulting from claims by third parties to any Assigned Proceeds or other payments received by any Indemnified Party in connection with the Mortgaged Property, (3) by reason of any alleged obligations of Pacific Lumber, Salmon Creek or the Trustor with respect to any of the Mortgaged Property and/or (4) by reason of any violation or alleged violation by Pacific Lumber, Salmon Creek or the Trustor of any General Laws or Timber Laws; provided, however, that the foregoing indemnity shall not apply where a court of competent jurisdiction shall have made a final determination that such liability was caused by the gross negligence or willful misconduct of the party or parties seeking indemnification. All amounts paid by the Indemnified Parties in settlement, compromise, satisfaction or discharge of any such claim, action or judgment, and all court costs, attorneys' fees and other expenses of every character incurred by the Indemnified Parties pursuant to and in accordance with the provisions of paragraph (n) or this paragraph (o) shall be due and payable by the Trustor on demand and shall become a part of the Secured Obligations secured by this Deed of Trust. (p) An Indemnified Party shall notify the Trustor promptly of any claim for which it may seek indemnity pursuant to the provisions of paragraphs (n) or (o). The Trustor shall have the right to defend the claim, and such Indemnified Party shall cooperate in the defense. If the Trustor does not defend such claim, such Indemnified Party may have separate counsel and the Trustor shall pay the reasonable fees and expenses of such counsel. The Trustor shall have no obligation to pay for any settlement of any such claim made without its consent. (q) The Trustor shall deliver to the Collateral Agent, and the Collateral Agent shall deliver to the Trustor, copies of all environmental inspection reports relating to Hazardous Materials obtained by such party or for its benefit, or otherwise in such party's possession, with respect to the Mortgaged Property. Each party shall maintain such reports as confidential, unless disclosure is required by law, or unless such information may become public other than as a consequence of such party's actions, and except that such information may be provided to any prospective purchaser of any of the Mortgaged Property. (r) Commencing as soon as reasonably possible, and in no event later than April 1, 1999, the Trustor shall maintain, on a quarterly basis, a complete current copy of the GIS Data Processing Information at a location with a third party approved by the Collateral Agent. Collateral Agent hereby approves, as the party to hold such Data Processing Information, the third party consultant retained from time to time by the Trustor to advise the Trustor with respect to the GIS. (s) The Trustor shall pay, or cause to be paid prior to delinquency, all real property taxes and assessments, general and special, and all other taxes and assessments, of any kind or nature whatsoever relating to the Mortgaged Property, including, without limitation, non- governmental levies or assessments such as maintenance charges, levies or charges resulting from covenants, conditions and restrictions affecting the Mortgaged Property, which are assessed or imposed upon the Mortgaged Property, or become due and payable, and which create or may create a lien upon the Mortgaged Property, or any part thereof (all of the above hereinafter referred to, collectively, as "Impositions"); provided, however, that if, by law, any such Imposition is payable, or may at the option of the taxpayer be paid, in installments, Trustor may pay the same or cause it to be paid, together with any accrued interest on the unpaid balance of such Imposition, in installments as the same become due and before any fine, penalty, interest or cost may be added thereto for the nonpayment of any such installment and interest. (t) If at any time after the date hereof there shall be assessed or imposed (i) a tax or assessment on the Mortgaged Property in lieu of or in addition to the Impositions otherwise payable by the Trustor pursuant to clause (s) or (ii) a license fee, tax or assessment imposed on Collateral Agent, a Secured Party, a Liquidity Provider or Deed of Trust Trustee and measured by or based in whole (or in part) upon the amount of the outstanding obligations secured hereby, or (iii) a license fee, tax or assessment imposed on Collateral Agent, a Secured Party, a Liquidity Provider or Deed of Trust Trustee because of Collateral Agent's or Deed of Trust Trustee's interest in the Mortgaged Property, then all (or said part of) such taxes, assessments or fees shall be deemed to be included within the term "Impositions" as defined in clause (s) and the Trustor shall pay and discharge the same as herein provided with respect to the payment of Impositions. Anything to the contrary herein notwithstanding, the Trustor shall have no obligation to pay any franchise, estate, inheritance, income, excess profits or similar tax levied on Collateral Agent or Deed of Trust Trustee. Section 7.2 Negative Covenants. As further assurances with regard to the Secured Obligations, the Trustor hereby covenants, warrants and agrees in favor of the Collateral Agent, for the benefit of the Secured Parties, as follows: (a) The Trustor will not mortgage, pledge or hypothecate the Mortgaged Property or any part thereof or any interest therein, except for (i) Nonrecourse Timber Acquisition Indebtedness permitted by the Indenture and (ii) the indebtedness referred to in Section 4.9(u) of the Indenture. (b) The Trustor will not, except for Permitted Encumbrances, create, suffer or permit to exist any Lien or other encumbrance of, on, in or affecting the Mortgaged Property, or any part thereof or any interest therein. (c) The Trustor will not permit removal of any Data Processing Equipment unless (i) such removal would not have a Material Adverse Effect or (ii) such removal is otherwise permitted by the terms of this Deed of Trust. Section 7.3 Covenants Survive. Without limiting any other provision of this Deed of Trust, all representations, warranties, covenants and indemnities contained in this Article VII (which representations, warranties, covenants and indemnities are being made solely for the benefit of the Trustee, the Collateral Agent, and the Secured Parties, and expressly not for the benefit of any other successor owner of any of the Mortgaged Property) shall survive any exercise of a power of sale or any foreclosure sale (whether judicial or nonjudicial) under this Deed of Trust or conveyance in lieu of foreclosure, and the indemnities contained in Sections 7.1(n) and 7.1(o) hereof shall survive the repayment in full of the Secured Obligations and the full and final release and discharge of this Deed of Trust and other instruments securing the Secured Obligations. Section 7.4 Obligations of the Services Provider under the New Services Agreement. Notwithstanding any provision of this Deed of Trust that provides that the Trustor shall be obligated to pay an expense or perform an obligation, the Services Provider shall not be relieved from any obligation that it may have under the New Services Agreement to pay such expenses or perform such obligation (to the extent set forth in the New Services Agreement), except to the extent provided therein. ARTICLE VIII--REMEDIES; POWER OF SALE Section 8.1 Events of Breach. If both (a) there is any "Event of Default" as defined in Section 7.1 of the Indenture (after giving effect to any applicable notice or grace periods provided in the Indenture), including, without limitation, any such event caused by a failure to pay when due any amount due under the Indenture or any installment of principal of or interest on the Secured Obligations, and (b) there exists an Acceleration Event (such combination of circumstances being referred to as an "Event of Breach"), then, in addition to the other rights and remedies set forth in this Article VIII, the Lien evidenced or created by this Deed of Trust shall be subject to foreclosure in any manner provided for herein or provided for by law. Section 8.2 Right to Cure. Upon the occurrence and during the continuance of an Event of Breach, the Collateral Agent, at its option and without any obligation to do so, may take such action or tender such performance or payment as may be required to cure the Event of Breach. All amounts advanced by the Collateral Agent as aforesaid and all costs and expenses incurred in taking such action or tendering such performance shall be due and payable upon demand, shall become a part of the Secured Obligations, and shall be fully secured by this Deed of Trust. Any amounts so paid or costs or expenses incurred, as well as the time of payment thereof, shall be deemed fully established by the affidavit or Certificate of the Collateral Agent signed by a Responsible Officer of the Collateral Agent and stating the action taken or the performance or payment made by the Collateral Agent, the circumstances under which such action was taken or such performance or payment made, that such action taken or performance or payment made was in compliance with this Deed of Trust, the amount so paid or costs or expenses incurred, as well as the time of payment thereof. The taking of such action or the tendering of any such performance or payment by the Collateral Agent shall not prevent the Trustee or any Secured Party from declaring (in accordance with the terms of the Indenture) the Secured Obligations to be due and payable under the provisions of the Indenture, this Deed of Trust, the Timber Notes, any Additional Timber Notes or the Line of Credit Agreement during the continuance of an Event of Breach and pursuing any other remedies available to the Trustee and the Secured Parties. Section 8.3 Power of Sale; Foreclosure. If an Event of Breach exists and any of the Timber Notes, Additional Timber Notes or any borrowings under the Line of Credit Agreement remains unpaid at the maturity thereof, whether upon acceleration of maturity or otherwise: (1) The Collateral Agent may elect to cause the Mortgaged Property or any part thereof to be sold under the power of sale herein granted in any manner permitted by applicable law. In connection with any sale or sales hereunder, the Collateral Agent may elect to treat any portion of the Mortgaged Property which consists of a right in action or which is property that can be severed from the real property covered hereby or any improvements thereon without causing structural damage thereto as if the same were personal property, and dispose of the same in accordance with applicable law, separate and apart from the sale of the real property. Any sale of any personal property hereunder shall be conducted in any manner permitted by Section 9-501 or any other applicable section of the Uniform Commercial Code. Where any portion of the Mortgaged Property consists of real and personal property or fixtures, whether or not such personal property is located on or within the real property, the Collateral Agent may elect in its discretion to exercise its rights and remedies against any or all of the real property, personal property, and fixtures in such order and manner as is now or hereafter permitted by applicable law. Without limiting the generality of the foregoing, the Collateral Agent may, in its sole and absolute discretion and without regard to the adequacy of its security, elect to proceed against any or all of the real property, personal property and fixtures in any manner permitted under Section 9-501(4) (a) of the Uniform Commercial Code; and if Collateral Agent elects to proceed in the manner permitted under Section 9-501(4) (a) (ii) of the Uniform Commercial Code, the power of sale herein granted shall be exercisable with respect to all or any of the real property, personal property and fixtures covered hereby, as designated by the Collateral Agent, and the Deed of Trust Trustee is hereby authorized and empowered to conduct any such sale of any real property, personal property and fixtures in accordance with the procedures applicable to real property. Where any portion of the Mortgaged Property consists of real property and personal property, any reinstatement of the obligation secured hereby, following default and an election by the Collateral Agent or the Secured Parties to accelerate the maturity of said obligation, which is made by the Trustor or any other person or entity permitted to exercise the right of reinstatement under Section 2924c of the California Civil Code or any successor statute, shall, in accordance with the terms of Uniform Commercial Code Section 9-501(4) (c) (iii), not prohibit the Collateral Agent or the Deed of Trust Trustee from conducting a sale or other disposition of any personal property or fixtures or from otherwise proceeding against or continuing to proceed against any personal property or fixtures in any manner permitted by the Uniform Commercial Code; nor shall any such reinstatement invalidate, rescind or otherwise affect any sale, disposition or other proceeding held, conducted or instituted with respect to any personal property or fixtures prior to such reinstatement or pending at the time of such reinstatement. Any sums paid to the Collateral Agent in effecting any reinstatement pursuant to Section 2924c of the California Civil Code shall be applied to the Trustor's obligations and to the Collateral Agent's reasonable costs and expenses in the manner required by Section 2924c. Should the Collateral Agent elect to sell any portion of the Mortgaged Property which is real property, or which is personal property or fixtures that the Collateral Agent has elected under Section 9-501(4) (a) (ii) of the Uniform Commercial Code to sell together with the real property in accordance with the laws governing a sale of real property, the Collateral Agent or the Deed of Trust Trustee shall give such notice of default and election to sell as may then be required by law. Thereafter, upon the expiration of such time and the giving of such notice of sale as may then be required by law, and without the necessity of any demand on the Trustor, the Deed of Trust Trustee, at the time(s) and place(s) specified in the notice of sale, shall sell said real property, and all estate, right, title, interest, claim and demand therein, and equity and right of redemption thereof, at such times and places as required or permitted by law, upon such terms as the Collateral Agent or the Deed of Trust Trustee may fix and specify in the notice of sale or as may be required by law. If the Mortgaged Property consists of several lots, parcels or items of property, the Collateral Agent may: (i) designate the order in which such lots, parcels or items shall be offered for sale or sold, or (ii) elect to sell such lots, parcels or items through a single sale, or through two or more successive sales, or in any other manner the Collateral Agent deems in its best interest. Should the Collateral Agent desire that more than one sale or other disposition of the Mortgaged Property be conducted, Collateral Agent may, at its option, cause the same to be conducted simultaneously, or successively, on the same day, or on such different days or times and in such order as the Collateral Agent may deem to be in its best interests, and no such sale shall exhaust the power of sale herein granted or terminate or otherwise affect the lien of this Deed of Trust on, or the security interest of the Collateral Agent in, any part of the Mortgaged Property not sold, until all of the Secured Obligations have been fully paid. In the event the Collateral Agent elects to dispose of the Mortgaged Property through more than one sale, the Trustor agrees to pay the costs and expenses of each such sale and of any judicial proceedings wherein the same may be made, including reasonable compensation to the Collateral Agent and the Deed of Trust Trustee, their agents and counsel, and to pay all expenses, liabilities and advances made or incurred by the Collateral Agent and the Deed of Trust Trustee (or either of them) in connection with such sale or sales, together with interest on all such advances made by the Collateral Agent and the Deed of Trust Trustee (or either of them) at the Default Rate. (2) The Collateral Agent, with or without entry, personally or by its agents or attorneys, insofar as applicable, may (A) institute judicial proceedings for the complete or partial foreclosure of this Deed of Trust under the provisions of the laws of the jurisdiction in which the Mortgaged Property or any part thereof is located, or under any other applicable provision of law; or (B) take all steps to protect and enforce the rights of the Collateral Agent and the Secured Parties, whether by action, suit or proceeding in equity or at law (for the specific performance of any covenant, condition or agreement contained in this Deed of Trust, or in aid of the execution of any power herein granted, or for any foreclosure hereunder, or for the enforcement or any other appropriate legal or equitable remedy), or otherwise, as the Collateral Agent, being advised by counsel, shall deem most advisable to protect and enforce any of its rights or duties hereunder. In exercising its rights under this Section 8.3, the Collateral Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. Section 8.4 Bid at Sale. (a) Upon any sale made under or by virtue of this Article VIII, the Collateral Agent may, on behalf of the Secured Parties, bid for and acquire the Mortgaged Property or any part thereof and, in lieu of paying cash therefor, may make settlement for the purchase price by crediting upon the Secured Obligations secured by this Deed of Trust the net proceeds of sale, after deducting therefrom the expenses of the sale and the costs of the action and any other sums which the Deed of Trust Trustee and the Collateral Agent are authorized to deduct under this Deed of Trust. The person making such sale shall accept such settlement without requiring the production of any Timber Note, any Additional Timber Note, the Line of Credit Agreement, this Deed of Trust or the Indenture, and without such production there shall be deemed credited to the Secured Obligations under this Deed of Trust the net proceeds of such sale. The Collateral Agent, upon so acquiring the Mortgaged Property or any part thereof, shall be entitled to own, hold, lease, rent, operate, manage or sell the same in any manner permitted by applicable laws. (b) In connection with any trustee sale or judicial sale by the Deed of Trust Trustee under this Deed of Trust, the Collateral Agent shall not accept any cash bid in an amount less than the aggregate amount payable under the Timber Notes and any Additional Timber Notes and the Line of Credit Agreement, unless otherwise permitted by the Indenture and the Line of Credit Agreement and all approvals required by the Indenture and Line of Credit Agreement have been obtained by Collateral Agent. In the event that relevant law provides that a trustee sale or judicial sale may be made in respect of less than all of the Company Owned Timberlands and Company Timber Rights, and the Collateral Agent shall determine to permit a trustee sale or judicial sale for less than all of the Company Owned Timberlands and Company Timber Rights, in connection with any such trustee sale or judicial sale by the Deed of Trust Trustee, the Collateral Agent shall not accept any cash bid in an amount less than the pro rata portion of the aggregate amount payable under the Timber Notes, any Additional Timber Notes and the Line of Credit Agreement, unless otherwise permitted by the Indenture and the Line of Credit Agreement and all approvals required by the Indenture and Line of Credit Agreement have been obtained by Collateral Agent. Section 8.5 Sale of Mortgaged Property; Application of Proceeds. (a) The Deed of Trust Trustee, upon the Collateral Agent's request, may postpone any sale of all or any part of the Mortgaged Property to be made under or by virtue of this Article VIII by public announcement at the time and place of such sale, or by publication, if required by law, and, from time to time thereafter, may further postpone such sale by public announcement made at the time of sale fixed by the preceding postponement. (b) Upon the completion of any sale made by the Deed of Trust Trustee under or by virtue of this Article VIII, the Deed of Trust Trustee shall execute and deliver to the accepted purchaser or purchasers a good and sufficient deed or deeds or other appropriate instruments, conveying, assigning and transferring all its estate, right, title and interest in and to the property and rights so sold. The Deed of Trust Trustee is hereby irrevocably appointed the true and lawful attorney-in- fact of the Trustor, in its name and stead or in the name of the Deed of Trust Trustee, to make all necessary conveyances, assignments, transfers and deliveries of the property and rights so sold, and, for that purpose, the Deed of Trust Trustee may execute all necessary deeds and other instruments of assignment and transfer, and may substitute one or more persons with like power, the Trustor hereby ratifying and confirming all that such attorney or attorneys or such substitute or substitutes shall lawfully do by virtue hereof. The Trustor shall, nevertheless, if so requested in writing by the Deed of Trust Trustee or the Collateral Agent, ratify and confirm any such sale or sales by executing and delivering to the Deed of Trust Trustee or to such purchaser or purchasers all such instruments as may be advisable, in the judgment of the Collateral Agent or the Deed of Trust Trustee, for such purposes and as may be designated in such request. Any such sale or sales made under or by virtue of this Article VIII shall operate to divest all the estate, right, title, interest, claim and demand, whether at law or in equity, of the Trustor in and to the property and rights so sold, and shall be a perpetual bar, at law and in equity, against the Trustor and any Person claiming through or under the Trustor and their successors and assigns. (c) The receipt by the Deed of Trust Trustee for the purchase money paid as a result of any such sale shall be a sufficient discharge therefor to any purchaser of the property or rights, or any part thereof, so sold. No such purchaser, after paying such purchase money and receiving such receipt, shall be bound to see to the application of such purchase money upon or for any trust or purpose of this Deed of Trust, any Timber Note, any Additional Timber Note, the Line of Credit Agreement or the Indenture, or shall be answerable, in any manner, for any loss, misapplication or non-application of any such purchase money or any part thereof, nor shall any such purchaser be bound to inquire as to the authorization, necessity, expediency or regularity of any such sale. (d) The purchase money, proceeds or avails of any sale made under or by virtue of this Article VIII, together with any other sums which then may be held by the Deed of Trust Trustee or the Collateral Agent under this Deed of Trust as part of the Mortgaged Property or the proceeds thereof (whether under the provisions of this Article VIII or otherwise), shall be applied, to the extent permitted by law, as follows: First, to pay all unpaid costs and expenses and other amounts owing to the Collateral Agent or the Deed of Trust Trustee under and pursuant to the terms of this Deed of Trust, including, without limitation, costs and expenses of any exercise of the power of sale or any foreclosure sale (excluding amounts payable in respect of indemnification obligations); and Second, to pay to the Collateral Agent for deposit in and disbursement from the Payment Account, in accordance with the provisions of Section 7.7 of the Indenture. If the proceeds of any realization of or upon the Mortgaged Property pursuant to this Article VIII are insufficient to cover the costs and expenses of such realization and the payment in full of the Secured Obligations, the Trustor shall remain liable for any deficiency. Section 8.6 Right to Possession. (a) If a Trapping Event occurs and is continuing and there exists an Acceleration Event, the Collateral Agent personally, or by its agents, attorneys or a receiver, may do any or all of the following: (i) Enter into and upon all or any part of the Mortgaged Property, and may exclude the Trustor, its agents and servants therefrom; and the Collateral Agent, having and holding the same, may use, operate, manage and control the Mortgaged Property or any part thereof and conduct the business thereof, either personally or by its superintendents, managers, agents, servants, attorneys or receivers. Upon every such entry, Collateral Agent may, at the expense of the Mortgaged Property or the Trustor, from time to time, either by purchase, repair or construction, maintain and restore the Mortgaged Property or any part thereof, or remediate any environmental problems, and may insure and reinsure the same in such amounts and in such manner as may seem to the Collateral Agent to be advisable. Similarly, from time to time, Collateral Agent may, at the expense of the Mortgaged Property or the Trustor, make all necessary or proper repairs, renewals, replacements, alterations, additions, betterments and improvements to and on the Mortgaged Property or any part thereof as may seem advisable to Collateral Agent; (ii) Manage and operate the Mortgaged Property or any part thereof and carry on the business thereof and exercise all rights and powers of the Trustor with respect thereto, either in the name of the Trustor or otherwise, as may seem to the Collateral Agent to be advisable; (iii) Collect and receive all earnings, revenues, rents, issues, profits and income of the Mortgaged Property or any part thereof, including, without limitation, the Assigned Proceeds. After deducting the expenses of (i) operating the business of the Mortgaged Property, (ii) all such maintenance, repairs, remediation, renewals, replacements, alterations, additions, betterments and improvements referred to above in this clause (a), (iii) all taxes, assessments, insurance and prior or other proper charges upon the Mortgaged Property or any part thereof and (iv) reasonable compensation for the services of Collateral Agent and all attorneys, counsel, agents, clerks, servants and other employees engaged or employed by it, Collateral Agent shall apply the monies arising by reason of any of its actions or activities referred to above in this clause (a) in the order of priorities and amounts set forth in clause "Second" of Section 8.5(d) hereof. All such costs, expenses and liabilities incurred by the Collateral Agent in collecting such rents, income and other Assigned Proceeds, in taking such possession and control of the Mortgaged Property, and in exploring, developing, improving, managing, operating, maintaining, enforcing, protecting or preserving the Mortgaged Property, if not paid out of rents, income and other Assigned Proceeds as herein above provided, shall be payable upon demand, and shall be a part of the Secured Obligations owing by the Trustor. (b) In exercise of the rights and powers granted under this Section 8.6, the Collateral Agent or its agents may: (i) use against the Trustor or any other persons, such lawful means as they may see fit to enforce the collection of any such rents, income and other Assigned Proceeds, and to secure possession and control of the Mortgaged Property, or any part thereof; (ii) settle or compromise the liability of any Person for such rents, income or other Assigned Proceeds; (iii) institute and prosecute to final conclusion any appropriate actions, in the name of such Person or in the name of the Trustor; and (iv) settle, compromise, abandon or reinstitute any such actions deemed reasonably appropriate by them. In furtherance of the foregoing, and not by way of limitation, the Trustor binds itself to take whatever lawful steps the Collateral Agent may reasonably request for such purposes, including, without limitation, the institution and prosecution of appropriate actions. In connection with any action taken by the Collateral Agent pursuant to this Section 8.6 in good faith and in the absence of gross negligence and willful misconduct, neither the Collateral Agent nor any agent of the Collateral Agent shall be liable for any loss sustained by the Trustor resulting from any failure to collect or enforce collection of any rent, income or other Assigned Proceeds, or from any other act or omission of the Collateral Agent or any such agent. The Collateral Agent or any agent of the Collateral Agent shall not have and nothing in this Section 8.6 shall impose, any duty, obligation or responsibility upon the Collateral Agent or any agent of the Collateral Agent for the improvement, enforcement, operation, protection, preservation, control, care, management, repair or replacement of the Mortgaged Property, or for the discharge or performance of any of the obligations, duties, liabilities, terms and conditions of any lease, permit, license, contract, agreement, instrument, document, Subject Contract, right or interest constituting part of or related to the Mortgaged Property, unless the Collateral Agent or any agent of the Collateral Agent shall have affirmatively undertaken any such obligation, duty or responsibility pursuant to and in exercise of the rights granted to them pursuant to this Section 8.6; or any responsibility or liability for any damage or waste committed on or to the Mortgaged Property by the Collateral Agent or any agent of the Collateral Agent (other than for the gross negligence or for a willful act conducted in bad faith by the Collateral Agent or any agent of the Collateral Agent), or on behalf of the Collateral Agent or any agent of the Collateral Agent by any operators, contractors, bailees, tenants, licensees or invitees or by any other Person, or for any dangerous or defective condition of the Mortgaged Property, or for the improvement, operation, enforcement, protection, preservation, management, upkeep, repair, replacement or control of the Mortgaged Property resulting in any damage to or loss of the Mortgaged Property or in any injury to, death of or any damage or loss suffered by the Trustor. Section 8.7 Remedies Cumulative. Each of the rights and remedies set forth in this Deed of Trust, the Timber Notes, any Additional Timber Notes, the Line of Credit Agreement, the Indenture or any other instrument now or hereafter evidencing or securing the Secured Obligations or available at law or in equity shall be cumulative, and concurrent, and, except as prohibited by applicable law, may be pursued jointly or severally against the Trustor or any of the Mortgaged Property, and shall be nonexclusive. Except as prohibited by applicable law, the election to pursue any such right or remedy shall not be deemed a waiver, then or thereafter, to pursue any other such right or remedy that may, at the time of exercise, be available to the party exercising same. Each and every right, power and remedy, whether specifically granted in this Deed of Trust or otherwise existing, may be exercised from time to time and as often and in such order as may be deemed expedient by Collateral Agent or the Deed of Trust Trustee, as the case may be, and the exercise of any such right, power, or remedy will not be deemed a waiver of the right to exercise, at the same time or thereafter, any other right, power or remedy. Section 8.8 Non-Waiver. The acceptance of payment of any portion of the Secured Obligations after its due date or after the occurrence of an Event of Breach shall not waive (a) any right to require prompt payment when due of all other sums constituting Secured Obligations or to declare an Event of Breach for failure to pay the entire unpaid balance of the Secured Obligations or (b) any right of the Deed of Trust Trustee and the Collateral Agent to proceed with the exercise of the power of sale or the foreclosure sale pursuant to any such notice and acceleration for any unpaid balance of the Secured Obligations. Delay of the Trustee, the Collateral Agent, the Deed of Trust Trustee or any Secured Party in asserting or exercising any right with respect to an Event of Breach or in giving notice with respect to any event or condition that will constitute an Event of Breach after notice and lapse of any grace or cure period without cure shall not waive the right thereafter to assert or exercise any right with respect to such an Event of Breach at any time while it continues or to give notice of any such event or condition while such event or condition continues and to cause an Event of Breach to occur if such event or condition is not cured within any applicable grace or cure period after giving of such notice. Waiver of a right granted to the Trustee, the Collateral Agent, the Deed of Trust Trustee or any of the Secured Parties as to one transaction or occurrence shall not be deemed a waiver of such right as to any other or subsequent transaction or occurrence. Section 8.9 Power of Attorney. Without limiting any rights or powers granted by this Deed of Trust to the Collateral Agent or the Deed of Trust Trustee while no Trapping Event has occurred and is continuing, upon the occurrence and during the continuance of any Trapping Event or any Event of Breach, the Collateral Agent and the Deed of Trust Trustee are each hereby appointed the attorney-in-fact of the Trustor for the purpose of carrying out the provisions of this Article VIII and taking any action and executing any instruments that the Collateral Agent or the Deed of Trust Trustee may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Section 8.10 Voluntary Appearance; Receivers. After the happening, and during the continuance, of (x) any Trapping Event upon notice from the Collateral Agent to the Trustor, (y) any Event of Breach, and (z) immediately upon commencement of (i) any action, suit or other legal proceeding by the Collateral Agent to obtain judgment for any sums required to be paid pursuant to any of the Timber Notes, any Additional Timber Notes, the Line of Credit Agreement, this Deed of Trust or the Indenture, or for judicial foreclosure of this Deed of Trust, or (ii) any action, suit or other legal proceeding by the Deed of Trust Trustee or the Collateral Agent of any other nature in aid of the enforcement of this Deed of Trust, the Timber Notes, any Additional Timber Notes, the Line of Credit Agreement or the Indenture, the Trustor will (1) enter its voluntary appearance in such action, suit or proceeding, and (2) if required by Deed of Trust Trustee or Collateral Agent during the continuance of a Trapping Event or Event of Breach, consent to the appointment of one or more receivers of the Mortgaged Property and of the earnings, revenues, rents, issues, profits and Assigned Proceeds thereof. After the happening of (x) any Trapping Event upon notice from the Collateral Agent to the Trustor, (y) any Event of Breach, and (z) during its continuance, or upon the commencement or filing of an action or bill in equity to foreclose this Deed of Trust or to enforce the specific performance hereof or in aid thereof, or upon the commencement of any other non-judicial or judicial proceeding to enforce any right of the Deed of Trust Trustee or the Collateral Agent, the Deed of Trust Trustee or the Collateral Agent shall be entitled, as a matter of right, if either of them shall so elect during the continuance of a Trapping Event or an Event of Breach, without notice to any other party and without regard to the adequacy of the security of the Mortgaged Property, forthwith, either before or after declaring any or all of the Secured Obligations to be due and payable, to the appointment of such a receiver or receivers. Any receiver or receivers so appointed shall have such powers as the court making the appointment shall confer, and shall have the right to incur such obligations and to issue such certificates therefor as the court shall authorize. Section 8.11 Retention of Possession. Notwithstanding the appointment of any receiver, liquidator or trustee of the Trustor, or any of its property, or of the Mortgaged Property or any part thereof, the Collateral Agent shall be entitled to retain possession and control of all or any part of the Mortgaged Property. Section 8.12 Suits by Collateral Agent. All rights of action under this Deed of Trust, the Timber Notes, any Additional Timber Notes the Line of Credit Agreement or the Indenture may be enforced by the Collateral Agent, the Trustee or the Deed of Trust Trustee, as the case may be, without the possession of any instruments secured hereby and without the production thereof or this Deed of Trust, the Indenture, the Line of Credit Agreement, the Timber Notes, or any Additional Timber Notes at any trial or other proceeding relative thereto. Any such suit or proceeding instituted by Collateral Agent or the Deed of Trust Trustee shall be brought in the name of Collateral Agent or the Deed of Trust Trustee, as trustees (subject to the provisions of Article IX hereof), and any recovery of judgment shall be, subject to the rights of Collateral Agent and the Deed of Trust Trustee, for the equal and ratable benefit of the Secured Parties. Section 8.13 Waiver of Certain Rights. To the fullest extent not prohibited by applicable law, the Trustor hereby waives its right, at any time, to: (a) insist upon, plead, claim or take any benefit or advantage of any stay, extension or moratorium law, whenever enacted, now or at any time hereafter in force, which may affect the covenants and terms of performance of this Deed of Trust, (b) claim, take or insist upon any benefit or advantage of any law, now or hereafter in force, providing for valuation or appraisal of the Mortgaged Property, or any part thereof, prior to any sale or sales thereof which may be made pursuant to any provision herein contained, or pursuant to the decree, judgment or order of any court of competent jurisdiction, or (c) after any such sale or sales, claim or exercise any right, under any statute heretofore or hereafter enacted by the United States of America, the State of California or otherwise, to redeem the property and rights sold pursuant to such sale or sales or any part thereof. The Trustor hereby expressly waives all benefits and advantages of such laws, and covenants not to hinder, delay or impede the execution of any power herein granted or delegated to the Collateral Agent or the Deed of Trust Trustee, but will suffer and permit the execution of every power granted hereunder as though no such laws had been made or enacted. The Trustor for itself, and all who may claim through or under it, waives, to the extent that it lawfully may do so, any and all right to have the property comprising the Mortgaged Property marshalled upon any foreclosure of the lien hereof or to have the property covered by this Deed of Trust and any other deed of trust, deed to secure debt or mortgage, security agreement or other financing instrument securing the Secured Obligations marshalled upon any foreclosure of any said deeds of trust, deeds to secure debt, mortgages, security agreements or other financing instruments and agrees that any court having jurisdiction to foreclose such lien may order the Mortgaged Property sold as an entirety. Upon any Event of Breach, the Collateral Agent may proceed directly and at once, without notice, against the Trustor to collect or recover the full amount of the Secured Obligations without first proceeding against any other Person. The Trustor, for itself and all who may claim through or under it, waives, to the extent it lawfully may do so, the giving of any bond or surety by any receiver appointed pursuant to law or this Deed of Trust. THE TRUSTOR WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS DEED OF TRUST, THE TIMBER NOTES, ANY ADDITIONAL TIMBER NOTES, THE LINE OF CREDIT AGREEMENT AND THE INDENTURE. Section 8.14 Limitation on Indemnities. So long as any amounts are payable in respect of the Timber Notes, any Additional Timber Notes, or the Line of Credit Agreement, any indemnities payable to any Person other than a Noteholder, a Liquidity Provider, the Collateral Agent or the Deed of Trust Trustee under any provision of this Deed of Trust shall be payable solely from Excess Funds or from other assets or funds that are free of the lien of this Deed of Trust; provided that any such indemnification obligation shall survive until such obligation shall be discharged in full and shall accrue interest for the period from and including the date such obligation arises to but excluding the date such obligation is discharged in full at a rate per annum equal to the Collection Account Rate. ARTICLE IX--THE DEED OF TRUST TRUSTEE Section 9.1 Certain Rights of the Deed of Trust Trustee. In addition to any rights which the Deed of Trust Trustee may have at law, the Deed of Trust Trustee shall have the following rights: (a) the Deed of Trust Trustee may consult with counsel and the written advice of such counsel or any opinion of counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted hereunder in good faith and in accordance with such advice or opinion of counsel; and (b) any action taken by the Deed of Trust Trustee or its agents hereunder, including, without limitation, the sale of all or any part of the Mortgaged Property and the opening of any bank accounts as may be required to fulfill any duty hereunder, shall bind the Secured Parties and the signature of the Deed of Trust Trustee or its agent shall be sufficient and effective to perform any such action; and no third party shall be required to inquire as to the authority of the Deed of Trust Trustee to so act, or as to compliance with any of the terms and provisions of this Deed of Trust, both of which shall be conclusively evidenced by the action taken by the Deed of Trust Trustee or its agent. Notwithstanding any provision in this Section 9.1 or elsewhere in this Deed of Trust, neither the Deed of Trust Trustee, nor any of its employees, attorneys or agents, shall take any action under this Deed of Trust, except upon the direction or with the consent of the Collateral Agent. Section 9.2 Compensation and Indemnity. The Trustor covenants and agrees: (a) to pay to the Deed of Trust Trustee from time to time reasonable compensation for all services rendered by the Deed of Trust Trustee hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); and (b) subject to Section 8.14 hereof, to indemnify, defend, protect and hold the Deed of Trust Trustee harmless from and against, any loss, claim, damage, action, demand, order, cost, liability or expense, including, without limitation, reasonable attorneys' fees, disbursements and expenses, incurred without gross negligence or willful misconduct on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending against any claim or liability in connection with the exercise or performance of any of the powers or duties hereunder (except any liability incurred by the Deed of Trust Trustee with gross negligence or willful misconduct on its part). The Deed of Trust Trustee shall notify the Trustor promptly of any claim for which it may seek indemnity. The Trustor shall defend the claim and the Deed of Trust Trustee shall cooperate in the defense. The failure of the Deed of Trust Trustee to so notify the Trustor shall not relieve the Trustor of its obligations hereunder. The Trustor need not pay for any settlement made without its written consent. Section 9.3 Removal or Substitution of the Deed of Trust Trustee. To the extent permitted by law, but to such extent only, the Deed of Trust Trustee is appointed herein subject to the following terms, namely: (a) The Deed of Trust Trustee shall have the right to resign upon the later of (i) 30 days written notice to the Trustor and Collateral Agent, or (ii) the date of appointment of a substitute Deed of Trust Trustee. Collateral Agent, at the later of such 30 days period (if applicable), or the date of appointment of a substitute Deed of Trust Trustee, by an instrument in writing executed by it, may accept the resignation of or remove any Deed of Trust Trustee. Upon the written request of Collateral Agent, the Trustor shall join with Collateral Agent in the execution, delivery and performance of all instruments and agreements necessary or proper to effectuate such resignation or removal. A successor to the Deed of Trust Trustee so resigned or removed may be appointed in the manner provided in this Section 9.3. (b) Upon the resignation or removal of any Deed of Trust Trustee, Collateral Agent shall have power to appoint and, upon the written request of Collateral Agent, the Trustor shall, for such purpose, join with Collateral Agent in the execution, delivery and performance of all instruments and agreements necessary or proper to appoint, one or more Persons approved by Collateral Agent to act as successor Deed of Trust Trustee of all or any part of the Mortgaged Property with such powers as provided for in this Article IX and to vest in such Person or Persons in the capacity aforesaid, any property, title, right or power deemed necessary or desirable, subject to the other provisions of this Section. If the Trustor does not join in such appointment within 15 days after the receipt by it of a request so to do, or in case an Event of Breach has occurred and is continuing, without any request upon the Trustor, Collateral Agent acting alone shall make such appointment. Should any written instrument from the Trustor be required by any successor Deed of Trust Trustee so appointed for more fully confirming to such successor Deed of Trust Trustee such property, title, right or power, any and all such instruments shall, on request, be executed, acknowledged and delivered by the Trustor. (c) Any successor to the Deed of Trust Trustee (hereinafter, in this subsection (c) called the "Successor Deed of Trust Trustee") shall execute, acknowledge and deliver to its predecessor (hereinafter in this subsection (c), called the "Predecessor Deed of Trust Trustee"), Collateral Agent and the Trustor, an instrument accepting such appointment. Thereupon, the Successor Deed of Trust Trustee shall, without any further act, deed or conveyance, become vested with the estates, properties, rights, powers, duties and trusts of the Predecessor Deed of Trust Trustee in the trusts created by this Deed of Trust, with the same effect as if originally named as Deed of Trust Trustee. At the written request of the Trustor, the Collateral Agent or the Successor Deed of Trust Trustee, the Predecessor Deed of Trust Trustee shall execute and deliver an instrument transferring to the Successor Deed of Trust Trustee, upon the trusts herein expressed, the Mortgaged Property and shall duly assign, transfer, deliver and pay over to the Successor Deed of Trust Trustee, any property and money subject to the lien hereof held by it. If any written instrument from the Trustor or Collateral Agent is required by the Successor Deed of Trust Trustee for more fully and certainly vesting in and confirming to the Successor Deed of Trust Trustee such estates, properties, rights, powers and trusts, then, at the request of the Successor Deed of Trust Trustee, all such instruments shall be made, executed, acknowledged and delivered by the Trustor or the Collateral Agent to the Successor Deed of Trust Trustee. ARTICLE X--MISCELLANEOUS Section 10.1 Severability. In the event any item, term, or provision contained in this Deed of Trust is in conflict or may be held hereafter to be in conflict with any applicable law, this Deed of Trust shall be affected only as to its application to such item, term or provision and shall, to the fullest extent permitted by applicable law, in all respects remain in full force and effect. Section 10.2 Captions. All Article and Section titles or captions contained in this Deed of Trust or in any appendix, schedule or exhibit attached hereto are for convenience only and shall not be deemed a part of this Deed of Trust and shall not modify, restrict or otherwise affect the meaning or interpretation of this Deed of Trust. Section 10.3 Service of Notices and Demands. Except as otherwise specifically required by applicable law, any notice, demand, request, authorization, direction, specification, consent, waiver or other document authorized or permitted by this Deed of Trust to be served on or given to the Trustor shall be sufficiently served or given for all purposes if it shall be sent by first class mail to the Trustor addressed to it at the address for the Trustor set forth in the preamble of this Deed of Trust, by telecopy or other means of electronic communication (confirmed in writing by mail simultaneously dispatched) (if by telecopy, to Fax No. (707) 764-5001, Attention: Scotia Pacific Company LLC), or at such other address (or telecopy or other means of electronic communication) as may have been furnished in writing to the other parties by the Trustor. Any notice, demand, request, authorization, direction, consent, waiver or other document authorized by this Deed of Trust to be served on or given to the Collateral Agent shall be sufficiently served or given for all purposes, if it shall be sent by first class mail to the Collateral Agent addressed to it at the address for the Collateral Agent set forth in the preamble of this Deed of Trust, by telecopy (confirmed in writing by mail simultaneously dispatched) to Fax No. (617) 664-5371 or at such other address (or telex, telecopy, or other electronic communication number, as the case may be) as may have been furnished in writing to the other parties by the Collateral Agent. Any notice, demand, request, authorization, direction, consent, waiver or other document authorized by this Deed of Trust to be served on or given to the Deed of Trust Trustee shall be sufficiently served or given for all purposes, if it shall be sent by first class mail to the Deed of Trust Trustee addressed to it at the address for the Deed of Trust Trustee set forth in the preamble of this Deed of Trust, by telecopy (confirmed in writing by mail simultaneously dispatched) to Fax No. (714) 261-9327, or at such other address (or telex, telecopy, or other electronic communication number, as the case may be) as may have been furnished in writing to the other parties by the Deed of Trust Trustee. Any notice or other communication mailed to a Noteholder shall be mailed to the Noteholder at the Noteholder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Noteholder or any defect in it shall not affect its sufficiency with respect to other Noteholders. Any notice or other communication mailed to a Liquidity Provider shall be mailed to the Liquidity Provider at the Liquidity Provider's address as it appears in the Line of Credit Agreement and shall be sufficiently given if so mailed within the time prescribed. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. Section 10.4 Governing Law; Submission to Jurisdiction; Waiver of Objection to Venue. (a) This Deed of Trust, including, without limitation, the enforcement hereof and the validity and priority of the lien created hereby, shall be governed by the internal laws of the State of California, without regard to its conflict of laws principles. (b) The Trustor hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York state court sitting in New York City for the purposes of all legal proceedings arising out of or relating to this Deed of Trust or the transactions contemplated hereby. The Trustor hereby irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Section 10.5 Effect of Other Security, Releases. The Trustor agrees that no other security, now existing or hereafter taken, for the Secured Obligations shall be impaired or affected in any manner by the execution hereof; no security subsequently taken by any holder of the Secured Obligations shall impair or affect in any manner the security given by this Deed of Trust; all security for the payment of the Secured Obligations shall be taken, considered and held as cumulative; and the taking of additional security shall at no time release or impair any security by endorsement or otherwise previously given. The Trustor further agrees that any part of the security herein described may be released without in any way altering, varying, or diminishing the force, effect, or lien of this Deed of Trust, or of any renewal or extension of said lien, and that this Deed of Trust shall continue as a first lien, assignment and security interest on all the Mortgaged Property not expressly released pursuant to the terms hereof until all Secured Obligations are fully discharged and paid. Section 10.6 No Election of Remedies. The filing of a suit to foreclose any lien, assignment, or security interest under this Deed of Trust either on any matured portions of the Secured Obligations or for all Secured Obligations shall never be considered an election so as to preclude foreclosure under any power of sale herein contained after dismissal of the suit. Section 10.7 Binding Effect; Collateral Agent. The terms, provisions, covenants and conditions hereof shall be binding upon the Trustor and the Trustor's successors and assigns and shall inure to the benefit of the Collateral Agent and its permitted successors and assigns pursuant to the Indenture. Neither the Trustor nor the Collateral Agent shall assign any of its respective rights or obligations hereunder except as expressly permitted hereby or by the Indenture. The Collateral Agent and the Trustee shall at all times be one and the same Person and shall comply with and be bound by all terms of and provisions of the Indenture applicable thereto, including, without limitation, Article 9 of the Indenture. Section 10.8 Amendments. (a) The Collateral Agent and the Trustor may amend, supplement or otherwise modify this Deed of Trust without notice to or consent of any Noteholder or Liquidity Provider: (1) to cure any ambiguity, omission, defect or internal inconsistency; (2) to add to the covenants of the Trustor for the benefit of the Collateral Agent or the Secured Parties or to surrender any right or power herein conferred upon the Trustor; or (3) to make any change that does not adversely affect the rights of any Noteholders or any Liquidity Provider. After an amendment, supplement or other modification under this Section becomes effective, the Trustor shall mail to Noteholders and the Liquidity Providers a notice briefly describing such amendment, supplement, or other modification. The failure to give such notice to all Noteholders and the Liquidity Providers, or any defect therein, shall not impair or affect the validity of an amendment, supplement or other modification under this Section 10.8. (b) The Collateral Agent and the Trustor may amend, supplement or otherwise modify any provision of this Deed of Trust without notice to any Noteholder or any Liquidity Provider, but with (A) written consent of the Majority Secured Parties and Rating Agency Confirmation, or (B) written consent of the Supermajority Holders (after prior notice of the Rating Agency Evaluation) and Rating Agency Evaluation. Subject to Sections 7.13 and 7.17 of the Indenture, the Majority Secured Parties may waive compliance with any provisions of this Deed of Trust without notice to any Noteholder. However, without the consent of each Noteholder affected, an amendment, supplement, waiver or other modification may not: (1) reduce the amount of Timber Notes whose Noteholders must consent to an amendment, supplement, waiver or other modification; or (2) make any change in this Section 10.8. It shall not be necessary for the consent of the Noteholders or Liquidity Providers under this Section 10.8 to approve the particular form of any proposed amendment, supplement, waiver or other modification, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement, waiver or other modification under this Section 10.8 becomes effective, the Trustor shall mail to Noteholders and the Liquidity Providers a notice briefly describing such amendment, supplement, waiver or other modification. The failure to give such notice to all Noteholders and the Liquidity Providers, or any defect therein, shall not impair or affect the validity of an amendment, supplement, waiver or other modification under this Section 10.8. Any amendment, supplement, waiver or other modification shall be binding upon all subsequent transferees of the Timber Notes and any replacement Liquidity Provider. (c) A consent to an amendment, supplement or other modification or a waiver by a Noteholder shall bind the Noteholder and every subsequent holder of that Timber Note or portion of the Timber Note that evidences the same debt as the consenting Noteholder's Timber Note, even if notation of the consent or waiver is not made on the Timber Note. Consent to any amendment, supplement or other modification or a waiver by a Noteholder shall be irrevocable once given. After an amendment, supplement, waiver or other modification becomes effective, it shall bind every Noteholder, unless it makes a change described in any of clauses (l) or (2) of Section 10.8. In that case, the amendment, supplement, waiver or other modification shall bind each Noteholder who has consented to it and every subsequent Noteholder of a Timber Note or a portion of a Timber Note that evidences the same debt as the consenting Noteholder's Timber Note. (d) A consent to an amendment, supplement or other modification or a waiver by a Liquidity Provider shall bind the Liquidity Provider and every subsequent provider of a Commitment in respect of the Line of Credit Agreement or successor to that portion of the Line of Credit Agreement that evidences the same debt as held by the consenting Liquidity Provider, even if notation of the consent or waiver is not made on the relevant instrument. Consent to any amendment, supplement or other modification or a waiver by a Liquidity Provider shall be irrevocable once given. After an amendment, supplement, waiver or other modification becomes effective, it shall bind every Liquidity Provider. The Trustor shall (or, if Definitive Notes have not been issued, may, but shall not be obligated to) fix a record date for the purpose of determining the Noteholders entitled to give their consent or take any action described above. If a record date is fixed, then notwithstanding the immediately preceding paragraph, those persons who were Noteholders at such record date (or their duly designated proxies), and only those persons, shall be entitled to give such consent or to take any such action, whether or not such persons continue to be Noteholders after such record date. (e) The Collateral Agent shall sign any amendment, supplement or other modification authorized pursuant to this Section 10.8 if the amendment does not adversely affect the rights, duties, liabilities or immunities of the Collateral Agent. If it does, the Collateral Agent may, but need not sign it. In signing such amendment the Collateral Agent shall be entitled to receive, and, subject to Section 9.1 of the Indenture, shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that such amendment is authorized or permitted by this Deed of Trust. Section 10.9 General Provisions as to Certificates and Opinions. (a) As evidence of compliance with any condition precedent or covenant provided for in this Deed of Trust that relates to the release of property subject to the lien of this Deed of Trust, to the addition of property to be subject to the lien of this Deed of Trust, to the satisfaction of the Secured Obligations and reconveyance of this Deed of Trust or to any other action to be taken by the Collateral Agent upon application, request or order of the Trustor, the Trustor will furnish to the Collateral Agent: (i) an Officer's Certificate of the Trustor stating that, in the opinion of the signers, all such conditions precedent and covenants (as the case may be) relating to the proposed action have been complied with (or will have been complied with upon the execution and delivery of designated instruments); and (ii) an Opinion of Counsel stating that in such counsel's opinion, as to legal matters, all such conditions precedent and covenants (as the case may be) have been complied with (or will have been complied with upon the execution and delivery of designated instruments); except that in the case of any application or request as to which the furnishing of such documents is specifically required by any provisions of this Deed of Trust or the Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. (b) Each Certificate or Opinion of Counsel with respect to compliance with a condition or covenant provided for in this Deed of Trust shall include: (i) a statement that the Person making such Certificate or rendering such Opinion of Counsel has read such condition or covenant; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such Certificate or Opinion of Counsel are based; (iii) a statement that in the opinion of such Person, such Person has made such examination or investigation as is necessary to enable such Person to express an informed opinion whether such condition or covenant has been complied with; and (iv) a statement whether, in the opinion of such Person such condition or covenant has been complied with. (c) Unless otherwise expressly provided herein, any application, request, order, certified resolution, Certificate, notice, statement or other instrument of the Trustor or of any other Person required or permitted to be filed with the Collateral Agent or to be made or given under this Deed of Trust shall be dated and shall state the provision or provisions of this Deed of Trust pursuant to which it is filed, made or given and shall be signed by a Responsible Officer of the Person taking such action. (d) Any counsel giving an Opinion of Counsel that an instrument conforms to the requirements of this Deed of Trust, or with respect to any similar matter, may state that such counsel is not passing upon the truth, accuracy or good faith of the facts or opinions stated in any application request, order, certified resolution, Officer's Certificate, appraiser's Certificate, notice, statement or other instrument required to be delivered to the Collateral Agent signed by any person other than such counsel. (e) Any Officer's Certificate of the Trustor or Certificate of an appraiser, forester or other expert may be based, insofar as the matters therein are of a legal nature, upon an Opinion of Counsel, unless such officer, appraiser, forester or other expert knows that such Opinion of Counsel is, or any of the facts upon which such Opinion of Counsel is based is, erroneous. (f) Any Opinion of Counsel may be based, insofar as it relates to factual matters or information in possession of the Trustor or the Services Provider, upon an Officer's Certificate or representations of a Responsible Officer of the Trustor or the Services Provider, unless such counsel knows that such Officers' Certificate or representations are erroneous. (g) Any Opinion of Counsel may be based, insofar as it relates to appraisal matters, upon an appraiser's Certificate, unless such counsel knows that the appraiser's Certificate is erroneous. (h) Any Opinion of Counsel may be based on the written opinion of other counsel reasonably satisfactory to the Collateral Agent, in which event such Opinion of Counsel shall be accompanied by a copy of such other counsel's opinion addressed to the Collateral Agent. Section 10.10 Certificates and Opinions as Conditions Precedent. Whenever it is provided in this Deed of Trust that the Trustor shall deliver any application, certified resolution, Certificate, Opinion of Counsel or other instrument, the truth and accuracy at the time of the granting of such application or at the effective date of such certified resolution, Certificate, Opinion of Counsel or other instrument, as the case may be, of the material facts and opinions stated therein shall, except as otherwise provided herein, be conditions precedent to the effectiveness thereof, and whenever the delivery of any such document is a condition precedent to the taking of any action by the Collateral Agent hereunder, the truth and accuracy of the material facts and opinions stated in any such document shall, except as otherwise provided herein, be conditions precedent to the right of the Trustor to have such action taken; provided that subject to Sections 9.1 and 9.2 of the Indenture (a) the Collateral Agent shall be fully protected in relying thereon and (b) if any opinion expressed in any appraiser's Certificate or Opinion of Counsel shall prove to have been untrue or inaccurate, the effectiveness of any action taken or omitted to be taken in reliance thereon shall not be affected so long as such opinion was expressed in good faith. Section 10.11 Recordation. Any supplemental deed of trust or other instrument delivered to the Collateral Agent pursuant to this Deed of Trust to effect the release from, or subjection to, the lien of this Deed of Trust of any property shall be executed in a form sufficient for recordation or filing in the real estate records and other appropriate records of each jurisdiction in which the filing of such supplemental deed of trust or instrument is to be made. Section 10.12 Partial Releases. No release from the lien or encumbrance of this Deed of Trust of any part of the Mortgaged Property by Collateral Agent or Deed of Trust Trustee shall in any way alter, vary or diminish the force or effect of this Deed of Trust on the balance of the Mortgaged Property or the priority of the lien of this Deed of Trust on the balance of the Mortgaged Property. Section 10.13 Counterpart Execution. This Deed of Trust may be executed in multiple original counterparts. Each such counterpart shall be deemed an original for all purposes, and all such counterparts together shall evidence and constitute one and the same instrument. Section 10.14 Limitations on Bankruptcy Petition Against the Trustor. The Collateral Agent and the Deed of Trust Trustee hereby covenant and agree that, prior to the date which is one year and one day after the last to occur of (a) payment in full of all outstanding Timber Notes and (b) payment in full of all amounts due under the Line of Credit Agreement, it will not institute against, or join any other Persons in instituting against, the Trustor any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding or other similar proceeding under any Bankruptcy Law, unless the consent of the Majority Secured Parties to the taking of such action is obtained. Section 10.15 Attorneys' Fees. If the Secured Obligations are not paid when due or if any Event of Breach occurs, the Trustor shall pay all costs of enforcement and collection, including but not limited to, reasonable attorneys' fees, costs and disbursements, whether or not such enforcement and collection includes the filing of a lawsuit. Section 10.16 Entire Agreement. This Deed of Trust, together with the other Operative Documents, constitutes the entire agreement of the parties with respect to the subject matter hereof. Section 10.17 When Timber Notes Disregarded. The provisions of Section 12.6 of the Indenture and the definition of the term "outstanding" shall govern for purposes of determining whether Holders of the required principal amount of Timber Notes have concurred in any request, demand, authorization, direction, notice, consent or waiver under or in connection with this Deed of Trust. Section 10.18 No Recourse Against Others. No director, officer, employee, stockholder, or member, in their capacity as such of the Trustor or the Collateral Agent shall have any personal liability for any obligations of the Trustor or the Collateral Agent under this Deed of Trust or for any claim based on, in respect of or by reason of such obligations or their creation; provided, however, that this Section 10.18 is not intended to limit in any way Pacific Lumber's obligations under any Operative Document. By accepting a Timber Note, each Noteholder shall waive and release all such liability. By executing the Line of Credit Agreement, the Liquidity Providers shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Timber Notes, any Additional Timber Notes and the Line of Credit. Section 10.19 Benefits of Deed of Trust. Nothing in this Deed of Trust, the Timber Notes, any Additional Timber Notes or the Line of Credit Agreement express or implied, shall give to any person, other than the parties hereto and their successors hereunder, the Noteholders, the Liquidity Providers and any Person entitled to indemnification hereunder, any benefit or any legal or equitable right, remedy or claim under this Deed of Trust. Section 10.20 Indenture. Notwithstanding anything to the contrary contained herein, with respect to any terms or provisions of the Indenture which are or may be applicable to the Mortgaged Property, to the extent such terms or provisions are inconsistent with or conflict with the terms and provisions of this Deed of Trust, the terms and conditions of the Indenture shall control. IN WITNESS WHEREOF, the Trustor has caused this Deed of Trust to be duly executed on its behalf by its authorized officer, effective on the date first above written, on the date set forth in the applicable acknowledgment hereto. SCOTIA PACIFIC COMPANY LLC, a Delaware limited liability company as Trustor By: /S/ GARY L. CLARK Gary L. Clark Vice President, Finance & Administration STATE OF CALIFORNIA ) ) COUNTY OF HUMBOLDT ) On July 17, 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) SCHEDULE A TO DEED OF TRUST DEFINITIONS An "Acceleration Event" will be deemed to exist at any time when the Timber Notes have been accelerated and such acceleration has not been rescinded. "Accounts" has the meaning given to such term in Section 5.1(a) of the Indenture. "Additional Liquidity Provider Fees" means any commitment fee, agent's fee or similar fee payable to the Liquidity Providers or to any agent for the Liquidity Providers under the Line of Credit Agreement to the extent, but only to the extent, that the amount or rate of such fee is in excess of the amount that would be payable therefor under the terms of the Bank of America Credit Agreement as in effect on the Closing Date. "Additional Timber Notes" means notes issued pursuant to a Supplemental Indenture pursuant to Section 2.14 of the Indenture. "Additional Timber Properties" means (a) any timber rights or timberlands located in the State of California which are purchased by the Trustor subsequent to the Closing Date and subjected to the Lien of the Deed of Trust in connection with the release of funds from the Prefunding Account pursuant to Section 5.10 of the Indenture and (b) the Elk River Timberlands, if and when the Elk River Timberlands become subject to this Deed of Trust. "Advance" means any Interest Advance and any Termination Advance, which may be a borrowing, draw or other cash receipt obtained by the Trustor or the Collateral Agent or behalf of the Trustor from the Liquidity Providers under the Line of Credit Agreement. The term "borrow" when used with respect to any Advance means to obtain such Advance under the Line of Credit Agreement and the term "borrowing" has a like meaning. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition of "Affiliate," "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreement Not to Cut" means any agreement by the Trustor to limit or refrain from cutting, harvesting, severing or selling any Company Timber in exchange for a monetary payment to the Trustor. "Alternate Property" means timberlands (a) containing at least the Mbfe of timber as the Headwaters Acquisition Property, (b) having a fair value at least equal to the Headwaters Acquisition Property, (c) having expected operating costs not materially greater than the Headwaters Acquisition Property, and (d) having sufficient access or access rights to enable harvesting operations to be conducted thereon, all of which matters shall be reflected in an Officer's Certificate. "Assigned Proceeds Obligor" means any Person (a) owing any Assigned Proceeds, (b) having in its possession any Assigned Proceeds, or (c) obligated to pay, perform or deliver any Assigned Proceeds. "Bank of America" means Bank of America, National Trust and Savings Association. "Bank of America Credit Agreement" means the Credit Agreement, dated July 20, 1998, among the Trustor, Bank of America National Trust and Savings Association, as agent, and the other financial institutions parties thereto, as such credit agreement may from time to time be extended, amended, modified, supplemented or amended and restated in accordance with the provisions of Section 11.3 of the Indenture. "Bankruptcy Law" means any Federal or State bankruptcy, insolvency, reorganization or similar law for the relief of debtors from time to time in effect. "Bankrupt or Insolvent" or "Bankruptcy or Insolvency" shall have occurred or exist with respect to any Person if: (a) such Person shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property under any Bankruptcy Law, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Federal Bankruptcy Code, (iv) file a petition seeking to take advantage of any other Bankruptcy Law, or (v) acquiesce in writing to any petition filed against it in an involuntary case under the Federal Bankruptcy Code; (b) a proceeding or case shall be commenced, without the application or consent of such Person, in any court of competent jurisdiction, seeking under any Bankruptcy Law (i) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of such Person, or of all or any substantial part of its assets or (iii) similar relief in respect of such Person under any Bankruptcy Law, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing (other than an order referred to in clause (c) below) shall be entered and continue unstayed and in effect, for a period of 60 or more consecutive days; or (c) an order for relief against such Person shall be entered in an involuntary case under the Federal Bankruptcy Code. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in the Borough of Manhattan, the City of New York, New York, in San Francisco, California or in the Commonwealth of Massachusetts, are authorized or required by law or executive order to close. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act, as the same may be in effect from time to time, any successor statute, and the rules and regulations thereunder. "Certificate" means a certificate conforming to the requirements of Section 12.5 of the Indenture and Section 10.9 of this Deed of Trust. "Class" means any of (i) the Class A-1 Timber Notes, (ii) the Class A-2 Timber Notes, (iii) the Class A-3 Timber Notes or (iv) any class of Additional Timber Notes. "Class A-1 Timber Notes" means the Class of Timber Notes issued pursuant to the Indenture and designated as the Scotia Pacific Company LLC 6.55% Class A-1 Timber Collateralized Notes. "Class A-2 Timber Notes" means the Class of Timber Notes issued pursuant to the Indenture and designated as the Scotia Pacific Company LLC 7.11% Class A-2 Timber Collateralized Notes. "Class A-3 Timber Notes" means the Class of Timber Notes issued pursuant to the Indenture and designated as the Scotia Pacific Company LLC 7.71% Class A-3 Timber Collateralized Notes. "Closing Date" means the date on which the Timber Notes are issued pursuant to the Indenture. "Code" means the Internal Revenue Code of 1986, as amended. "Collateral Agent" means State Street Bank and Trust Company, in its capacity as collateral agent for the Holders of the Timber Notes and the Liquidity Providers pursuant to this Deed of Trust and the Indenture, together with its successors in such capacity. "Collateral Agent Expenses" means any expenses or damages of or compensation owing to the Collateral Agent (including, without limitation, the reasonable fees and disbursements of counsel to the Collateral Agent) incurred with respect to the enforcement or administration of this Deed of Trust or owing to the Collateral Agent as part of the Secured Obligations. "Collateral Mortgaged Property" means and includes all Mortgaged Property (including both those now and hereafter existing), to which Article 9 of the Uniform Commercial Code may now or hereafter apply, including, but not limited to, personal property (tangible and intangible), fixtures, goods, documents, instruments, general intangibles, chattel paper, accounts, deposit accounts, products and proceeds, and further including, without limitation, Harvested Timber, Company Timber to be cut pursuant to a Purchase Agreement, the Assigned Proceeds, the Data Processing Equipment, the Data Processing Information, the Subject Contracts and the Accounts. "Collection Account" means the Collection Account established pursuant to Section 5.1(a) of the Indenture. "Collection Account Disbursement" has the meaning given to such term in Section 5.3(b) of the Indenture. "Collection Account Disbursement Funds" has the meaning given to such term in Section 5.3(b) of the Indenture. "Collection Account Rate" means, for any date as a rate per annum equal to the rate per annum (determined as of a date not more than three Business Days prior to such date) for the offering to leading banks in the London interbank market of Dollar deposits having a term of 30 days and in an amount comparable to the amount to which such rate is applied. "Commitment" means, at any time, the maximum principal or face amount of the Advances, whether or not outstanding, that a Liquidity Provider is required to make under the Line of Credit Agreement at such time, as such amount may be varied or adjusted from time to time. "Commitments" means, at any time, the aggregate amount of the Commitments of all Liquidity Providers at such time. "Company Owned Timberlands" means: (a) the parcels of land described in (i) Exhibit A to this Deed of Trust and (ii) any amendment to this Deed of Trust with respect to the addition of Substitute Timber Property or Additional Timber Properties, together with the entire right, title and interest of the Trustor in and to such parcels of land, subject to Permitted Encumbrances, together with (a) all right, title and interest of the Trustor in and to all buildings, structures and other improvements now standing, or at any time hereafter constructed or placed, upon such land, including, without limitation, all right in and to all equipment and fixtures of every kind and nature on such land or in any such buildings, structures or other improvements (such buildings, structures, other improvements, equipment and fixtures being herein collectively called the "Improvements"), (b) all right, title and interest of the Trustor in and to all and singular the tenements, hereditaments, easements, rights of way, rights, privileges and appurtenances in and to such land belonging or in any way appertaining thereto, including without limitation, all right, title and interest of the Trustor in, to and under any streets, ways, alleys, vaults, gores or strips of land adjoining such land and (c) all claims or demands of the Trustor, in law or in equity, in possession or expectancy of, in and to such land together with all rents, income, revenues, issues and profits from and in respect of the property described above in this paragraph (a) and the present and continuing right to make claim for, collect, receive and receipt for the same as hereinafter provided. It is the intention of the Trustor that, so far as may be permitted by law, all of the foregoing, whether now owned or hereafter acquired by the Trustor, affixed, attached or annexed to such land shall be and remain or become and constitute a part of the Mortgaged Property and the security covered by and subject to the Lien of the Deed of Trust; (b) all right, title and interest of the Trustor in and to (i) all extensions, improvements, betterments, renewals, substitutes and replacements of and on the property described in the foregoing clause (a) and (ii) all additions and appurtenances thereto not presently leased to or owned by the Trustor and hereafter leased to, acquired by or released to the Trustor or, constructed, assembled or placed upon the Company Owned Timberlands immediately upon such leasing, acquisition, release, construction, assembling or placement, and without any further grant or other act by the Trustor (including, without limitation, all lands added by lot line adjustment to any existing legal parcel constituting part of the Company Owned Timberlands); and (c) all the estate, right, title and interest of the Trustor, in and to all contract rights, actions and rights in action, relating to the property described in clause (a), including, without limitation, all rights to insurance proceeds and unearned premiums arising from or relating to damage to such property. Notwithstanding the foregoing, Company Owned Timberlands shall not include any Pacific Lumber Timber. "Company Timber" means (i) all trees and timber, including, without limitation, standing timber and crops, now located on or hereafter planted or growing in the soil of any Company Timber Property (other than the Pacific Lumber Timber Rights Property), or any part or parcel thereof, and all additions, substitutions and replacements thereof (including timber to be cut pursuant to a Purchase Agreement) and (ii) any and all Harvested Timber. "Company Timber Property" means the Company Owned Timberlands and the Company Timber Rights Property. "Company Timber Rights" means (i) the timber rights of the Trustor in respect of the Company Timber Rights Property referred to in clause (i) of the definition of such term, including, without limitation, the ownership of, and (subject to compliance with applicable law) the right in perpetuity (or in the case of Company Timber Rights in respect of not more than 200 acres of timberlands, the right expiring not earlier than November 1, 2027) to harvest, all trees and timber, including, without limitation, standing timber and crops, now located on or hereafter planted or growing in the soil of such Company Timber Rights Property or any part or parcel thereof and (ii) any timber rights which are (A) purchased by the Trustor subsequent to the Closing Date with funds from the Prefunding Account, (B) in perpetuity or expire no earlier than December 31, 2048 and (C) described in an amendment to this Deed of Trust. "Company Timber Rights Property" means (i) those portions of the timberlands owned by Pacific Lumber, Salmon Creek or an unrelated third party on the date hereof which are subject to the Company Timber Rights and are described with particularity in the Pacific Lumber Timber Deeds and, as to a portion of such lands, in certain maps referenced in the Pacific Lumber Timber Deeds and held by an escrow agent pursuant to an Escrow Agreement by and among the Trustor, Pacific Lumber, Salmon Creek and such escrow agent, dated as of the Closing Date, and (ii) any timberlands that are subject to timber rights referred to in clause (ii) of the definition of Company Timber Rights. "Conveyance Documents" means (i) the Grant Deed dated March 18, 1993 from Pacific Lumber, as grantor, to Scotia Pacific Holding Company, a Delaware corporation ("Scotia Pacific"), as grantee, conveying certain of the Company Owned Timberlands to Scotia Pacific and reserving in Pacific Lumber certain timber rights (the "First Pacific Lumber Grant Deed"), (ii) the Grant Deed dated on or prior to the Closing Date from Pacific Lumber, as grantor, to the Trustor, as grantee, conveying certain Company Owned Timberlands to the Trustor (the "Second Pacific Lumber Grant Deed"), (iii) the Quitclaim Deed dated on or prior to the Closing Date from Pacific Lumber to the Trustor conveying to the Trustor all of Pacific Lumber's interest in certain of the timber rights previously reserved by Pacific Lumber in the First Pacific Lumber Grant Deed (the "Pacific Lumber Quitclaim Deed"), (iv) three Grant Deeds, each dated on or prior to the Closing Date, from Pacific Lumber, as grantor, to the Trustor, as grantee, conveying the Company Timber Rights to the Trustor (the "Pacific Lumber Timber Deeds"), (v) the Bill of Sale and General Assignment dated as of March 23, 1993 transferring from Pacific Lumber certain of the Data Processing Information and other personal property to Scotia Pacific (the "Bill of Sale"), (vi) the Bill of Sale and General Assignment dated as of the Closing Date transferring certain Data Processing Information and other personal property with respect to certain Company Owned Timberlands and the Company Timber Rights to the Trustor (the "New Bill of Sale"), (vii) the New Environmental Indemnification Agreement, (viii) the New Reciprocal Rights Agreement, and (ix) the Transfer Agreement dated as of the Closing Date (the "New Transfer Agreement") among the Trustor, Pacific Lumber and Salmon Creek. "Counsel" means legal counsel reasonably satisfactory to the Trustee. Such legal counsel may be an employee, officer, manager or director of the Trustor, Pacific Lumber or an Affiliate of either of them, unless otherwise indicated. "Covenant defeasance" shall have the meaning set forth in Section 8.3 of the Indenture. "Data Processing Equipment" means all hardware, software, or other data processing systems or equipment, whether now owned or hereafter acquired by the Trustor, and wherever located. "Data Processing Information" means all information, programs, know-how, methods or methodology relating to the management of the Company Timber Property, the harvesting, severing or cutting of Company Timber, and the preparation of applications for Timber Harvesting Plans, including, without limitation, all such information, programs, know-how, methods or methodology relating to the GIS. "Definitive Note" means a Timber Note issued in certified form. "De Minimis Receipts" means payments received by the Trustor in an aggregate amount not greater than $50,000 at any one time that would otherwise be required to be deposited in the Collection Account and which the Trustor has deposited into another bank account. "Default" means any occurrence or condition that, with notice or the lapse of time, or both, would become an Event of Default. "Default Interest" means the interest accruing at the Default Rate on any amount of Regular Interest on any Class of Timber Notes that was not paid when such amount became due and payable. "Default Rate" means the applicable Note Rate plus 2.00% per annum. "Disposal Site" means any site, facility or location to which any Hazardous Materials from or attributable to the Company Owned Timberlands have been transported for treatment, disposal, storage or deposit. "Dollars" and "$" means lawful money of the United States of America. "Downgrade Advance" has the meaning set forth in Section 11.2(c) of the Indenture. "Elk River Timberlands" means, in the event the Headwaters Acquisition Property is acquired by an Affiliate of the Trustor upon the consummation of the Headwaters Agreement (as such term is defined in the Offering Memorandum), (a) such Headwaters Acquisition property, or (b) the Alternate Property, either (a) or (b) of which will be transferred to the Trustor within 180 days after consummation of the Headwaters Agreement and made subject to the Lien of the Deed of Trust promptly after the acquisition thereof by the Trustor. "Environmental Laws" means all federal, state or local statutes, laws, ordinances, regulations, rules, rulings, orders, restrictions, requirements, writs, injunctions, decrees or other official acts relating to the environment or hazardous or similar substances (including, without limitation, CERCLA and similar state laws), whether now or hereafter enacted or imposed by any Governmental Authority. "Escrow Holder" means U.S. Bank of California, a California State Chartered bank. "Excess Funds" has the meaning given to such term in Section 5.3(c)(x) of the Indenture. "General Laws" means all applicable statutes, laws, ordinances, regulations, rules, rulings, orders, restrictions, requirements, writs, injunctions, decrees or other official acts of any Governmental Authority, now and hereafter existing at any time or times, other than Environmental Laws and Tax Laws. "Financial Asset" means "financial asset" as defined in Section 8-102 (a)(9) of the Uniform Commercial Code. "GIS" means the geographical information system of the Trustor, including any Data Processing Equipment and/or Data Processing Information which is a part of such system, and any updates, upgrades or modifications thereto developed by Pacific Lumber or the Trustor. "Governmental Authority" means (a) the United States of America, (b) any State, commonwealth, county, parish, municipality, territory, possession or other governmental subdivision within the United States of America or under the jurisdiction of the United States of America and (c) any Tribunal. "Harvested Timber" means all trees, timber and crops which have been severed, cut or harvested from the Company Timber Property (other than the Pacific Lumber Timber Rights Property), or any parcel thereof, and with respect to which title has not yet passed to a third party purchaser in compliance with the terms of the Indenture. "Hazardous Materials" means (a) any "hazardous waste," "hazardous substance," "hazardous material," "hazardous constituent," "toxic chemical," "toxic substance," "acutely toxic substance," "pollutant" or "contaminant," or any other formulation intended to define, list or classify substances by reason of hazardous, dangerous, toxic or other deleterious properties, such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity or "EP toxicity," as defined in any Environmental Law (including, without limitation, asbestos, polychlorinated biphenyls, oil, petroleum, petroleum-related or petroleum-derived products, natural gas, natural gas liquids, liquified natural gas or synthetic natural gas), or any similar substances, (b) any substance the presence of which on any property included in the Company Owned Timberlands is prohibited by any Environmental Law, (c) any underground storage tanks, (d) any flammable substances or explosives or any radioactive materials and (e) any other substances subject to any rules or regulations (including, without limitation, any notice requirements or special handling requirements) of any Governmental Authority under any Environmental Law. "Hazardous Materials Contamination" means the contamination (whether now existing or hereafter occurring) of any improvements, facilities, soil, groundwater, air or other elements on or of any property included in the Company Owned Timberlands or the contamination of any improvements, facilities, soil, groundwater, air or other elements on or of any lands as a result of Hazardous Materials at any time (before or after date of this Deed of Trust) emanating from any Company Owned Timberlands. "Headwaters Acquisition Property" means, of the approximately 7,700 acres of timberlands expected to be acquired by an Affiliate of the Trustor upon the consummation of the Headwaters Agreement, that portion of such timberlands, if any, actually so acquired by an Affiliate of the Trustor upon the consummation of the Headwaters Agreement. "Holder" means the Person in whose name a Timber Note or an Additional Timber Note is registered on the Register or on any similar register for any Additional Timber Notes, as the case may be. "Incidental Waste Disposal" means log yard debris which is and has been disposed of in accordance with standard industry practices and spills of minor quantities of motor oil and other petroleum products from motor vehicles and equipment used in the ordinary course of Company Timber harvesting and related operations, none of which, individually or in the aggregate, would have a Material Adverse Effect. "Indenture" means the Indenture between the Trustor and the Trustee, pursuant to which the Timber Notes have been issued, as the same may be amended, modified or supplemented. "Interest Advance" has the meaning set forth in Section 11.2(a) of the Indenture. "Lien" means any deed of trust, security interest, assignment, pledge, hypothecation, charge or other encumbrance. "Lien of the Deed of Trust" means the lien, assignment and security interest created or granted, or renewed, extended and continued in force and effect, by this Deed of Trust (including after-acquired property provisions of this Deed of Trust), or created by any subsequent conveyance under this Deed of Trust or supplement to this Deed of Trust in favor of the Collateral Agent (whether made by the Trustor or any other Person), or otherwise created, effectively constituting any property a part of the security and Mortgaged Property held by the Collateral Agent for the benefit of the Secured Parties. "Line of Credit Agreement" means a credit facility, including a line of credit, revolving loan agreement, letter of credit facility or any similar financing facility, of the Trustor in effect from time to time with one or more Liquidity Providers each of whom, as of the date such credit facility is first entered into, or, if later with respect to any Liquidity Provider, as of the date it first becomes party thereto, has the Required Liquidity Provider Rating, pursuant to which the Trustor or the Collateral Agent on behalf of the Trustor may obtain Interest Advances or a Termination Advance from the Liquidity Providers thereunder, as such credit facility may from time to time be extended, amended, modified, supplemented or amended and restated in accordance with the provisions of Section 11.3 of the Indenture; provided, however, that such credit facility is either (I) the Bank of America Credit Agreement or (II) a replacement for a then existing Line of Credit Agreement entered into in compliance with Section 11.4 of the Indenture. As of the Closing Date, the Line of Credit Agreement is the Bank of America Credit Agreement. "Liquidity Provider" means any financial institution that is at the relevant time a party to the Line of Credit Agreement and has a Commitment thereunder or has Advances outstanding thereunder. "Liquidity Providers' Expenses" mean, as of any date, all amounts then due from the Trustor under the Line of Credit Agreement, other than interest (including any Supplemental Liquidity Provider Interest) and principal and other than any Additional Liquidity Provider Fees; provided, however, that indemnification obligations under the Line of Credit Agreement shall not be deemed to be Liquidity Providers' Expenses (but shall be deemed to be obligations for interest and principal on Advances) to the extent that such indemnification obligations include, or represent compensation for or damages constituting, the principal of and interest on Advances. "Lump Sum Sale" means, with respect to any sale of Company Timber, any agreement or arrangement pursuant to which the Trustor receives full cash payment in advance for the purchase price for a specified quantity of Company Timber (or Company Timber covered by one or more Timber Harvesting Plans or contained on one or more parcels of land), and is required to provide, subsequent to the date of such payment, the quantity of timber provided therein (or covered by such Timber Harvesting Plans or contained on such parcels). "Majority Holders" at any date means, subject to Section 7.13 of the Indenture, the Holders of a majority in aggregate outstanding principal amount of Timber Notes and any Additional Timber Notes of all Classes at such date. "Majority Secured Parties" means the holders of a majority in aggregate outstanding principal amount of Advances under the Line of Credit Agreement, the Timber Notes and any Additional Timber Notes. "Material Adverse Effect" means any material adverse effect on (a) the Mortgaged Property or the operation, use or value thereof, (b) the ability of the Trustor to perform and observe in all material respects its covenants and obligations under this Deed of Trust, the Indenture or any of the other Operative Documents, (c) the condition (financial or otherwise), results of operations, business or business prospects of the Trustor or (d) the rights or remedies of the Trustee or any Noteholder under the Indenture or of this Deed of Trust Trustee or the Collateral Agent under this Deed of Trust. "Mbfe" means, with respect to (i) old growth redwood, one Mbfe for each one thousand board feet, net Scribner scale, of Company Timber, (ii) old growth Douglas-fir, 0.723757 Mbfe for each one thousand board feet, net Scribner scale, of Company Timber, (iii) young growth redwood, 0.751381 Mbfe for each one thousand board feet, net Scribner scale, of Company Timber, (iv) young growth Douglas-fir, 0.488950 Mbfe for each one thousand board feet, net Scribner scale, of Company Timber and (v) each other species or category of Company Timber other than hardwoods (i.e., trees which are not conifers), 0.309392 Mbfe for each one thousand feet, net Scribner scale, of Company Timber. "Monthly Calculation Date" means the last day of each calendar month. "Monthly Deposit Date", with respect to any Monthly Calculation Date, means (a) the 20th day of the calendar month following such Monthly Calculation Date or (b) if such day is not a Business Day, the Business Day immediately succeeding such day (provided, however, that all calculations as of such Monthly Deposit Date shall be computed as of the date that would have been a Monthly Deposit Date if such date were a Business Day). "Mortgaged Property" means all of the rights, titles, interests and estates now owned or hereafter acquired by the Trustor in, to and under, each of the following: i. the Company Owned Timberlands; ii. the Company Timber Rights; iii. all Company Timber; iv. the Accounts, all funds, investments, securities and Financial Assets from time to time held in or credited to any Account, all Security Entitlements with Respect to any Account and all interests, profits, Proceeds, or other income derived from such funds, investments, securities, Financial Assets and Security Entitlements and all the Trustor's rights in any funds held in any Account; v. all the Subject Contracts, and all the Proceeds now or hereafter receivable, owing, deliverable, performable or attributable to or under the Subject Contracts; vi. all Data Processing Equipment and all other machinery, equipment and other tangible personal property and all fixtures and improvements now or hereafter situated upon any part of the Company Owned Timberlands; vii. all Data Processing Information and all other information, programs, know-how, methods or methodology relating to the management of the Company Timber Property and the harvesting, severing or cutting of Company Timber; viii. all existing and future permits, licenses, rights-of-way, easements, leases, franchises, certificates of public convenience and necessity, and all similar rights and privileges, that relate to or are appurtenant to any part of the Company Timber Property; ix. all Proceeds of and other rights relating to insurance or condemnation (including, without limitation, any judgments, insurance proceeds, awards of damages and settlements) receivable or accruing by reason of the loss of, damage to, diminution in the value of or income or revenues from, or taking (by power of eminent domain or otherwise) of all or any part of the properties or interests hereinabove or hereinbelow described in this definition of the Mortgaged Property; x. all documents, instruments, drafts, acceptances, general intangibles, chattel paper, deposit accounts, accounts, and all the Proceeds therefrom or attributable thereto, whether now or hereafter existing, arising out of or relating to the sale, use, exchange, development, operation, cutting, harvesting, storage, gathering, transportation, improvement, marketing, disposal, lease, handling or other dealings with or of all or any portion of the properties or interests hereinabove or hereinbelow described in this definition of Mortgaged Property; xi. without limiting the foregoing descriptions, all equipment and inventory (as such terms are defined in the Uniform Commercial Code) and all documents (as defined in the Uniform Commercial Code) now and at any time or times hereafter obtained or acquired by the Trustor covering or representing all or any portion of the properties or interests hereinabove or hereinbelow described in this definition of Mortgaged Property; xii. all Timber Harvesting Plans and any other permits, documents or other governmental approvals pertaining to the harvesting, cutting, severing, transporting, storing, processing or handling of the Company Timber; and all plans, engineering reports, land planning, maps, surveys, and information and any other reports, plans, maps, surveys or information to be used in connection with the Company Owned Timberlands or Company Timber Rights; xiii. all property of any kind or description that (i) may from time to time after the date of this Deed of Trust by delivery or by writing of any kind be conveyed, mortgaged, pledged, assigned or transferred to the Collateral Agent by the Trustor, or by any Person, with the consent of the Trustor, or otherwise as expressly permitted by the terms of this Deed of Trust and accepted by the Collateral Agent to be held as part of the Mortgaged Property or (ii) is required by the terms of the Indenture or this Deed of Trust to be subjected to the Lien of the Deed of Trust; xiv. each and every right, privilege, hereditament and/or appurtenance in anywise incident or appertaining to any of the properties or interests hereinabove or hereinbelow described in this definition of the Mortgaged Property; xv. the Proceeds from or attributable to the rights, titles, interests and estates hereinabove referred to in this definition of the Mortgaged Property (including, without limitation, all Assigned Proceeds), all guarantees and suretyship agreements relating to any such Proceeds, and the rights, titles and interests of the Trustor therein, and all security for payment or performance thereof, now or hereafter existing or arising; xvi. all other personal property used in connection with the above-described Mortgaged Property; and xvii. all extensions, renewals, proceeds, accessions, improvements, substitutions and replacements of and to any of the above-described Mortgaged Property. Notwithstanding the foregoing, Mortgaged Property shall not include (i) any Pacific Lumber Timber, (ii) any motor vehicles subject to a certificate of title law, (iii) any Timber Harvesting Plans to the extent that the Trustor is prohibited from granting a security interest therein, (iv) any permits, documents or other governmental approvals other than Timber Harvesting Plans which the Trustor is prohibited by applicable law from granting a security interest in or (v) any accounts or inventory (as each such term is defined in the Uniform Commercial Code) of Pacific Lumber or any proceeds thereof. "New Additional Services Agreement" means the New Additional Services Agreement dated as of the Closing Date between the Trustor and Pacific Lumber, as the same may be amended, modified or supplemented. "New Environmental Indemnification Agreement" means the New Environmental Indemnification Agreement dated as of the Closing Date between the Trustor and Pacific Lumber, as the same may be amended, modified or supplemented. "New Master Purchase Agreement" means the New Master Purchase Agreement dated as of the Closing Date between the Trustor and Pacific Lumber, as the same may be amended, modified or supplemented. "New Reciprocal Rights Agreement" means the New Reciprocal Rights Agreement dated as of the Closing Date among the Trustor, Pacific Lumber and Salmon Creek, as the same may be amended, modified or supplemented. "New Services Agreement" means the New Services Agreement entered into between the Trustor and Pacific Lumber dated as of the Closing Date, as the same may be amended, modified or supplemented, and any similar agreement hereafter entered into between the Trustor and any Person (other than Pacific Lumber) as successor Services Provider, as the same may be amended, modified or supplemented. "New Transfer Agreement" has the meaning assigned to such term in the definition of "Conveyance Documents." "Nonrecourse Timber Acquisition Indebtedness" means purchase money indebtedness incurred by the Trustor in the course of acquisition of any timberlands or timber rights, provided that (i) in the event of nonpayment of such purchase money indebtedness, the holder thereof shall only have recourse for repayment to the property securing such indebtedness and (ii) the agreements is respect of such purchase money indebtedness shall contain a non-petition agreement substantially similar to that included in the New Master Purchase Agreement. "Non-Renewal Advance" has the meaning set forth in Section 11.2(b) of the Indenture. "Note Rate" means, for each Class of Timber Notes, the interest rate indicated on the face of each Timber Note of such Class. "Noteholder" means a Holder. "Offering Memorandum" means the Offering Memorandum, dated July 9, 1998, relating to the offering of the Timber Notes, as such Offering Memorandum may be amended or supplemented. "Officer" has the meaning given to such term in the definition of "Responsible Officer." "Officer's Certificate" means a certificate that: (a) is signed by a Responsible Officer of the Person or Persons required to furnish or submit such certificate; and (b) complies with the applicable requirements of Section 12.5 of the Indenture or Section 10.9 of this Deed of Trust, as the case may be. "Operative Documents" means the Indenture, this Deed of Trust, the Timber Notes from time to time outstanding, the New Services Agreement, the New Master Purchase Agreement (and log purchase agreements entered into pursuant thereto), and the Conveyance Documents. "Opinion of Counsel" means a written opinion of Counsel which: (a) complies with the applicable requirements of Section 12.5 of the Indenture or Section 10.9 of this Deed of Trust, as applicable; (b) is addressed to the Trustee or the Collateral Agent, as applicable; and (c) is in form and substance reasonably satisfactory to the addressee. "Pacific Lumber" means The Pacific Lumber Company and any successor in interest thereto. "Pacific Lumber Timber" means (i) all trees and timber, including, without limitation, standing timber and crops, now located on or hereafter planted or growing in the soil of any Pacific Lumber Timber Rights Property, or any part or parcel thereof, and all additions, substitutions and replacements thereof and (ii) any and all of the foregoing which have been severed, cut or harvested from the Pacific Lumber Timber Rights Property or any part of parcel thereof. "Pacific Lumber Timber Rights" means the timber rights of Pacific Lumber in respect of the Pacific Lumber Timber Rights Property, including, without limitation, the ownership of, and (subject to compliance with applicable law) the right in perpetuity to harvest, all trees and timber, including, without limitation, standing timber and crops, now located on or hereafter planted or growing in the soil of any Pacific Lumber Timber Rights Property or any part or parcel thereof. "Pacific Lumber Timber Rights Property" means those portions of the Company Owned Timberlands specifically identified as Pacific Lumber Timber Rights Property on those certain maps held by an escrow agent pursuant to an Escrow Agreement by and among the Trustor, Pacific Lumber, Salmon Creek and such escrow agent, dated as of the Closing Date. "Pacific Lumber Timber Rights Property Release Notice" has the meaning set forth in Section 6.3 of the Indenture. "Pay-as-You-Harvest Sale" means, with respect to any sale of Timber, any agreement or arrangement pursuant to which (A) the Trustor shall receive partial payment in advance (the "Up-Front Payment") for the purchase of a specified quantity of Company Timber (or Company Timber covered by one or more Timber Harvesting Plans or contained on one or more parcels of land), and the balance of which shall be paid as (or after) such Company Timber is harvested and/or delivered or (B) the Trustor shall receive payments for the purchase of a specified quantity of Company Timber (or Company Timber covered by one or more Timber Harvesting Plans or con- tained on one or more parcels of land) as (or after) such Company Timber is harvested and/or delivered. "Payment Account" means the Payment Account to be established and maintained by the Trustee pursuant to Section 5.1(a) of the Indenture. "Permitted Encumbrances" means: (a) the specific matters, if any, to which this Deed of Trust is expressly made subject as set forth in a Schedule to a mortgagee title insurance policy in favor of the Trustee or Collateral Agent in respect of the Mortgaged Property; (b) the New Reciprocal Rights Agreement; (c) easements, restrictions, rights-of-way, servitudes, restrictive covenants, permits, licenses, use agreements, boundary agreements, surface leases, subsurface leases, or other similar encumbrances on, over or in respect of the Company Timber or the Company Timber Property contained in or arising from or in respect of any document, instrument or agreement entered into by or with the consent of the Trustor in connection with any Timber Harvesting Plans, Timber Laws, or Environmental Laws; (d) discrepancies, conflicts in boundary lines, shortages in area, encroachments, or any other facts which a correct survey would disclose, none of which, singly or in the aggregate, materially adversely affects the operation or value of the Mortgaged Property or materially adversely impairs the Trustor's or the Collateral Agent's right to receive and retain the proceeds of cutting, harvesting or severing of Company Timber attributable to the Company Owned Timberlands or the Company Timber Rights; (e) Liens for Trustor Taxes not yet delinquent or that are being diligently contested by the Trustor in good faith by appropriate proceedings and against which adequate reserves are being maintained in accordance with generally accepted accounting principles by the Trustor, provided that the enforcement or foreclosure of any such lien shall have been stayed pending the resolution of such proceedings; (f) operators' liens or mechanics' or materialmen's liens arising in the ordinary course of business and incidental to the incurrence of reasonable expenses permitted by the Indenture or this Deed of Trust with respect to the Mortgaged Property for amounts not yet due and payable or that are being diligently contested by the Trustor in good faith by appropriate proceedings and against which adequate reserves are being maintained by the Trustor, provided that the enforcement or foreclosure of any such lien shall have been stayed pending the resolution of such proceedings; such lien is fully subordinate to and subject in right of prior payment of the Secured Obligations; (g) easements, restrictions, rights-of-way, servitudes, restrictive covenants, permits, licenses, use agreements, boundary agreements, surface leases, subsurface leases or other similar encumbrances on, over or in respect of the Company Timber or Company Owned Timberlands, none of which, singly or in the aggregate, materially adversely affects the operation or value of the Mortgaged Property or materially adversely impairs the Trustor's or the Collateral Agent's right to receive and retain the Proceeds of cutting, harvesting or severing Company Timber attributable to the Company Owned Timberlands or the Company Timber Rights; (h) such sales contracts and other similar agreements as are customarily found in connection with operating properties comparable to the Company Owned Timberlands or the Company Timber Rights, none of which, singly or in the aggregate, materially adversely affects the operation or value of the Mortgaged Property or materially adversely impairs the Trustor's or the Collateral Agent's right to receive and retain the Proceeds of cutting, harvesting or severing Company Timber attributable to the Company Owned Timberlands or the Company Timber Rights; (i) any lease, contract or other agreement or encumbrance (including, without limitation, the interest of any purchaser under a Lump Sum Sale Agreement entered into in accordance with Section 6.1 of the Indenture in and to Company Timber so purchased) granted or created by the Trustor after the date of the Deed of Trust that is specifically permitted and authorized under the terms of the Indenture and this Deed of Trust; and (j) Liens securing the indebtedness referred to in clause (u) of Section 4.9 of the Indenture. "Person" means an individual, a corporation, a partnership, a trust, an unincorporated organization, a limited liability company (including, without limitation, the Trustor), or a government or political subdivision thereof. "Prefunding Account" means the Prefunding Account established pursuant to Section 5.1(a) of the Indenture. "Premium" has the meaning given to such term in Section 2.12 of the Indenture. "Proceeding" means any suit in equity, action at law or other judicial or administrative proceeding. "Proceeds" means all proceeds, products, offspring, rents or profits of or derived from the Mortgaged Property. The term "Proceeds" includes whatever is receivable or received when any of the Mortgaged Property or Proceeds is sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including return premiums, with respect to any insurance relating thereto. "Purchase Agreement" means (i) the New Master Purchase Agreement or (ii) any other agreement for the purchase of stumpage or logs between the Trustor and any other Person, as the same may be extended, renewed, modified, amended or supplemented. "Registrar" shall have the meaning set forth in Section 2.3 of the Indenture. "Release and Substitution Notice" has the meaning given to such term in Section 6.4 of the Indenture. "Release Notice" has the meaning given to such term in Section 6.1(g) of the Indenture. "Required Liquidity Provider Rating" means, with respect to a Liquidity Provider, a rating on its short-term unsecured debt obligations of not less than P-1 by Moody's and A-1 by S&P or, if S&P and Moody's have not rated such Liquidity Provider's short-term unsecured debt obligations, a rating on its long-term unsecured debt obligations of not less than Aa2 by Moody's and not less than AA by S&P, or, in each case, if any such Rating Agency adopts a new rating system, any successor rating thereto. "Responsible Officer" or "Officer" (a) of any Person that is a corporation (other than the Trustee), means the chairman of the board of directors, the president or any vice president, the controller or any assistant controller, or the treasurer or any assistant treasurer, or the secretary or any assistant secretary of such Person; (b) of any Person that is a partnership (other than the Trustee), means any such officer of a corporate general partner of such Person or any individual general partner of such Person; (c) of any Person that is a limited liability company (other than the Trustee), means the chairman of the board of managers and any other person performing functions comparable to the functions of the officers enumerated in (a) of this definition); and (d) of the Trustee or the Collateral Agent, means (i) any officer in the Corporate Trust Office of the Trustee or Collateral Agent and (ii) any other officer of the Trustee or Collateral Agent to whom a matter is referred because of such officer's knowledge of and familiarity with such matter. "Salmon Creek" means Salmon Creek Corporation, a Delaware corporation and any successor in interest thereto. "Secured Parties" means any Persons who at any time or from time to time are holders of any of the Secured Obligations or any portion thereof. "Security Agreement" means the security agreement set forth in Article III of the Deed of Trust, covering and describing the Collateral Mortgaged Property and other rights and interests of the Trustor and securing payment of the Secured Obligations. "Security Entitlement" means "security entitlement" as defined in Section 8-102 (a)(17) of the Uniform Commercial Code. "Services" has the meaning given to such term in the New Services Agreement. "Services Provider" means Pacific Lumber, as the initial service provider under the New Services Agreement, together with its successors in such capacity under the New Services Agreement. "State" means any one of the 50 states of the United States of America (and any additional states that may be admitted after the Closing Date) or the District of Columbia. "Subject Contracts" means (a) all presently existing and future contracts or leases relating in any manner to the purchase, sale, removal, regeneration, cutting, harvesting, hauling or storing of any Company Timber, including, without limitation, the New Master Purchase Agreement, (b) the New Services Agreement, (c) the Conveyance Documents, and (d) any other agreements entered into by the Trustor subsequent to the date of this Deed of Trust, whether or not of the same general nature as set forth in clauses (a) through (c). "Substitute Timber Property" means any parcel or parcels of land or any timber rights subjected to the Lien of the Deed of Trust in accor- dance with Section 6.4 of the Indenture. "Supermajority Holders", at any date, means the Holders of 66 % in aggregate outstanding principal amount of Timber Notes and Additional Timber Notes at such date. "Supplemental Liquidity Provider Interest" means any interest payable under the Line of Credit Agreement to the extent, but only to the extent, that such interest is payable at a rate per annum that is in excess of the rate per annum for such interest payable under the terms of the Bank of America Credit Agreement as in effect on the Closing Date. "Takings Litigation" means any existing or future action brought by the Trustor alleging uncompensated taking by any governmental authority of Company Owned Timberlands or Company Timber Rights for public use, and seeking just compensation from or other relief against such governmental authority. "Tax Laws" means all applicable statutes, laws, ordinances, regulations, rules, rulings, orders, restrictions, requirements, writs, injunctions, decrees or other official acts relating to the reporting, imposition, rendition, collection, enforcement or other aspects of Trustor Taxes, of every kind or character now imposed or hereafter enacted by any Governmental Authority. "Taxes" means all Yield Taxes and all ad valorem, occupation, property and other taxes and assessments imposed with respect to the Company Owned Timberlands or Company Timber Rights subject to the Lien of the Deed of Trust (excluding income taxes and franchise taxes). "Termination Advance" means a Downgrade Advance or a Non-Renewal Advance, together with any Interest Advances outstanding on the date such Downgrade Advance or Non-Renewal Advance is made. "Timber Harvesting Plans" means all permits, whether now existing or hereafter created, filed with any Governmental Authority with respect to the harvesting, cutting or severance of Timber. "Timber Laws" means all applicable statutes, laws, ordinances, regulations, rules, rulings, orders, restrictions, requirements, writs, injunctions, decrees or other official acts relating to the harvesting, cutting, severance, handling or transporting of Company Timber, and the maintenance, operation and management of the Company Timber Property, whether now or hereafter enacted or imposed by any Governmental Authority, including, without limitation, those relating to streams, waterways, wildlife habitat and endangered species, exclusive of Environmental Laws. "Timber Note" means any of the Class A-1Timber Notes, the Class A-2 Timber Notes and the Class A-3 Timber Notes issued pursuant to the Indenture. "Trapping Event" shall have the meaning given to such term in Section 5.3(d)(iii) of the Indenture. "Tribunal" means any court or any governmental department, commission, board, bureau, agency or instrumentality of the United States of America or of any State, commonwealth, territory, possession, county, parish, municipality or other governmental subdivision within the United States of America or under the jurisdiction of the United States of America, whether now or hereafter constituted or existing. "Trustee" means the Person named as "Trustee" in the recitals to the Indenture, in its capacity as trustee under the Indenture, together with its successors in such capacity. "Trustee's Expenses" means any fees, expenses, and damages of, or compensation to, the Trustee (including, without limitation, the reasonable fees and disbursements of counsel to the Trustee) incurred pursuant to the Indenture or owing to the Trustee as part of the Secured Obligations. "Trustor Taxes" means (without duplication) all taxes, assessments, fees, levies, imposts, duties, deductions, withholdings or other charges, together with any interest and penalties payable in connection therewith, from time to time or at any time imposed or assessed by any statute, law, ordinance, regulation, rule, ruling, order, writ, injunction, decree or other official act of any Governmental Authority (a) against the Trustor by reason of the Trustor's ownership, harvesting, sale or other disposition or use of all or any part of the Mortgaged Property, (b) upon or with respect to, measured by or charged against, required to be deducted or withheld from or otherwise attributable to all or any part of the Mortgaged Property (or the use, sale or other disposition thereof) or (c) upon or against the Trustor, the Collateral Agent, the Services Provider, the Trustee or any Beneficiary (as defined in the Deed of Trust) by reason of the Deed of Trust or the Liens created thereby, including, without limitation, yield, franchise, sales, transfer, gross receipts, profits, income (other than income taxes imposed on amounts paid or accrued on the Notes), property, ad valorem, production and severance taxes. "Uniform Commercial Code" means the Uniform Commercial Code as now or hereafter in effect in the State of California. "Up-Front Payment" has the meaning set forth in the definition of Pay-as-You-Harvest-Sale. "Yield Taxes" means all yield, severance, excise, sales and other taxes imposed on the cutting, harvesting, severing or sale of Company Timber from the Company Owned Timberlands or the Company Timber Rights Property subject to the Lien of the Deed of Trust (excluding income taxes and franchise taxes). Any capitalized term used in this Deed of Trust and not defined in this Deed of Trust shall have the meaning set forth in the Indenture. EX-4 4 EXHIBIT 4.3 TO MAXXAM 2ND QTR 10-Q CREDIT AGREEMENT DATED AS OF JULY 20, 1998 AMONG SCOTIA PACIFIC COMPANY LLC, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, AS AGENT, AND THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO ARRANGED BY BA SECURITIES, INC. TABLE OF CONTENTS ARTICLE I. DEFINITIONS 1 1.1 Certain Defined Terms. 1 1.2 Other Interpretive Provisions. 11 1.3 Accounting Principles. 12 ARTICLE II. THE CREDITS 13 2.1 Amounts and Terms of Commitments. 13 2.2 Loan Accounts. 13 2.3 Procedure for Borrowing. 13 2.4 Conversion and Continuation Elections. 15 2.5 Commitment Reductions and Terminations. 16 2.6 Repayment of Advances. 17 2.7 Interest. 17 2.8 Fees. 18 2.9 Computation of Fees and Interest. 18 2.10 Payments by the Company. 18 2.11 Payments by the Banks to the Agent; Defaulting Banks. 20 2.12 Sharing of Payments, Etc. 21 2.13 Extension of Scheduled Termination Date. 21 ARTICLE III. TAXES, YIELD PROTECTION AND ILLEGALITY 22 3.1 Taxes. 22 3.2 Illegality. 23 3.3 Increased Costs and Reduction of Return. 24 3.4 Funding Losses. 24 3.5 Inability to Determine Rates. 25 3.6 Certificates of Banks. 25 3.7 Substitution of Banks. 26 3.8 Survival. 26 ARTICLE IV. 27 4.1 Conditions of Closing Date. 27 4.2 Conditions to Each Advance. 29 ARTICLE V. REPRESENTATIONS AND WARRANTIES 30 5.1 Existence and Power. 30 5.2 Authorization; No Contravention. 30 5.3 Governmental Authorization. 31 5.4 Binding Effect. 31 5.5 Litigation. 31 5.6 No Default. 31 5.7 ERISA Compliance. 31 5.8 Title to Properties. 32 5.9 Financial Condition. 32 5.10 Environmental Matters. 33 5.11 Regulated Entities. 33 5.12 No Burdensome Restrictions. 33 5.13 Subsidiaries. 33 5.14 Insurance. 33 5.15 Full Disclosure. 34 ARTICLE VI. AFFIRMATIVE COVENANTS 34 6.1 Financial Statements. 34 6.2 Certificates; Other Information. 35 6.3 Performance of This and Other Agreements. 35 ARTICLE VII. NEGATIVE COVENANTS 35 7.1 Amendments. 36 7.2 Merger. 36 7.3 Additional Notes. 36 ARTICLE VIII. LINE OF CREDIT ACCELERATION 36 8.1 Triggering Event. 36 8.2 Line of Credit Acceleration. 37 ARTICLE IX. THE AGENT 37 9.1 Appointment and Authorization; "Agent". 37 9.2 Delegation of Duties. 38 9.3 Liability of Agent. 38 9.4 Reliance by Agent. 38 9.5 Notice of Triggering Event. 39 9.6 Credit Decision. 39 9.7 Indemnification of Agent. 39 9.8 Agent in Individual Capacity. 40 9.9 Successor Agent. 40 9.10 Withholding Tax. 41 ARTICLE X. MISCELLANEOUS 42 10.1 Amendments and Waivers. 42 10.2 Notices. 43 10.3 No Waiver; Cumulative Remedies. 44 10.4 Costs and Expenses. 44 10.5 Company Indemnification. 45 10.6 Payments Set Aside. 45 10.7 Successors and Assigns. 46 10.8 Assignments, Participations, etc. 46 10.9 Notification of Addresses, Lending Offices, Etc. 47 10.10 Limitations upon Bankruptcy Petition Against Issuer. 48 10.11 Limitations upon Actions by Agent or Banks. 48 10.12 Release of Lien. 48 10.13 Counterparts. 48 10.14 Severability. 48 10.15 No Third Parties Benefited. 48 10.16 Governing Law and Jurisdiction. 49 10.17 Waiver of Jury Trial. 49 10.18 Entire Agreement. 50 SCHEDULES Schedule 2.1 Commitments Schedule 5.7 ERISA Schedule 2.3(g) Wire Transfer Instructions for Trustee Schedule 10.02 Lending Offices; Addresses for Notices EXHIBITS Exhibit A Form of Notice of Borrowing (Interest Advance) Exhibit B Form of Notice of Borrowing (Non-Renewal Advance) Exhibit C Form of Notice of Borrowing (Downgrade Advance) Exhibit D Form of Notice of Conversion/Continuation Exhibit E Form of Assignment and Acceptance Exhibit F Form of Annual Timber Harvest Report CREDIT AGREEMENT This CREDIT AGREEMENT is entered into as of July 20, 1998, among Scotia Pacific Company LLC, a Delaware limited liability company (the "Company"), the several financial institutions from time to time party to this Agreement (collectively, the "Banks"; individually, a "Bank"), and Bank of America National Trust and Savings Association, as agent for the Banks. WHEREAS, pursuant to the Indenture (this and other defined terms having the meaning given in Section 1.1), the Company has issued the Timber Notes; and WHEREAS, the Company, to support the timely payment of the interest on the Timber Notes in accordance with their terms, has requested the Banks to make available to the Company a revolving credit facility upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: ARTICLE I. DEFINITIONS 1.1 Certain Defined Terms. The following terms have the following meanings: "Accelerated Advance" means each Advance outstanding as of the declaration by the Agent pursuant to Section 8.2 that all Advances be converted into "Accelerated Advances" (which Advances shall thereafter no longer constitute Interest Advances or Termination Advances hereunder). "Acceleration Event" means the acceleration of the Timber Notes, which acceleration at the relevant time has not been rescinded. "Advance" means any of the Interest Advances, Non-Renewal Advances, Downgrade Advances, or Accelerated Advances, which may be a Base Rate Advance or a LIBOR Advance (each, a "Type" of Advance), and any reference to Advances also applies to all of the Interest Advances, Non- Renewal Advances, Downgrade Advances, or Accelerated Advances. "Affected Bank" has the meaning specified in Section 3.7. "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, membership interests, by contract, or otherwise. "Agent" means BofA in its capacity as agent for the Banks hereunder, and any successor agent arising under Section 9.9. "Agent-Related Persons" means BofA and any successor agent arising under Section 9.9, together with their respective Affiliates (including, in the case of BofA, the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Agent's Advance" has the meaning given in Section 2.11(a). "Agent's Payment Office" means the address for payments set forth on Schedule 10.2 or such other address as the Agent may from time to time specify. "Agreement" means this Credit Agreement. "Applicable Margin" means (a) with respect to any Base Rate Advance, 0.00% per annum at any time that Advances have not been continually outstanding for more than six months, and 0.50% per annum at all other times, and (b) with respect to any LIBOR Advance, 0.75% per annum at any time that Advances have not been continually outstanding for more than six months, and 1.50% per annum at all other times. Notwithstanding the foregoing, (1) at any time that a Triggering Event or an Acceleration Event exists and at all times after a Line of Credit Acceleration, the Applicable Margin shall be increased by 2.00% per annum, and (2) if any Termination Advances are not repaid in full on or before the date scheduled for the twelfth installment of principal on account thereof pursuant to Section 2.6(a), the Applicable Margin shall be increased by an additional 0.75% per annum. "Arranger" means BA Securities, Inc., a Delaware corporation, formerly named BancAmerica Robertson Stephens. "Assignee" has the meaning specified in Section 10.8(a). "Assignment and Acceptance" has the meaning given in Section 10.8(a). "Attorney Costs" means and includes all fees and disbursements of any law firm or other external counsel, the allocated cost of internal legal services and all disbursements of internal counsel. "Availability Termination Date" means the earlier to occur of the close of business on the Scheduled Termination Date and the Line of Credit Acceleration. "Bank" has the meaning specified in the introductory clause hereto. "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. Section101, et seq.). "Bankruptcy or Insolvency" has the meaning given in the Indenture. "Base Rate" means, for any day, the higher of: (a) 0.50% per annum above the Federal Funds Rate; and (b) the rate of interest in effect for such day as publicly announced from time to time by BofA in San Francisco, California, as its "reference rate." (The "reference rate" is a rate set by BofA based upon various factors including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) Any change in the reference rate announced by BofA shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Advance" means an Advance that bears interest based on the Base Rate. "BofA" means Bank of America National Trust and Savings Association, a national banking association. "Borrowing" means a borrowing hereunder consisting of Advances of the same Type made to the Company on the same day. "Borrowing Date" means any date on which a Borrowing occurs under Section 2.3 or the Line of Credit Acceleration occurs under Section 8.2. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in New York City, San Francisco, or the Commonwealth of Massachusetts are authorized or required by law to close and, if the applicable Business Day relates to any LIBOR Advance, means such a day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. "Collateral Agent" has the meaning given in the Indenture. "Collection Account" has the meaning given in the Indenture. "Closing Date" means the date on which all conditions precedent set forth in Section 4.1 are satisfied or waived by all Banks (or, in the case of Section 4.1(f), waived by the Person entitled to receive such payment). "Code" means the Internal Revenue Code of 1986, and regulations promulgated thereunder. "Commitment" shall have the meaning specified in Section 2.1. "Company" means Scotia Pacific Company LLC, a Delaware limited liability company; provided, however, that any references to the business and operations of the Company before the Closing Date refer to the business and operations of Scotia Pacific Holding Company, a Delaware corporation and a predecessor in interest of the Company (exclusive of the operations attributable to the timberlands and timber and related timber harvesting rights transferred by the Company pursuant to the Company Transfer (as defined in the Offering Memorandum)), and to the operations attributable to the timberlands and timber and related timber harvesting rights transferred to the Company pursuant to the Palco Transfers (as defined in the Offering Memorandum). "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. "Conversion/Continuation Date" means any date on which, under Section 2.4, the Company (a) converts Base Rate Advances into LIBOR Advances, or (b) continues a LIBOR Advance as such for a new Interest Period. "Deed of Trust" has the meaning given in the Indenture. "Defaulting Bank" has the meaning given in Section 2.11(c). "Dollars", "dollars" and "$" each mean lawful money of the United States. "Downgrade Advance" means an extension of credit by a Bank to the Company pursuant to Section 2.3(c). "Eligible Assignee" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the United States; (c) a Person that is primarily engaged in the business of commercial banking and that is (i) a Subsidiary of a Bank, (ii) a Subsidiary of a Person of which a Bank is a Subsidiary, or (iii) a Person of which a Bank is a Subsidiary; and (d) any other Person acceptable to the Agent and the Company in their sole and absolute discretion; provided, however, that no Person shall constitute an Eligible Assignee at any time that the Commitments are in effect unless such Person meets the Rating Qualification. "Environmental Claims" means all claims, however asserted, by any Governmental Authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment. "Environmental Laws" has the meaning given in the Indenture. "ERISA" means the Employee Retirement Income Security Act of 1974, and regulations promulgated thereunder. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate. "Eurodollar Reserve Percentage" has the meaning specified in the definition of "LIBOR". "Exchange Act" means the Securities Exchange Act of 1934, and regulations promulgated thereunder. "FDIC" means the Federal Deposit Insurance Corporation, and any Governmental Authority succeeding to any of its principal functions. "Federal Funds Rate" means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") for the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not or, as of any relevant date, has not yet been so published for any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent (and, upon request of the Company or the Trustee in any instance, communicated to the Company or the Trustee) of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. "Fee Letter" has the meaning specified in Section 2.8(a). "Final Maturity Date" means July 20, 2028. "FRB" means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. "Further Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges (including, without limitation, net income taxes and franchise taxes), and all liabilities with respect thereto, imposed by any jurisdiction on account of amounts payable or paid pursuant to Section 3.1. "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Indebtedness" has the meaning given in the Indenture. "Indemnified Liabilities" has the meaning specified in Section 10.5. "Indemnified Person" has the meaning specified in Section 10.5. "Indenture" means the Indenture dated as of July 20, 1998, between the Company and State Street Bank and Trust Company, as Trustee. "Indenture Default" means a "Default" as defined in the Indenture. "Indenture Event of Default" means an "Event of Default" as defined in the Indenture. "Independent Auditor" has the meaning specified in Section 6.1(a). "Interest Advance" means an extension of credit by a Bank to the Company pursuant to Section 2.3(a). "Interest Payment Date" means (a) as to any Interest Advance, each Monthly Deposit Date occurring after such Advance is made, (b) as to any Termination Advance, each Note Payment Date occurring after such Advance is made and, in the case of an Interest Advance converted into a Termination Advance, on the Monthly Deposit Date first occurring after the date of such conversion, and (c) as to any Accelerated Advance, each Monthly Deposit Date occurring after the Line of Credit Acceleration. "Interest Period" means, as to any LIBOR Advance, (a) in the case of an Interest Advance or Accelerated Advance, the period commencing on the Borrowing Date of such Advance or on the Conversion/Continuation Date on which the Advance is converted into or continued as a LIBOR Advance, and ending on the next Monthly Deposit Date occurring more than 4 Business Days after the commencement of such Interest Period, and (b) in the case of a Termination Advance, the period commencing on the Borrowing Date of such Advance or on the Conversion/Continuation Date on which the Advance is converted into or continued as a LIBOR Advance, and ending on the next Note Payment Date. "IRS" means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code. "Lending Office" means, as to any Bank, the office or offices of such Bank specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office", as the case may be, on Schedule 10.02, or such other office or offices as such Bank may from time to time notify the Company and the Agent. "LIBOR" means, with respect to any LIBOR Advance for any Interest Period therefor, the rate of interest per annum determined by the Agent by reference to the London interbank offered rate for U.S. Dollar deposits for the relevant Interest Period as set forth on the LIBOR Page (as defined below) at 11:00 a.m., London time, on the applicable Determination Date (as defined below). For purposes of the foregoing, "LIBOR Page" means the display designated as Page 3750 on the Dow Jones Markets (Telerate) Service, and if such page or a successor thereto is not available, the Reuter's Screen LIBO Page (or such other page as may replace such pages on such services for the purpose of displaying London interbank offered rates of major banks); and "Determination Date" means the date two Business Days prior to the first day of any Interest Period. In the case of LIBOR Advances for an Interest Period commencing upon a Monthly Deposit Date or up to three Business Days before or after a Monthly Deposit Date and (in any such case) ending on the next Monthly Deposit Date, the Interest Period for purposes of determining LIBOR will be presumed to be one month; in the case of LIBOR Advances for an Interest Period commencing upon one Note Payment Date and ending on the next Note Payment Date, the Interest Period for purposes of determining LIBOR will be presumed to be six months; and, in all other cases, the Interest Period employed in determining LIBOR shall be the interest period closest to the actual duration of such Interest Period for which rates are displayed on the LIBOR Page. "LIBOR Advance" means an Advance that bears interest based on the LIBOR. "Lien" has the meaning given in the Indenture. "Line of Credit Acceleration" means the election by the Banks pursuant to Section 8.2 to permanently cancel their obligations to make Advances and, to the extent any Advances are outstanding, to convert such Advances into Accelerated Advances. "Liquidity Account" has the meaning given in the Indenture. "Margin Stock" means "margin stock" as such term is defined in Regulation T, U or X of the FRB. "Material Adverse Effect" has the meaning given in the Indenture. "Minimum Principal Amortization" has the meaning given in the Indenture. "Monthly Deposit Date" has the meaning given in the Indenture. "Mortgaged Property" has the meaning given in the Indenture. "Multiemployer Plan" means a "multiemployer plan", within the meaning of Section 4001(a)(3) of ERISA, to which the Company or any ERISA Affiliate makes, is making, or is obligated to make contributions or, during the preceding three calendar years, has made, or been obligated to make, contributions. "Non-Pro Rata Advance" shall mean an Advance made pursuant to the deemed request by the Company pursuant to Section 2.11(c). "Non Renewal Advance" means an extension of credit by a Bank to the Company pursuant to Section 2.3(b). "Note Payment Date" has the meaning given in the Indenture. "Note Rate" has the meaning given in the Indenture. "Notice of Borrowing" means a notice in substantially the form of Exhibits A, B, or C, as applicable. "Notice of Conversion/Continuation" means a notice in substantially the form of Exhibit D. "Obligations" means all advances, debts, liabilities, obligations, covenants and duties arising hereunder or under the Fee Letter, the Indenture, or the Deed of Trust owing by the Company to any Bank, the Agent, or any Indemnified Person (in their capacities as such), whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising. "Offering Memorandum" means the Offering Memorandum dated July 9, 1998, of the Company in respect of the Timber Notes. "Operating Agreement" has the meaning given in the Indenture. "Operative Documents" means the Operative Documents as defined in the Indenture, together with this Agreement, the Fee Letter, and all certificates, Notices of Borrowing, and Notices of Conversion/Continuation delivered pursuant hereto. "Other Taxes" means any present or future stamp, court or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, this Agreement or any other Operative Documents. "Participant" has the meaning specified in Section 10.8(d). "Payment Account" has the meaning given in the Indenture. "PBGC" means the Pension Benefit Guaranty Corporation, or any Governmental Authority succeeding to any of its principal functions under ERISA. "Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA which the Company sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five (5) plan years. "Permitted Encumbrances" has the meaning given in the Indenture. "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or Governmental Authority. "Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA) which the Company sponsors or maintains or to which the Company makes, is making, or is obligated to make contributions and includes any Pension Plan. "Principal Amount" means with respect to any Advance on any date, the aggregate outstanding principal amount thereof after giving effect to any Borrowings and prepayments or repayments of Advances occurring on such date. "Pro Rata Share" means, as to any Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Commitment divided by the aggregate Commitments; provided, however, that for purposes of determining the Pro Rata Share of Non-Pro Rata Advances by a Bank that is not a Defaulting Bank, the Commitment of the Defaulting Bank shall be disregarded. "Purchase Agreement" means the Note Purchase Agreement dated July 9, 1998, between the Company, The Pacific Lumber Company, and Salomon Brothers Inc., as Representative of the Initial Purchasers, with respect to the purchase of the Timber Notes. "Rating Qualification" means, with respect to any Bank or potential Bank, the requirement that such Bank's short-term unsecured debt be rated not less than "P-1" by Moody's (as defined in the Indenture) and "A-1" by S&P (as defined in the Indenture) (or on its long-term unsecured debt, if there are no applicable short-term unsecured debt ratings, that the long-term unsecured debt rating of such Bank or potential Bank be rated not less than "Aa2" by Moody's and "AA" by S&P). "Replacement Bank" has the meaning specified in Section 3.7. "Replacement Line of Credit" means a credit facility entered into by the Company in replacement of this Agreement in compliance with Section 11.4 of the Indenture. "Reportable Event" means, any of the events set forth in Section 4043(c) of ERISA or the regulations thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC. "Required Banks" means at any time Banks then holding at least 66-2/3% of the Principal Amount of the Advances, or, if no Principal Amount is then outstanding, Banks then having at least 66-2/3% of the Commitments. "Requirement of Law" means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. "Required Liquidity Amount" has the meaning given in the Indenture. "Responsible Officer" means (a) with respect to the Trustee, a trust officer of the Trustee, and (b) with respect to the Company, the chief executive officer, president or any vice-president, treasurer or any assistant treasurer, or secretary or any assistant secretary of the Company, or any other officer having substantially the same authority and responsibility; or, with respect to certification of financial statements, the chief financial officer or the treasurer of the Company, or any other officer having substantially the same authority and responsibility. "Scheduled Termination Date" means July 18, 1999, or such later date to which the Scheduled Termination Date is extended in accordance with Section 2.13. "SEC" means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions. "Subsidiary" of a Person means any corporation , association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the voting stock, membership interests or other equity interests (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of the Company. "Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of each Bank and the Agent, respectively, taxes imposed on or measured by its net income and franchise taxes imposed on it by the jurisdiction (or any political subdivision thereof) under the laws of which such Bank or the Agent, as the case may be, is organized or maintains a lending office and excluding any taxes, levies, assessments, imposts, duties, deductions, and fees, including withholding taxes, to which a Bank or the Agent is subject at the time such Bank or Agent becomes a party to this Agreement or to which such Bank or Agent becomes subject for reasons other than a change of law, treaty, or regulation or interpretation thereof by any Governmental Authority. "Termination Advance" means each Non-Renewal Advance, each Downgrade Advance, and each Interest Advance outstanding at the time of the making of any Non-Renewal Advance or Downgrade Advance (which Interest Advances shall thereafter no longer constitute Interest Advances hereunder). "Timber Notes" has the meaning given in the Indenture. "Triggering Event" has the meaning given in Section 8.1. "Trustee" has the meaning given in the Indenture. "Type" has the meaning specified in the definition of "Advance." "Unfunded Pension Liability" means the excess of a Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. 1.2 Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (b) The words "hereof", "herein", "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (ii) The term "including" is not limiting and means "including without limitation." (iii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." (d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, and references to sections therein shall include references to any successor provisions contained in such amendments and modifications, but only to the extent such amendments and other modifications are not prohibited by the terms of any Operative Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (e) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (f) Unless otherwise expressly provided, any reference to any action of the Agent or the Banks by way of consent, approval or waiver shall be deemed modified by the phrase "in its/their sole discretion." (g) This Agreement and certain of the other Operative Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Company and the other parties, and are the products of all parties. Accordingly, they shall not be construed against the Banks or the Agent merely because of the Agent's or Banks' involvement in their preparation. 1.3 Accounting Principles. (a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied. (b) References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Company. ARTICLE II. THE CREDITS 2.1 Amounts and Terms of Commitments. Each Bank severally agrees, on the terms and conditions set forth herein, to make loans to the Company (each such loan, an "Advance") from time to time from the Closing Date through the Availability Termination Date, in an aggregate amount not to exceed at any time outstanding the amount set forth opposite such Bank's name on Schedule 2.1 (such amount as the same may be reduced under Section 2.5 or reduced or increased as a result of one or more assignments under Section 10.8, the Bank's "Commitment"); provided, however, that, after giving effect to any Borrowing, the Principal Amount of all Advances shall not at any time exceed the aggregate Commitments of all Banks. Within the limits of each Bank's Commitment, unless a Termination Advance has been made, the Line of Credit Acceleration has occurred, or a Triggering Event or an Acceleration Event exists, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.1, prepay under Section 2.6 and reborrow under this Section 2.1. 2.2 Loan Accounts. The Advances made by each Bank shall be evidenced by one or more accounts or records maintained by such Bank and the Agent in the ordinary course of business. The accounts or records maintained by the Agent and each Bank shall be conclusive absent manifest error of the amount of the Advances made by the Banks to the Company and the interest and payments thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Company hereunder to pay any amount owing with respect to the Advances. 2.3 Procedure for Borrowing. (a) Interest Advances shall be made in one or more Borrowings, on a Business Day that is either a Note Payment Date or the first, second, or third Business Day before or after a Note Payment Date, by delivery to the Agent of one or more written and completed Notices of Borrowing complying with Section 2.3(d) in substantially the form of Exhibit A, in an amount not exceeding the aggregate unused Commitments at such time and shall be used solely for the payment when due of interest on the Timber Notes (but not interest on premiums) at the Note Rates therefor in accordance with Section 5.7 of the Indenture. (b) Non-Renewal Advances shall be made in a single Borrowing on a Business Day that is on or after the date 10 days before the Scheduled Termination Date if such Scheduled Termination Date has not been extended in accordance with Section 2.13 either by the Banks then parties hereto or by substitution of Banks as provided in that Section (and no Replacement Line of Credit to replace this Agreement has been obtained by the Company) by delivery to the Agent of a written and completed Notice of Borrowing complying with Section 2.3(d) in substantially the form of Exhibit B, in an amount equal to the aggregate unused Commitments at such time, and shall be used to fund the Liquidity Account in accordance with Section 11.2(b) of the Indenture. (c) Downgrade Advances shall be made in a single Borrowing on a Business Day that is on or after the date 30 days after a downgrading of the rating of any Bank below the Rating Qualification if no Replacement Bank assumes the Commitment of such Bank in accordance with Section 3.7 (and no Replacement Line of Credit has been obtained by the Company), by delivery to the Agent of a written and completed Notice of Borrowing complying with Section 2.3(d) in substantially the form of Exhibit C, in an amount equal to the aggregate unused Commitments at such time, and shall be used to fund the Liquidity Account in accordance with Section 11.2(c) of the Indenture. (d) Each Borrowing of Advances shall be made upon the Company's or the Trustee's irrevocable written notice delivered to the Agent in the form of a Notice of Borrowing (which notice must be received by the Agent prior to 12:00 noon. (New York City time) (i) three Business Days prior to the requested Borrowing Date, in the case of LIBOR Advances, and (ii) on the requested Borrowing Date, in the case of Base Rate Advances, specifying: (A) the amount of the Borrowing; (B) the requested Borrowing Date, which shall be a Business Day; and (C) the Type of Advances constituting the Borrowing, subject to Sections 2.3(e) and (h). (e) All Advances may be made as LIBOR Advances or Base Rate Advances unless (1) in the case of Interest Advances, the aggregate amount of Interest Advances requested in any Borrowing, together with all outstanding LIBOR Advances continued on that Borrowing Date and all outstanding Base Rate Advances converted to LIBOR Advances on that Borrowing Date, is less than $1,000,000, or (2) in the case of Termination Advances, there are fewer than 15 days in the Interest Period for such Advances. In the cases described in (1) or (2) above, such Advances shall be made as Base Rate Advances. (f) The Agent will promptly notify each Bank of its receipt of any Notice of Borrowing and of the amount of such Bank's Pro Rata Share of that Borrowing. (g) Each Bank will make the amount of its Pro Rata Share of each Borrowing available to the Agent for the account of the Company at the Agent's Payment Office by 1:00 p.m. (New York City time) (in the case of Base Rate Advances requested on or before 5:00 p.m. (New York City time) on the preceding Business Day and LIBOR Advances) or 2:00 p.m. (New York City time) (in the case of Base Rate Advances requested after 5:00 p.m. (New York City time) on the preceding Business Day) on the Borrowing Date requested by the Company in funds immediately available to the Agent. Except as provided in Section 2.11(c) with respect to Non-Pro Rata Advances, the proceeds of all such Advances will then be made available to the Company by the Agent, in like funds as received by the Agent, by wire transfer to the Trustee pursuant to the wire transfer instructions set forth on Schedule 2.3(g), or such instructions as the Trustee may from time to time provide to the Agent. (h) After giving effect to any Borrowing, unless the Agent shall otherwise consent, there may not be more than five different Interest Periods in effect. (i) The Company irrevocably authorizes the Agent and the Banks to accept Notices of Borrowing from the Trustee and agrees that they will be entitled to rely upon any such Notices of Borrowing purporting to be executed by a Responsible Officer of the Trustee without further investigation or inquiry, notwithstanding any contrary direction or request from the Company or any other Person, and without liability to, or creation of any defense in favor of, the Company by virtue of such reliance. (j) Upon the making of the Termination Advances as LIBOR Advances, any Interest Advances converted into Termination Advances shall be converted to LIBOR Advances on the same Borrowing Date. If Termination Advances are made as Base Rate Advances, (i) any such Interest Advances that are LIBOR Advances shall continue as LIBOR Advances until the end of the relevant Interest Period and shall thereafter be continued or converted to the same Type of Advance as all other Termination Advances, and (ii) any such Interest Advances that are Base Rate Advances shall be continued as such and shall thereafter be continued or converted to the same Type of Advance as all other Termination Advances. 2.4 Conversion and Continuation Elections. (a) Subject to Section 2.4(b), unless any outstanding Advance is repaid in full on any Interest Payment Date, if such Advance is a Base Rate Advance, it will be continued as such, and if such Advance is a LIBOR Advance, it will be converted into a Base Rate Advance as of such Interest Payment Date. (b) The Company may, by delivery of a Notice of Conversion/Continuation to the Agent in accordance with Section 2.4(c), elect, (i) as of any Business Day, to convert any Base Rate Advance, or portion thereof that will be outstanding after such Business Day, into a LIBOR Advance, or (ii) as of any Interest Payment Date, to continue any existing LIBOR Advance, or portion thereof that will be outstanding after such Interest Payment Date, as a LIBOR Advance; provided, that (x) a Base Rate Advance may be converted into a LIBOR Advance only if the aggregate amount of all Advances, including such Base Rate Advance, being borrowed or continued as or converted to LIBOR Advances on the relevant Business Day equals or exceeds $1,000,000 and the Interest Period for such LIBOR Advances is at least 26 days long; and (y) if at any time the aggregate amount of LIBOR Advances having the same Interest Period is reduced, by payment, prepayment, or conversion of part thereof to be less than $1,000,000, such LIBOR Advances shall automatically convert into Base Rate Advances. (c) The Company shall deliver a Notice of Conversion/Continuation, which notice shall be irrevocable, to be received by the Agent not later than 12:00 noon (New York City time) at least three Business Days in advance of the Conversion/ Continuation Date, specifying: (A) the proposed Conversion/Continuation Date; and (B) the aggregate amount of Advances to be converted or continued. (d) The Agent will promptly notify each Bank of its receipt of a Notice of Conversion/Continuation or, if no timely notice is provided by the Company, the Agent will promptly notify each Bank of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective Principal Amounts of the Advances with respect to which the notice was given held by each Bank. (e) After giving effect to any conversion or continuation of Advances, unless the Agent shall otherwise consent, there may not be more than five different Interest Periods in effect. 2.5 Commitment Reductions and Terminations. (a) The aggregate Commitments will be reduced upon and to the extent of each reduction in the Required Liquidity Amount. Once reduced in accordance with this Section, the Commitments may not be increased. Any reduction of the Commitments shall be applied to each Bank according to its respective Pro Rata Share. The Company will notify the Agent of each reduction in the Required Liquidity Amount on or before the Business Day such reduction occurs, and the Agent will promptly notify each Bank thereof. (b) Upon the earliest to occur of the making of the Termination Advances, the Availability Termination Date, or upon the effectiveness of any Replacement Line of Credit, the Commitments shall terminate. In addition, the Company may elect to terminate the Commitments, with the consent of the Trustee or following discharge of the Indenture, by providing three Business Day's prior irrevocable written notice to the Agent accompanied upon the date of termination with repayment in full of all Obligations, including payment of the commitment fee described in Section 2.10(b) through the date of such termination. 2.6 Repayment of Advances. (a) Subject to Section 2.10(d), the Company shall repay the Principal Amount of the Termination Advances in twelve semiannual installments commencing on the first Interest Payment Date occurring at least 27 but not more than 33 months after the date such Termination Advances were made. Such installments shall be equal to the principal payments that would be required to fully amortize the Principal Amount of Termination Advances with twelve equal installments of principal and interest assuming, hypothetically, that the interest thereon was the interest rate applicable to a LIBOR Advance having an Interest Period of six months made on the date 10 days before the date the first such principal installment is due. The Agent shall calculate such amortization schedule and provide it to the Company, the Trustee, and each Bank promptly after such date of determination. If the amount available pursuant to the Indenture for payment of any such installment of principal on any Interest Payment Date is insufficient to make such payment in full, such amount shall, subject to Section 2.10(d), be payable upon the next Interest Payment Date, and successive Interest Payment Dates thereafter, until payment in full. (b) Subject to Section 2.10(d), the Company shall repay the Principal Amount of Interest Advances and Accelerated Advances upon each Monthly Deposit Date as and to the extent of funds available therefor under Section 5 of the Indenture. (c) The Company shall repay the Principal Amount of all Advances upon the effectiveness of any Replacement Line of Credit. In addition, upon three Business Day's prior irrevocable written notice to the Agent, the Company may prepay the Advances in whole or in part. (d) The Company shall repay the Principal Amount of all Advances on the Final Maturity Date. 2.7 Interest. (a) Each Advance shall bear interest on the Principal Amount thereof from the applicable Borrowing Date at a rate per annum equal to LIBOR or the Base Rate, as the case may be (and subject to the Company's right to convert Base Rate Advances to LIBOR Advances under Section 2.4), plus the Applicable Margin. (b) Subject to Section 2.10(d), interest on each Advance shall be paid in arrears on each Interest Payment Date, on the effectiveness of any Replacement Line of Credit, and on the Final Maturity Date. Interest shall also be paid on the date of any repayment of Advances under Section 2.6 for the portion of the Advances so repaid. (c) Any amounts not constituting the principal balance of Advances including, to the extent permitted by law, interest not paid when due hereunder, shall bear interest, from the date such amounts become due and payable hereunder, at the rate that would then be applicable to Base Rate Advances. (d) Anything herein to the contrary notwithstanding, the obligations of the Company to any Bank hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by such Bank would be contrary to the provisions of any law applicable to such Bank limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Bank, and in such event the Company shall pay such Bank interest at the highest rate permitted by applicable law. 2.8 Fees. (a) Arrangement, Agency Fees. The Company shall pay an arrangement fee to the Arranger for the Arranger's own account, and shall pay an agency fee to the Agent for the Agent's own account, as required by the letter agreement ("Fee Letter") between the Company, The Pacific Lumber Company, and the Arranger and Agent dated June 9, 1998. (b) Commitment Fee. The Company shall pay to the Agent for the account of each Bank a commitment fee on such Bank's actual daily unused Commitment equal to 0.625% per annum. Such commitment fee shall accrue from the Closing Date to the termination of the Commitments and shall be due and payable quarterly in arrears on the Monthly Deposit Dates occurring in January, April, July, and October of each year. Such commitment fee shall be computed by giving effect to any reduction in the Commitments pursuant to Section 2.5 on the later of the effective date of such reduction or the third Business Day after the Company notifies the Agent thereof. 2.9 Computation of Fees and Interest. (a) All computations of interest for Base Rate Advances when the Base Rate is determined by BofA's "reference rate" shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest and fees being paid than if computed on the basis of a 365-day year). Interest and the commitment fee shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof. (b) Each determination of an interest rate by the Agent shall be conclusive and binding on the Company and the Banks in the absence of manifest error. 2.10 Payments by the Company. (a) All payments to be made by the Company shall be made without set-off, recoupment or counterclaim. All payments by the Company (other than payments under Sections 10.4 and 10.5, which shall be paid directly to the Persons entitled thereto) shall be made to the Agent for the account of the Banks at the Agent's Payment Office, and shall be made in dollars and in immediately available funds, no later than 3:00 p.m. (New York City time) on the date specified herein. The Agent will promptly distribute such payment, in like funds as received, to each Bank as follows: payment of interest will be distributable to the Banks pro rata in accordance with the Principal Amount of Advances made by each Bank; payments of principal will be distributed first in repayment of Agent's Advances (if any), second in repayment of Non-Pro Rata Advances (if any) on a pro rata basis among Banks having made such Advances, and third to all other Advances pro rata in accordance with the Principal Amount thereof held by each Bank; and all other amounts will be distributable in accordance with the Banks' Pro Rata Share (or other applicable share as expressly provided herein). Any payment received by the Agent later than 3:00 p.m. (New York City time) shall be deemed to have been received on the following Business Day and any applicable interest shall continue to accrue. (b) Whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest. (c) Unless the Agent receives notice from the Company before the date on which any payment is due to the Banks that the Company will not make such payment in full as and when required, the Agent may assume that the Company has made such payment in full to the Agent on such date in immediately available funds and the Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Company has not made such payment in full to the Agent, each Bank shall repay to the Agent on demand such amount distributed to such Bank, together with interest thereon at the Federal Funds Rate for each day from the date such amount is distributed to such Bank until the date repaid. (d) Notwithstanding any other provision of this Agreement, unless all outstanding Advances are being repaid in full and the Commitments have been or are being terminated, all payments to be made by the Company under this Agreement shall be made only from the Collection Account or the Payment Account, as the case may be, as provided and on the dates specified in the Indenture and only to the extent that the Company shall have sufficient income or proceeds therefrom to enable the Company to make payments in accordance with the terms hereof after giving effect to the priority of payments provisions set forth in the Indenture. If the amount of Liquidity Provider Expenses (as defined in the Indenture) or the amount of principal or interest on account of the Advances included for payment in any Monthly Trustee Certificate (as defined in the Indenture) submitted by the Company to the Trustee pursuant to Section 5.3(b) of the Indenture does not accurately reflect the amount owed to the Agent and the Banks, the Agent may or, upon direction of the Required Banks, shall notify the Company of such deficiency. If such deficiency is not remedied by inclusion of such amounts in the next Monthly Trustee Certificate delivered after such notice, then the Agent shall be entitled to certify to the Trustee (with a copy to the Company) the appropriate amount of additional Liquidity Provider Expenses, principal, or interest pursuant to Section 5.3(g) of the Indenture, which certification shall be conclusive absent manifest error. 2.11 Payments by the Banks to the Agent; Defaulting Banks. (a) Unless the Agent receives notice from a Bank, at least one Business Day prior to the date of any Borrowing, that such Bank will not make available as and when required hereunder to the Agent for the account of the Company the amount of that Bank's Pro Rata Share of the Borrowing, the Agent may assume that each Bank has made such amount available to the Agent in immediately available funds on the Borrowing Date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Bank shall not have made its full amount available to the Agent in immediately available funds and the Agent in such circumstances has made available to the Company such amount, that Bank shall on the Business Day following such Borrowing Date make such amount available to the Agent, together with interest at the Federal Funds Rate for each day during such period. A notice of the Agent submitted to any Bank with respect to amounts owing under this Section 2.11(a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Agent shall constitute such Bank's Advance on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, such Advance (an "Agent's Advance") shall be payable solely to the Agent for its own account. (b) The failure of any Bank to make any Advance on any Borrowing Date shall not relieve any other Bank of any obligation hereunder to make an Advance on such Borrowing Date, but no Bank shall be responsible for the failure of any other Bank to make the Advance to be made by such other Bank on any Borrowing Date except to the extent set forth in Section 2.11(c). (c) If any Bank fails to make an Advance on any Borrowing Date in violation of its obligations hereunder (a "Defaulting Bank"), the Agent, promptly following its actual knowledge of such failure, will notify the Company and each of the Banks of such failure and the amount of the Advance that such Defaulting Bank failed to make, and such notice will be deemed to constitute an irrevocable request by the Company for a Base Rate Advance in an amount equal to the lesser of (1) the amount of the Advance that such Defaulting Bank failed to make and (2) the unused Commitments of the Banks not constituting a Defaulting Bank with respect to such Advance. Such deemed request will be effective as and to the extent of a Notice of Borrowing delivered at such time pursuant to Section 2.3, and each Bank confirms that its commitment contained in Section 2.1 remains applicable, subject to the limitations set forth in that Section, with respect to Advances requested under this Section 2.11(c). Without limiting the foregoing, in no instance shall any Bank be obligated to make Advances that would cause the Principal Amount of its Advances to exceed such Bank's Commitment. To the extent the Agent had made an Agent's Advance on account of amounts such Defaulting Bank failed to advance, the Agent shall retain the proceeds of such Non-Pro Rata Advances for its own account in repayment of such Agent's Advances. All proceeds of Non-Pro Rata Advances not so applied shall be disbursed as provided in Section 2.3(g). 2.12 Sharing of Payments, Etc. If, other than as expressly provided elsewhere herein, any Bank shall obtain on account of the Advances made by it any payment (whether voluntary, involuntary, through the exercise of any right of set- off, or otherwise) in excess of its ratable share (or other share contemplated hereunder), such Bank shall immediately (a) notify the Agent of such fact, and (b) purchase from the other Banks such participations in the Advances made by them as shall be necessary to cause such purchasing Bank to share the excess payment pro rata with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Bank, such purchase shall to that extent be rescinded and each other Bank shall repay to the purchasing Bank the purchase price paid therefor, together with an amount equal to such paying Bank's ratable share (according to the proportion of (i) the amount of such paying Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Banks following any such purchases or repayments. 2.13 Extension of Scheduled Termination Date. At least 75 and no earlier than 120 days before each Scheduled Termination Date, the Company or the Trustee may request, through the Agent, that each Bank extend the Scheduled Termination Date, effective upon the day following the Scheduled Termination Date then in effect, to a date that is 364 days following the Scheduled Termination Date then in effect. Each Bank that elects to extend the Scheduled Termination Date will so indicate by notifying the Agent, the Company and the Trustee in writing during the period between 60 and 50 days before the Scheduled Termination Date then in effect. If some but less than all of the Banks elect to extend the Scheduled Termination Date during the aforesaid period, the Company may (but shall not be obligated to) invoke the provisions of Section 3.7 to substitute, effective following the Scheduled Termination Date then in effect, for the Commitments and Advances of any Bank that has not elected to extend the Scheduled Termination Date. Unless the Termination Advance has earlier been made or a Line of Credit Acceleration has earlier occurred, the Scheduled Termination Date will be extended as aforesaid if, on or before the Scheduled Termination Date then in effect, after taking into account any substitution in accordance with Section 3.7, Banks with aggregate Commitments equal to the Required Liquidity Amount have agreed to the extension of the Scheduled Termination Date as aforesaid. If the Scheduled Termination Date shall be so extended, any Bank not electing to extend shall cease to be a party to this Agreement effective upon its replacement under Section 3.7, and, if such Bank's Advances have been assigned to a Replacement Bank in accordance with Section 3.7, such Bank shall have no continuing rights or obligations hereunder except under those sections that are expressly to survive termination of the Commitments and repayment of the Advances. No Bank that does not at the time meet the Rating Qualification will be permitted to elect to extend the Scheduled Termination Date. ARTICLE III. TAXES, YIELD PROTECTION AND ILLEGALITY 3.1 Taxes. (a) Any and all payments by the Company to each Bank or the Agent under this Agreement and any other Operative Document shall be made free and clear of, and without deduction or withholding for, any Taxes. In addition, the Company shall pay all Other Taxes. (b) If the Company shall be required by law to deduct or withhold any Taxes, Other Taxes or Further Taxes from or in respect of any sum payable hereunder to any Bank or the Agent, then: (i) the sum payable shall be increased as necessary so that, after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section), such Bank or the Agent, as the case may be, receives and retains an amount equal to the sum it would have received and retained had no such deductions or withholdings been made; (ii) the Company shall make such deductions and withholdings; (iii) the Company shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law; and (iv) the Company shall also pay to each Bank or the Agent for the account of such Bank, at the time interest is paid, Further Taxes in the amount that the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes, Other Taxes or Further Taxes had not been imposed. (c) The Company agrees to indemnify and hold harmless each Bank and the Agent for the full amount of (i) Taxes, (ii) Other Taxes, and (iii) Further Taxes in the amount that the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes, Other Taxes or Further Taxes had not been imposed, and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes, Other Taxes or Further Taxes were correctly or legally asserted by a relevant Government Authority. Payment under this indemnification shall be made within 30 days after the date the Bank or the Agent makes written demand therefor, subject, however, to Section 2.10(d). (d) Within 30 days after the date of any payment by the Company of Taxes, Other Taxes or Further Taxes, the Company shall furnish to each Bank or the Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to such Bank or the Agent. (e) If the Company is required to pay any amount to any Bank or the Agent pursuant to Sections 3.1(b) or (c), then such Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office so as to eliminate any such additional payment by the Company which may thereafter accrue, if such change in the sole judgment of such Bank is not otherwise disadvantageous to such Bank. 3.2 Illegality. (a) If any Bank determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Bank or its applicable Lending Office to make LIBOR Advances, then, on notice thereof by the Bank to the Company through the Agent, any obligation of that Bank to make LIBOR Advances shall be suspended until the Bank notifies the Agent and the Company that the circumstances giving rise to such determination no longer exist (which notification will be given by such Bank promptly after such circumstances cease to exist). (b) If a Bank determines that it is unlawful to maintain any LIBOR Advance, the Company shall, upon its receipt of notice of such fact and demand from such Bank (with a copy to the Agent), prepay in full such LIBOR Advances of that Bank then outstanding, together with interest accrued thereon and amounts required under Section 3.4, either on the last day of the Interest Period thereof, if the Bank may lawfully continue to maintain such LIBOR Advances to such day, or immediately, if the Bank may not lawfully continue to maintain such LIBOR Advance. If the Company is required to so prepay any LIBOR Advance, then concurrently with such prepayment, the Company shall borrow from the affected Bank, and the affected Bank shall advance to the Company, a Base Rate Advance in the amount of such repayment. (c) If the obligation of any Bank to make or maintain LIBOR Advances has been so terminated or suspended, the Company may elect, by giving notice to the Bank through the Agent that all Advances which would otherwise be made by the Bank as LIBOR Advances shall be instead Base Rate Advances. (d) Before giving any notice to the Agent under this Section, the affected Bank shall designate a different Lending Office with respect to its LIBOR Advances if such designation will avoid the need for giving such notice or making such demand and will not, in the good faith judgment of the Bank, be illegal or otherwise disadvantageous to the Bank. 3.3 Increased Costs and Reduction of Return. (a) If any Bank determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the LIBOR or in respect of the assessment rate payable by any Bank to the FDIC for insuring U.S. deposits) in or in the interpretation of any law or regulation or (ii) the compliance by that Bank with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Bank of agreeing to make or making, funding or maintaining any LIBOR Advances, then the Company shall, following demand of such Bank upon the Company through the Agent, subject to Section 2.10(d), pay to the Agent for the account of such Bank, additional amounts as are sufficient to compensate such Bank for such increased costs. (b) If any Bank shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Bank (or its Lending Office) or any corporation controlling the Bank with any change in Capital Adequacy Regulation, which introduction, change, or compliance requirement is first implemented after the date of this Agreement or, if later, the date a Bank becomes a Bank hereunder, affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy and such Bank's desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitment, loans, credits or obligations under this Agreement, then, upon demand of such Bank to the Company through the Agent, the Company shall pay to the Agent for the account of such Bank, from time to time as specified by the Bank, subject to Section 2.10(d), additional amounts sufficient to compensate the Bank for such increase. (c) Before giving any notice to the Agent under this Section, the affected Bank shall designate a different Lending Office with respect to its LIBOR Advances if such designation will avoid the need for giving such notice or making such demand or reduce the amount of any compensation payable to such Bank pursuant to this Section and will not, in the good faith judgment of the Bank, be illegal or otherwise disadvantageous to the Bank. 3.4 Funding Losses. The Company shall reimburse each Bank and hold each Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of: (a) the failure of the Company to make on a timely basis any payment of principal of any LIBOR Advance; (b) the failure of the Company or the Trustee to borrow, continue or convert an Advance after either of them has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/ Continuation; (c) the prepayment or other payment (including in connection with an assignment by an Affected Bank pursuant to Section 3.7 or following a Line of Credit Acceleration) of a LIBOR Advance on a day that is not the last day of the relevant Interest Period; or (d) the conversion under Section 2.3(j) of any LIBOR Advance into a Termination Advance having a different Interest Period on a day that is not the last day of the relevant Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its LIBOR Advances or from fees payable to terminate the deposits from which such funds were obtained. For purposes of calculating amounts payable by the Company to the Banks under this Section and under Section 3.3(a), each LIBOR Advance made by a Bank (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the rate used in determining LIBOR for such LIBOR Advance by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such LIBOR Advance is in fact so funded. 3.5 Inability to Determine Rates. If the Agent determines that for any reason adequate and reasonable means do not exist for determining the LIBOR for any requested Interest Period with respect to a proposed LIBOR Advance, or that the LIBOR applicable pursuant to Section 2.7 for any requested Interest Period with respect to a proposed LIBOR Advance does not adequately and fairly reflect the cost to the Banks of funding such Advance, the Agent will promptly so notify the Company and each Bank. Thereafter, the obligation of the Banks to make or maintain LIBOR Advances hereunder shall be suspended until the Agent upon the instruction of the Required Banks revokes such notice in writing (which instruction each Bank agrees to give promptly upon the circumstances described in this Section 3.5 ceasing to exist). Upon receipt of such notice, the Company may revoke any Notice of Conversion/Continuation then submitted by it, and, if the Company or the Trustee has submitted a Notice of Borrowing requesting LIBOR Advances, the Banks shall make such Advances in the amount specified in such Notice of Borrowing as Base Rate Advances instead of LIBOR Advances. 3.6 Certificates of Banks. Any Bank claiming reimbursement or compensation under this Article III shall deliver to the Company (with a copy to the Agent) a certificate setting forth in reasonable detail the calculation or other determination of the amount payable to the Bank hereunder and such certificate shall be conclusive and binding on the Company in the absence of manifest error. 3.7 Substitution of Banks. Upon (a) the receipt by the Company from any Bank of a claim for compensation under, or notice from any Bank of a circumstance described in, Section 3.1, Section 3.2, Section 3.3, or (b) any Bank being downgraded so that it no longer satisfies the Rating Qualification, or (c) any Bank electing not to extend the Scheduled Termination Date before the date 50 days before such Scheduled Termination Date pursuant to Section 2.13 after a request to do so by the Company or the Trustee pursuant to that Section, or (d) a Bank becoming a Defaulting Bank (a Bank described in any of the foregoing clauses (a) through (d) being referred to as an "Affected Bank"), the Company may: (i) except in the case of an Affected Bank described in clause (c) above, request the Affected Bank to use its best efforts to obtain an Eligible Assignee (which, in the case of a substitution as a result of a claim or circumstance referred to in clause (a) above, would not following such substitution subject the Company or be subject to similar claims or circumstances) to acquire and assume all or a ratable part of all of such Affected Bank's Advances and Commitment; (ii) request one more of the other Banks to acquire and assume all or a ratable part of such Affected Bank's Advances and Commitment; or (iii) designate an Eligible Assignee to acquire and assume all or a ratable part of such Affected Bank's Advances and Commitment (any Bank or Eligible Assignee making an acquisition and assumption pursuant to clause (i), (ii), or (iii) above being referred to as a "Replacement Bank"). Any such designation of a Replacement Bank under clause (i) or (iii) shall be subject to the prior written consent of the Agent, which consent shall not be unreasonably withheld. In the event of the replacement of an Affected Bank, such Affected Bank agrees to assign its rights and obligations hereunder, including its Commitment and Advances, to a Replacement Bank selected in accordance with the foregoing upon payment by the Replacement Bank to such Bank of the Principal Amount of the Affected Bank's Advances (with any accrued but unpaid interest thereon and any accrued but unpaid commitment fee under Section 2.8 to be payable to the Affected Bank as provided in the Assignment and Acceptance), to effect each such assignment in accordance with, and subject to the terms and conditions of, Section 10.8, and to take all other action reasonably necessary to permit a Replacement Bank to succeed to its rights and obligations hereunder; provided, however, that the Company shall be liable for the payment upon demand, but subject to Section 2.10(d), of all costs and other amounts arising under Section 3.4 that result from the acquisition of any Affected Bank's LIBOR Advances (or any portion thereof) by a Bank or a Replacement Bank on a date other than the last day of the applicable Interest Period therefor. 3.8 Survival. The agreements and obligations of the Company in this Article III shall survive the payment of all other Obligations. ARTICLE IV. CONDITIONS PRECEDENT 4.1 Conditions of Closing Date. The obligations of each Bank hereunder are subject to the condition that the Agent shall have acknowledged in writing on the Closing Date, on behalf of itself and each of the Banks, its receipt of all of the following (to the extent receipt thereof has not been waived in writing), in form and substance reasonably satisfactory to the Agent and each Bank, and with sufficient copies for each Bank: (a) Credit Agreement. This Agreement executed by each party thereto; (b) Resolutions; Incumbency. (i) Copies of the resolutions of the board of managers of the Company authorizing the transactions contemplated hereby, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Company; and (ii) A certificate of the Secretary or Assistant Secretary of the Company certifying the names and true signatures of the officers of the Company authorized to execute, deliver and perform this Agreement, and all other Operative Documents; (c) Operating Agreement; Good Standing. Each of the following documents: (i) the Operating Agreement of the Company, certified by the Secretary or Assistant Secretary of the Company as of the Closing Date; and (ii) a good standing and tax good standing certificate for the Company from the Secretary of State (or similar, applicable Governmental Authority) of the States of Delaware and California as of a recent date, together with (in the case of Delaware) a bring-down certificate by facsimile, dated the second Business Day preceding the Closing Date; (d) Operative Documents. (i) A copy of the Deed of Trust, duly executed by the Company, as trustor, and duly notarized, together with legal descriptions of the real property Mortgaged Property, which Deed of Trust shall have been submitted to the issuer of the title policy referred to below for recording in the official records of the County Recorder's office of the Humboldt County; (ii) written advice relating to such Lien and judgment searches as the Agent or any Bank shall have requested, and copies of such termination statements or other documents as may be necessary to confirm that the Mortgaged Property is subject to no other Liens in favor of any Persons (other than Permitted Encumbrances); (iii) evidence that all other actions necessary or, in the opinion of the Agent or the Banks, desirable to perfect and protect the first priority security interest created by the Deed of Trust with respect to the Mortgaged Property have been taken; (iv) an A.L.T.A. Form B (or other form acceptable to the Agent and the Banks) mortgagee policy of title insurance or a binder issued by a title insurance company satisfactory to the Agent and the Banks insuring (or undertaking to insure, in the case of a binder) that the Deed of Trust creates and constitutes a valid first Lien against the real property included in the Mortgaged Property in favor of the Trustee, subject only to exceptions reasonably acceptable to the Agent and the Banks, with such endorsements, affirmative insurance, and reinsurance as the Agent or any Bank may reasonably request; and (v) copies of each other Operative Document identified herein or in the Indenture; (e) Legal Opinions. (i) an opinion of Kramer, Levin, Naftalis and Frankel, counsel to the Company, and an opinion of Managing Counsel of the Company, each addressed to the Agent and the Banks, in form and substance satisfactory to the Agent and the Required Banks; and (ii) reliance letters addressed to the Agent and the Banks, in form and substance satisfactory to the Agent and the Required Banks, with respect to the opinions to be delivered pursuant to the Purchase Agreement by Kramer, Levin, Naftalis and Frankel, counsel to the Company and The Pacific Lumber Company, Managing Counsel of the Company, Managing Counsel of Pacific Lumber and Sheppard, Mullin, Richter & Hampton LLP, counsel to the Company and The Pacific Lumber Company. (f) Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees, costs and expenses to the extent then due and payable hereunder on the Closing Date, together with reasonable Attorney Costs of BofA to the extent invoiced prior to or on the Closing Date, plus such additional amounts of reasonable Attorney Costs as shall constitute BofA's reasonable estimate of Attorney Costs incurred or to be incurred by it in connection with the Closing Date (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and BofA); including any such costs, fees and expenses arising under or referenced in Sections 2.8 and 10.4; (g) Pacific Lumber Certificate. A certificate signed on behalf of The Pacific Lumber Company by its chief financial officer, dated as of the Closing Date, stating that: (i) the representations and warranties of The Pacific Lumber Company and its subsidiaries in each of the Operative Documents identified herein or in the Indenture to which it is a party are true and correct in all material respects on and as of such date, as though made on and as of such date; (ii) the Merger, the Palco Transfers, and the Company Transfer (as defined in the Offering Memorandum) have been completed substantially as described in the Offering Memorandum, the Old Timber Notes (as defined therein) shall have been repaid in full; (h) Company Certificate. A certificate signed on behalf of the Company by a Responsible Officer, dated as of the Closing Date, stating that: (i) the representations and warranties contained in Article V and each of the representations and warranties of the Company in each of the other Operative Documents identified herein or in the Indenture are true and correct in all material respects on and as of such date, as though made on and as of such date; and (ii) the Company has duly issued and sold not less than $800,000,000 but not more than $900,000,000 of Timber Notes as contemplated by the Offering Memorandum, which Timber Notes have been rated BBB or higher by S&P and Baa2 or higher by Moody's and all other conditions precedent to the purchase of the Timber Notes by the Initial Purchasers under the Purchase Agreement have been satisfied; and (i) Other Documents. Such other approvals, opinions, documents or materials as the Agent or any Bank may reasonably request. 4.2 Conditions to Each Advance. The obligation of each Bank to make any Advance is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date: (a) Closing Date. The Closing Date shall have occurred and the Availability Termination Date shall not have occurred; (b) Triggering, Acceleration Events. No Triggering Event or Acceleration Event shall exist on such Borrowing Date; and (c) Notice of Borrowing. A Notice of Borrowing complying with Section 2.3 shall have been delivered to Agent, properly completed for the type of Advance requested. ARTICLE V. REPRESENTATIONS AND WARRANTIES The Company represents and warrants, on and as of the Closing Date after giving effect to the transactions described in Section 4.1(g)(ii), to the Agent and each Bank that: 5.1 Existence and Power. The Company: (a) is a limited liability company duly organized, validly existing and in good standing under the laws of Delaware; (b) has the power and authority and all governmental licenses, authorizations, consents and approvals to (1) own its assets, carry on its business and to execute, deliver, and (2) perform its obligations under the Operative Documents; (c) is duly qualified as a foreign limited liability company and is licensed and in good standing under the laws of California, and there is no other jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license; and (d) is in compliance with all Requirements of Law; except, in each case referred to in clauses (b)(1), (c) or (d), to the extent that the failure to do so would not reasonably be expected to have a Material Adverse Effect. 5.2 Authorization; No Contravention. The execution, delivery and performance by the Company of this Agreement and each other Operative Document to which it is a party, have been duly authorized by all necessary limited liability company action, and do not and will not: (a) contravene the terms of the Operating Agreement; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any Contractual Obligation (other than Liens created in favor of the Trustee or the Collateral Agent under the Operative Documents) to which the Company is a party or any order, injunction, writ or decree of any Governmental Authority to which the Company or its property is subject; or (c) violate any Requirement of Law. 5.3 Governmental Authorization. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Company of this Agreement or any other Operative Document, except for such of the foregoing as have been made or obtained on or before the Closing Date or which are contemplated by the Operative Documents or described in the Offering Memorandum but which are not required to be made as of the Closing Date. 5.4 Binding Effect. This Agreement and each other Operative Document to which the Company is a party constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. The Deed of Trust is effective to create, in favor of the Collateral Agent for the benefit of the Secured Parties (as defined in the Indenture), a first priority security interest in and lien upon the Mortgaged Property, subject to Permitted Encumbrances. 5.5 Litigation. Except as specifically disclosed in the Offering Memorandum or as would not have a Material Adverse Effect, there are no actions, suits, proceedings, claims or disputes pending, or to the best knowledge of the Company, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, against the Company or any of its properties. No injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any other Operative Document, or directing that the transactions provided for herein or therein not be consummated as herein or therein provided. 5.6 No Default. As of the Closing Date, the Company is not in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, could reasonably be expected to have a Material Adverse Effect. 5.7 ERISA Compliance. (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law. Each Plan which is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS and to the best knowledge of the Company, nothing has occurred which would cause the loss of such qualification. The Company and each ERISA Affiliate has made all required contributions to any Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. (b) There are no pending or, to the best knowledge of Company, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the Company nor any ERISA Affiliate has engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. 5.8 Title to Properties. The Company has good record and marketable title in fee simple to, or valid leasehold interests in, or Company Timber Rights (as defined in the Indenture) in, all real property necessary or used in the ordinary conduct of its business, except for Permitted Encumbrances and such defects in title as could not, individually or in the aggregate, have a Material Adverse Effect. 5.9 Financial Condition. (a) The audited annual financial statements of the Company dated December 31, 1997, the unaudited quarterly financial statements of the Company dated March 31, 1998, and the related consolidated statements of income and cash flows for the fiscal periods ended on those dates: (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; (ii) fairly present the financial condition of the Company as of the date thereof and results of operations for the period covered thereby; and (iii) show all material indebtedness and other liabilities, direct or contingent, of the Company as of the date thereof, including liabilities for taxes, material commitments and contingent obligations, subject, in the case of the quarterly statements, to good faith audit adjustments. (b) Since December 31, 1997, except as disclosed in the Offering Memorandum or in the reports filed by the Company or The Pacific Lumber Company with the SEC pursuant to the Securities Exchange Act of 1934, as amended, before the Closing Date, there has been no Material Adverse Effect. 5.10 Environmental Matters. The Company conducts in the ordinary course of business a review of the effect of existing Environmental Laws and existing Environmental Claims on its business, operations and properties, and as a result thereof the Company has reasonably concluded that, except as disclosed in the Offering Memorandum, such Environmental Laws and Environmental Claims would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 5.11 Regulated Entities. None of the Company, any Person controlling the Company, or any Subsidiary, is an "Investment Company" within the meaning of the Investment Company Act of 1940. The Company is not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur Indebtedness. 5.12 No Burdensome Restrictions. Except as disclosed in the Offering Memorandum, the Company is not a party to or bound by any Contractual Obligation, or subject to any Requirement of Law, which would reasonably be expected to have a Material Adverse Effect. 5.13 Subsidiaries. The Company has no Subsidiaries and has no equity investments in any other Person. 5.14 Insurance. The properties of the Company are insured with financially sound and reputable insurance companies not Affiliates of the Company, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the Company operates, it being understood, however, that the Company does not maintain insurance in respect of standing timber. 5.15 Full Disclosure. None of the representations or warranties made by the Company in the Operative Documents as of the date such representations and warranties are made or deemed made, and none of the statements contained in any exhibit, report, statement or certificate furnished by or on behalf of the Company in connection with the Operative Documents (including the Offering Memorandum) contain any untrue statement of a material fact or collectively omit any material fact necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading as of the time when made or delivered. ARTICLE VI. AFFIRMATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Advance or other Obligation shall remain unpaid or unsatisfied 6.1 Financial Statements. The Company shall deliver to the Agent and each Bank, in form and detail reasonably satisfactory to the Agent and the Required Banks: (a) as soon as available, but not later than 105 days after the end of each fiscal year (commencing with the fiscal year ended December 31, 1998), a copy of the audited balance sheet of the Company as at the end of such year and the related statements of income or operations and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of Arthur Andersen LLP or another nationally-recognized independent public accounting firm ("Independent Auditor") which report shall state that such financial statements present fairly, in all material respects, the financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years. Such opinion shall not be qualified or limited because of a restricted or limited examination by the Independent Auditor of any material portion of the Company's records; (b) as soon as available, but not later than 60 days after the end of each of the first three fiscal quarters of each fiscal year (commencing with the fiscal quarter ended September 30, 1998), a copy of the unaudited balance sheet of the Company as of the end of such quarter and the related statements of income or operations and cash flows for the period commencing on the first day and ending on the last day of such quarter, and certified on behalf of the Company by a Responsible Officer as fairly presenting in all material respects, in accordance with GAAP (subject to ordinary, good faith year-end audit adjustments), the financial position and the results of operations of the Company. 6.2 Certificates; Other Information. The Company shall furnish to the Agent and each Bank: (a) promptly, copies of all audit reports and management audit letters delivered by the Independent Auditor to the Company (b) promptly, copies of all financial statements and reports that the Company sends to the holders of the Timber Notes, and copies of all financial statements and regular, periodical or special reports (including Forms 10K, 10Q and 8K) that the Company may make to, or file with, the SEC; (c) on or before February 1 of each year, an annual timber harvest report for the preceding calendar year substantially in the form of Exhibit F; (d) simultaneously with the giving of any notice or the providing of any certificate, report or statement to the Trustee or the Rating Agencies under the Operative Documents (including the compliance certificate referenced in Section 4.6(b) of the Indenture), a copy of such notice, certificate, report, or statement; (e) promptly upon a Responsible Officer of the Company becoming aware thereof, notice of each Indenture Event of Default and each Triggering Event, and any event that, with the giving of notice or passage of time, would constitute an Indenture Event of Default or Triggering Event, together with a description thereof in reasonable detail; and (f) promptly, such additional information regarding the business, financial or corporate affairs of the Company as the Agent, at the request of any Bank, may from time to time reasonably request. 6.3 Performance of This and Other Agreements. Punctually pay or cause to be paid (subject to Section 2.10(d)) all amounts payable by it under this Agreement and the other Operative Documents and observe and perform all the conditions, covenants, and requirements applicable to it contained in this Agreement or any other Operative Document. ARTICLE VII. NEGATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Advance or other Obligation shall remain unpaid or unsatisfied, the Company shall not: 7.1 Amendments. Unless the Required Banks waive compliance in writing, modify, amend or supplement, or give any consent to any modification, amendment, or supplement or make any waiver with respect to, any provision of the Operative Documents, except in the case of Operative Documents other than this Agreement, the Fee Letter, the Indenture, and the Deed of Trust, for amendments, supplements, or modifications that (a) either (i) cure any ambiguity, omission, defect or inconsistency or are necessary to comply with the Trust Indenture Act of 1939, as amended, or (ii) add to the covenants to the other party or parties thereto for the benefit of the Company or the Noteholders or surrender any right or power conferred on such other party or parties, and (b) do not adversely affect the rights of the Agent or any Bank; provided, however, that the consent of Required Banks to any such amendments, supplements, or modifications to the Indenture or the Deed of Trust complying with the provisions of clauses (a) and (b) above shall not be unreasonably delayed or denied; and provided further that no consent of the Required Banks pursuant to this Section is required for either (x) amendments, modifications, or supplements to the Deed of Trust that solely add property to the Lien of the Deed of Trust or solely release property from the Lien of the Deed of Trust to the extent such release may be effected strictly in accordance with the terms of Article 6 of the Indenture or Section 5.2(a) of the Deed of Trust, or (y) any action to be taken by the Company pursuant to Section 10 of the New Reciprocal Rights Agreement (as defined in the Indenture). 7.2 Merger. Unless each Bank waives compliance in writing, convert to another organizational form or consolidate with or merge into any other wholly-owned subsidiary of The Pacific Lumber Company as permitted by Section 4.13 of the Indenture. 7.3 Additional Notes. Unless the Required Banks consent thereto, issue any Additional Timber Notes (as defined in the Indenture). ARTICLE VIII. LINE OF CREDIT ACCELERATION 8.1 Triggering Event. A "Triggering Event" will be deemed to exist if (1) the maturity of the Timber Notes has been accelerated pursuant to Section 7.2 of the Indenture at a time when an Indenture Event of Default exists under Section 7.1(3) thereof, or (2) the maturity of the Timber Notes has been accelerated pursuant to Section 7.2 of the Indenture at a time when an Indenture Event of Default does not exist under Section 7.1(3) thereof and such acceleration remains in effect for 90 days, or (3) an Indenture Event of Default exists under Section 7.1(3) of the Indenture and such Indenture Event of Default continues unremedied (whether from the proceeds of an Interest Advance, withdrawals from the Liquidity Account, or otherwise) for at least 10 Business Days longer than six calendar months from the date of the Indenture Default giving rise to such Indenture Event of Default (excluding any such Indenture Event of Default that would not exist or would have been cured if a Defaulting Bank had performed its obligations hereunder), or (4) any interest on account of any Interest Advance is not paid when due (without giving effect to Section 2.10(d)) and remains unpaid for a period of one month plus 10 Business Days or longer during which period an Indenture Event of Default exists under Section 7.1(3) of the Indenture (excluding any such Indenture Event of Default that would not exist or would have been cured if a Defaulting Bank had performed its obligations hereunder), or (5) the principal of the Timber Notes is not repaid in full upon the Final Maturity Date, or (6) a Bankruptcy or Insolvency occurs with respect to the Company. The foregoing shall be determined without giving effect to any waiver of any breach or default under the Indenture, including any Indenture Event of Default, to which the Required Banks have not consented. 8.2 Line of Credit Acceleration. At any time that a Triggering Event exists, the Agent shall, at the direction of the Required Banks, and may, with the consent of the Required Banks, declare a Line of Credit Acceleration by notice to the Company and the Trustee. ARTICLE IX. THE AGENT 9.1 Appointment and Authorization; "Agent". (a) Each Bank hereby irrevocably (subject to Section 9.9) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Operative Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Operative Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Operative Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Operative Document or otherwise exist against the Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. 9.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Operative Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 9.3 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Operative Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by the Company or any Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Operative Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Operative Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Operative Document, or for any failure of the Company or any other party to any Operative Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Operative Document, or to inspect the properties, books or records of the Company or any of the Company's Affiliates. 9.4 Reliance by Agent. (a) The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Operative Document unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Operative Document in accordance with a request or consent of the Required Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. (b) For purposes of determining compliance with the conditions specified in Section 4.1, each Bank that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Agent to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Bank. 9.5 Notice of Triggering Event. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Triggering Event or Acceleration Event, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Banks, unless the Agent shall have received written notice from a Bank, the Trustee, or the Company referring to this Agreement, describing such event and identifying it as a "Triggering Event" or "Acceleration Event". 9.6 Credit Decision. Each Bank acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of the Company, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Company, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Company hereunder. Each Bank also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Operative Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Agent, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Company which may come into the possession of any of the Agent-Related Persons. 9.7 Indemnification of Agent. Whether or not the transactions contemplated hereby are consummated, the Banks shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Bank shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including reasonable Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Operative Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. 9.8 Agent in Individual Capacity. BofA and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Company and its Affiliates as though BofA were not the Agent hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, BofA or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Affiliate) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Advances, BofA shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent. 9.9 Successor Agent. The Agent may, and at the request of the Required Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent resigns under this Agreement, the Required Banks shall appoint from among the Banks a successor agent for the Banks which successor agent shall be approved by the Company unless an Acceleration Event or Triggering Event exists or the Line of Credit Acceleration has occurred. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Banks and the Company, a successor agent from among the Banks. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article IX and Sections 10.4 and 10.5 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Banks shall perform all of the duties of the Agent hereunder until such time, if any, as the Required Banks appoint a successor agent as provided for above. 9.10 Withholding Tax. (a) If any Bank is a "foreign corporation, partnership or trust" within the meaning of the Code and such Bank claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such Bank agrees with and in favor of the Agent and the Company, to deliver to the Agent and the Company: (i) if such Bank claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, two properly completed and executed copies of IRS Form 1001 or any successor form before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Bank claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Bank, two properly completed and executed copies of IRS Form 4224 or any successor form before the payment of any interest is due in the first taxable year of such Bank and in each succeeding taxable year of such Bank during which interest may be paid under this Agreement or at such other times as required under applicable law; and (iii) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Bank agrees to promptly notify the Agent and the Company of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Bank claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 or any successor form and such Bank sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations, such Bank agrees to notify the Agent and the Company of the percentage amount in which it is no longer the beneficial owner of Obligations. To the extent of such percentage amount, the Agent will treat such Bank's IRS Form 1001 as no longer valid. (c) If any Bank claiming exemption from United States withholding tax by filing IRS Form 4224 or any successor form with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations, such Bank agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. (d) If any Bank is entitled to a reduction in the applicable withholding tax, the Agent may withhold from any interest payment to such Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. However, if the forms or other documentation required by Section 9.10(a) are not delivered to the Agent, then the Agent may withhold from any interest payment to such Bank not providing such forms or other documentation an amount equivalent to the applicable withholding tax imposed by Sections 1441 and 1442 of the Code, without reduction. (e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered or was not properly executed, or because such Bank failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Bank shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Banks under this Section shall survive the payment of all Obligations and the resignation or replacement of the Agent. (f) For any period in which a Bank has failed to provide the Agent and the Company with the appropriate form in accordance with Section 9.10(e), such Bank shall not be entitled to any payment, payment increase, or indemnification under Section 3.1 with respect to Taxes imposed by the United States; provided, however, that should a Bank that is otherwise exempt from or subject to a reduced rate of withholding become subject to Taxes because of its failure to deliver a form required hereunder, the Company and the Agent shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. ARTICLE X. MISCELLANEOUS 10.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement, and no consent with respect to any departure by the Company therefrom, shall be effective unless the same shall be in writing and signed by the Required Banks (or by the Agent at the written request of the Required Banks) and the Company and acknowledged by the Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by each Bank affected thereby and the Company and acknowledged by the Agent, do any of the following: (a) increase or extend the Commitment of any Bank; (b) postpone or delay any date fixed by this Agreement for any payment of principal, interest, fees or other amounts due to the Banks (or any of them) hereunder, or reduce the amount due to the Banks (or any of them) on any such date, or consent to any amendment of Article 5 of the Indenture that would have the effect of subordinating, delaying, or deferring the Agent's or any Bank's right to receive payment thereunder on account of the Obligations; (c) reduce the principal of, or the rate of interest specified herein on any Advance, or (subject to clause (ii) below) any fees or other amounts payable hereunder; (d) change the percentage of the Commitments or of the aggregate Principal Amount of the Advances which is required for the Banks or any of them to take any action hereunder; or (e) amend this Section, or Section 2.12, or any provision herein providing for consent or other action by all Banks; and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Required Banks or all the Banks, as the case may be, affect the rights or duties of the Agent under this Agreement or any other Operative Document, (ii) no amendment, waiver or consent shall, unless in writing and consented to by the Trustee as well as signed by the Required Banks or all the Banks, as the case may be, shall reduce the aggregate Commitments hereunder below the Required Liquidity Amount or impair the rights of the Trustee to request Advances hereunder, and (iii) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. 10.2 Notices. (a) All notices, requests, consents, approvals, waivers and other communications shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by the Company or the Trustee by facsimile (i) shall be immediately confirmed by a telephone call to the recipient at the number specified on Schedule 10.2, and (ii) shall be followed promptly by delivery of a hard copy original thereof) and mailed by registered or certified mail, return receipt requested, faxed or delivered, to the address or facsimile number specified for notices on Schedule 10.2; or, as directed to the Company, the Trustee, or the Agent, to such other address as shall be designated by such party in a written notice to the other parties, and as directed to any other party, at such other address as shall be designated by such party in a written notice to the Company, the Trustee, and the Agent. (b) All such notices, requests and communications shall be effective when delivered for overnight (next-day) delivery, or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon delivery; except that notices pursuant to Article II or IX to the Agent shall not be effective until actually received by the Agent and that all notices by the Company or the Agent shall be copied to the Trustee. (c) Any agreement of the Agent and the Banks herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Company. The Agent and the Banks shall be entitled to rely in good faith on the authority of any Person purporting to be a Person authorized by the Company or the Trustee to give such notice and the Agent and the Banks shall not have any liability to the Company or any other Person on account of any action taken or not taken by the Agent or the Banks in reliance upon such telephonic or facsimile notice. The obligation of the Company to repay the Advances shall not be affected in any way or to any extent by any failure by the Agent and the Banks to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Banks of a confirmation which is at variance with the terms understood by the Agent and the Banks to be contained in the telephonic or facsimile notice. 10.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Bank, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 10.4 Costs and Expenses. The Company shall: (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse BofA (including in its capacity as Agent) on the Closing Date and thereafter on the first Monthly Deposit Date occurring at least 20 days after demand (subject to Sections 2.10(d) and 4.1(f)) for all out-of-pocket costs and expenses incurred by BofA (including in its capacity as Agent) in connection with the development, preparation, delivery, administration and execution of this Agreement, any Operative Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by BofA (including in its capacity as Agent) with respect thereto; (b) pay or reimburse the Agent on the first Monthly Deposit Date occurring at least 20 days after demand (subject to Sections 2.10(d) and 4.1(f)) for all costs and expenses incurred by Agent in connection with any amendment, supplement, waiver or modification to (in each case, whether or not consummated) this Agreement, any Operative Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated thereby, including reasonable Attorney Costs incurred by Agent with respect thereto; and (c) pay or reimburse the Agent and each Bank within five Business Days after demand (subject to Sections 2.10(d) and 4.1(f)) for all costs and expenses (including Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Operative Document during the existence of an Acceleration Event or a Triggering Event or after the Line of Credit Acceleration (including in connection with any "workout" or restructuring regarding the Advances, and including in any Bankruptcy or Insolvency or appellate proceeding). 10.5 Company Indemnification. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify, defend and hold the Agent-Related Persons, and each Bank and each of its respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Advances, termination of the Commitments, or the termination, resignation or replacement of the Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any Operative Document, or the transactions contemplated hereby or thereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Bankruptcy or Insolvency or appellate proceeding) related to or arising out of this Agreement or the Advances or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other Obligations. The Agent and the Banks acknowledge and agree that, to the extent the Indemnified Liabilities include or represent compensation for principal or interest on the Advances, the Agent and the Banks shall be entitled to payment thereof under the Indenture as and to the same extent that the Indenture provides for payment of such principal and interest on the Advances in question. 10.6 Payments Set Aside. To the extent that the Company makes a payment to the Agent or the Banks and such payment or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Bankruptcy or Insolvency or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made, and (b) each Bank severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent. 10.7 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, except that the Company may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Agent and each Bank. 10.8 Assignments, Participations, etc. (a) BofA may at any time assign and delegate to one or more (but not more than four) Eligible Assignees all or any portion of its Advances, its Commitment and the other rights and obligations of BofA as a Bank hereunder; any Bank may, with the written consent of the Agent, at any time assign and delegate to one or more other Banks all or any portion of its Advances, its Commitment, and the other rights and obligations of such Bank hereunder; and any Bank may, with the written consent of the Agent, at any time assign and delegate to one but not more than one Eligible Assignee (provided that no written consent of the Agent shall be required in connection with any assignment and delegation by a Bank to an Eligible Assignee that is an Affiliate of such Bank) (each an "Assignee") all, but not less than all, of its Advances, its Commitment and the other rights and obligations of such Bank hereunder; provided, however, that in any of the cases described above the Company and the Agent may continue to deal solely and directly with such Bank in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the Company, the Trustee, and the Agent by such Bank and the Assignee; (ii) such Bank and its Assignee shall have delivered to the Company, the Trustee, and the Agent an Assignment and Acceptance Agreement in the form of Exhibit E ("Assignment and Acceptance") and (iii) the assignor Bank or Assignee has paid to the Agent a processing fee in the amount of $4000. Any assignment by a Bank other than BofA of less than all of its outstanding Advances and Commitment, other than interest and fees accruing before the effective date of such assignment, shall be null and void. Notwithstanding the foregoing, BofA shall not assign less than all of its outstanding Advances and Commitment if, after giving effect thereto, there would be in excess of five Banks. (b) From and after the date that the Agent notifies the assignor Bank, the Company, and the Trustee that it has received (and provided its consent with respect to) an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Bank under the Operative Documents, and (ii) the assignor Bank shall, to the extent that rights and obligations hereunder and under the other Operative Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Operative Documents. (c) Immediately upon the satisfaction of the conditions set forth in clauses (i), (ii), and (iii) of Section 10.8(a), this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the assignment to the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Bank pro tanto. (d) Any Bank may at any time sell to one or more commercial banks or other Persons not Affiliates of the Company (a "Participant") participating interests in any Advances, the Commitment of that Bank and the other interests of that Bank (the "originating Bank") hereunder and under the other Operative Documents; provided, however, that (i) the originating Bank's obligations under this Agreement shall remain unchanged, (ii) the originating Bank shall remain solely responsible for the performance of such obligations, (iii) the Company, the Trustee, and the Agent shall continue to deal solely and directly with the originating Bank in connection with the originating Bank's rights and obligations under this Agreement and the other Operative Documents, and (iv) no Bank shall transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Operative Document, except as between the Participant and the originating Bank only and only to the extent such amendment, consent or waiver would require the consent of each affected Bank as described in the first proviso to Section 10.1. In the case of any such participation, the Participant shall not have any rights under this Agreement, or any of the other Operative Documents, and all amounts payable by the Company hereunder shall be determined as if such Bank had not sold such participation. (e) Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR Section203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 10.9 Notification of Addresses, Lending Offices, Etc. Each Bank shall notify the Company, the Trustee, and the Agent in writing of any changes in the address to which notices to the Bank should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. 10.10 Limitations upon Bankruptcy Petition Against Issuer. The Agent and each Bank hereby covenant and agree that, before the date that is one year and one day after the payment in full of all Timber Notes, it will not institute against, or join any other Persons in instituting against, the Company any bankruptcy, reorganization, arrangement, insolvency, or liquidation proceeding or other similar proceeding under any Bankruptcy Law (as defined in the Indenture), unless consent of 51% of the Noteholders to the taking of such action is obtained. 10.11 Limitations upon Actions by Agent or Banks. The Agent and each Bank hereby covenant and agree that it will not institute any suit against the Company or exercise any right of set-off, banker's lien, or the like, against any deposit account or property of the Company held or maintained by the Agent or such Bank if and to the extent that the institution or prosecution thereof or the entry of judgment therein or the exercise of any such right would, under applicable law, result in the surrender, impairment, waiver, or loss of the Lien of the Deed of Trust. 10.12 Release of Lien. Upon the request of the Company, following repayment in full of the Advances, all interest thereon, and all other Obligations then due and payable hereunder, if the Company is in material compliance with each of its obligations hereunder and under the other Operative Documents (excepting such non-compliance that would not reasonably be expected to affect adversely the Agent or the Banks), the Agent shall execute and deliver to the Collateral Agent such confirmations as the Company may reasonably request that the obligations to the Agent and the Banks that are secured by the Deed of Trust have been repaid in full. 10.13 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. 10.14 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 10.15 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Company, the Banks, the Agent and the Agent-Related Persons, and their successors and permitted assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Operative Documents. Notwithstanding the foregoing, the Trustee, in its capacity as such, shall be deemed a third party beneficiary of this Agreement to the extent of its rights provided herein and subject to Section 10.1. 10.16 Governing Law and Jurisdiction. (a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER OPERATIVE DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA SITTING IN THE CITY OF SAN FRANCISCO OR THE STATE OF NEW YORK SITTING IN NEW YORK CITY, BOROUGH OF MANHATTAN, OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF CALIFORNIA OR THE SOUTHERN DISTRICT OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTIONS IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA OR NEW YORK LAW, AS APPLICABLE. 10.17 Waiver of Jury Trial. THE COMPANY, THE BANKS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER OPERATIVE DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER OPERATIVE DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER OPERATIVE DOCUMENTS. 10.18 Entire Agreement. This Agreement, together with the other Operative Documents, embodies the entire agreement and understanding among the Company, the Banks and the Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in San Francisco by their proper and duly authorized officers as of the day and year first above written. SCOTIA PACIFIC COMPANY LLC By: /S/ GARY L. CLARK Gary L. Clark Title: Vice President -- Finance and Administration BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank and as Agent By: /S/ MICHAEL BALOK Michael Balok Title: Managing Director EX-11 5 EXHIBIT 11 TO MAXXAM 2ND QTR 10-Q EXHIBIT 11 MAXXAM INC. COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- --------------------------- 1998 1997 1998 1997 -------------- ------------- ------------- ------------- Weighted average common shares outstanding 7,000,597 8,531,457 7,000,597 8,593,856 Common equivalent shares attributable to stock options and convertible securities 828,522 768,040 812,720 769,339 -------------- ------------- ------------- ------------- Total common and common equivalent shares 7,829,119 9,299,497 7,813,317 9,363,195 ============== ============= ============= ============= Earnings per share information: Basic: Net income $ 1.76 $ 3.72 $ 2.04 $ 3.80 ============== ============= ============= ============= Diluted: Net income per common and common equivalent share $ 1.57 $ 3.42 $ 1.83 $ 3.49 ============== ============= ============= =============
EX-27 6 EXHIBIT 27.1 TO MAXXAM 2ND QTR 10-Q
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 1 277,300 35,400 250,300 6,400 560,800 1,381,800 2,200,800 882,400 4,059,000 677,300 1,913,700 0 300 5,000 6,100 4,059,000 1,363,600 1,363,600 1,099,700 1,099,700 141,600 0 106,400 37,700 13,400 14,300 0 0 0 14,300 2.04 1.83
EX-27 7 EXHIBIT 27.2 TO MAXXAM 2ND QTR 10-Q
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 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997 1 1 1 1 193,700 224,400 197,600 164,600 52,400 51,600 59,200 84,600 248,400 253,600 270,000 261,800 5,200 4,800 4,800 5,900 640,900 626,900 625,700 629,600 1,377,600 1,393,800 1,379,500 1,436,100 2,092,500 2,108,300 2,138,400 2,166,500 794,000 808,900 830,700 845,600 4,029,400 4,072,700 4,048,300 4,114,200 623,900 647,300 623,300 742,100 1,944,000 1,940,500 1,904,500 1,957,000 0 0 0 0 300 300 300 300 5,000 5,000 5,000 5,000 (56,200) (32,600) 42,800 (8,200) 4,029,400 4,072,700 4,048,300 4,114,200 631,600 1,320,700 3,046,700 2,729,100 631,600 1,320,700 2,046,700 2,729,100 508,700 1,049,000 1,625,000 2,167,000 508,700 1,049,000 1,625,000 2,167,000 73,900 170,000 246,100 325,700 0 0 0 0 53,100 106,000 158,300 201,400 6,800 11,900 47,800 74,500 2,700 (27,500) (13,600) (6,900) 700 32,600 50,600 65,200 0 0 0 0 0 0 0 0 0 0 0 0 700 32,600 50,600 65,200 .08 3.80 5.97 7.81 .07 3.49 5.47 7.14
EX-27 8 EXHIBIT 27.3 TO MAXXAM 2ND QTR 10-Q
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 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 1 1 1 1 113,800 118,900 120,500 336,600 19,800 40,800 50,600 50,300 238,600 233,100 226,600 205,900 5,700 5,800 5,800 5,200 646,600 631,500 623,600 634,800 1,259,000 1,250,500 1,239,800 1,477,400 1,930,700 1,960,400 2,003,000 2,067,400 703,200 725,000 750,600 769,500 3,871,800 3,877,300 3,883,100 4,115,700 628,600 654,400 615,300 743,500 1,698,300 1,672,900 1,710,300 1,951,500 0 0 0 0 300 300 300 300 5,000 5,000 5,000 5,000 (83,100) (66,000) (60,500) (56,100) 3,871,800 3,877,300 3,883,100 4,115,700 612,200 1,279,900 1,921,100 2,543,300 612,200 1,279,900 1,921,100 2,543,300 483,700 1,024,600 1,566,500 2,085,000 483,700 1,024,600 1,566,500 2,085,500 75,300 156,100 245,800 327,000 0 0 0 0 45,100 90,700 135,500 175,500 13,400 24,000 8,400 (12,100) 5,000 (4,100) (27,100) (44,900) 5,800 22,700 28,000 22,900 0 0 0 0 0 0 0 0 0 0 0 0 5,800 22,700 28,000 22,900 .66 2.61 3.22 2.63 .61 2.40 2.96 2.42
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