UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
Commission File Number 333-18723
MAXXAM GROUP HOLDINGS INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0518669
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
5847 SAN FELIPE, SUITE 2600 77057
HOUSTON, TEXAS (Zip Code)
(Address of Principal
Executive Offices)
Registrant's telephone number, including area code: (713) 975-7600
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Number of shares of common stock outstanding at July 31, 1998: 1,000
Registrant meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
TABLE OF CONTENTS
PAGE
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet at June 30, 1998 and
December 31, 1997 3
Consolidated Statement of Operations for the three and
six months ended June 30, 1998 and 1997 4
Consolidated Statement of Cash Flows for the six months
ended June 30, 1998 and 1997 5
Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures S-1
Appendix A - Glossary of Defined Terms A-1
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
ASSETS
$ 123,718 $ 91,753
Marketable securities 21,996 51,324
Receivables:
Trade 13,522 19,269
Other 7,755 6,667
Inventories 53,992 61,355
Prepaid expenses and other current assets 8,754 13,080
------------ ------------
Total current assets 229,737 243,448
Timber and timberlands, net of accumulated
depletion of $173,242 and $169,167,
respectively 297,458 299,153
Property, plant and equipment, net of accumulated
depreciation of $81,079 and $76,420,
respectively 102,282 103,388
Note receivable from MAXXAM Inc. 125,875 125,000
Investment in Kaiser Aluminum Corporation 51,532 41,402
Deferred financing costs, net 24,003 25,739
Deferred income taxes 61,932 58,767
Restricted cash 28,108 28,434
Other assets 5,039 4,209
------------ ------------
$ 925,966 $ 929,540
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 5,125 $ 3,535
Accrued interest 30,450 30,838
Accrued compensation and related benefits 9,888 12,544
Deferred income taxes 10,784 10,882
Other accrued liabilities 1,592 1,631
Long-term debt, current maturities 20,607 19,429
------------ ------------
Total current liabilities 78,446 78,859
Long-term debt, less current maturities 888,083 892,896
Other noncurrent liabilities 28,594 28,976
------------ ------------
Total liabilities 995,123 1,000,731
------------ ------------
Contingencies
Stockholder's deficit:
Common stock, $1.00 par value; 3,000 shares
authorized; 1,000 shares issued 1 1
Additional capital 123,167 123,167
Accumulated deficit (192,325) (194,359)
------------ ------------
Total stockholder's deficit (69,157) (71,191)
------------ ------------
$ 925,966 $ 929,540
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(UNAUDITED)
Net sales:
Lumber and logs $ 57,789 $ 70,139 $ 106,291 $ 130,405
Other 5,730 6,709 9,135 13,258
------------- ------------- ------------- -------------
63,519 76,848 115,426 143,663
------------ ------------ ------------ ------------
Operating expenses:
Cost of goods sold 39,526 42,057 72,590 80,102
Selling, general and
administrative expenses 3,527 3,867 6,698 7,248
Depletion and depreciation 5,734 6,660 11,351 13,207
------------ ------------ ------------ ------------
48,787 52,584 90,639 100,557
------------ ------------ ------------ ------------
Operating income 14,732 24,264 24,787 43,106
Other income (expense):
Equity in earnings of Kaiser
Aluminum Corporation 5,819 - 10,130 -
Investment, interest and
other income 5,627 7,709 14,103 12,107
Interest expense (23,831) (23,623) (47,650) (47,343)
------------ ------------ ------------ ------------
Income before income taxes 2,347 8,350 1,370 7,870
Credit (provision) for income
taxes 1,313 (3,326) 3,164 (3,158)
------------ ------------ ------------ ------------
Net income $ 3,660 $ 5,024 $ 4,534 $ 4,712
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
SIX MONTHS ENDED
JUNE 30,
1998 1997
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,534 $ 4,712
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion and depreciation 11,351 13,207
Equity in undistributed earnings of
Kaiser Aluminum Corporation (10,130) -
Amortization of deferred financing
costs and discounts on long-term
debt 8,922 8,126
Net gain on asset dispositions (1,902) -
Net sales of marketable securities 32,373 6,941
Net gain on marketable securities (2,990) (3,196)
Deferral of interest payment on note
receivable from MAXXAM Inc. (875) -
Increase (decrease) in cash resulting from
changes in:
Receivables 5,572 (1,034)
Inventories, net of depletion 4,923 8,256
Prepaid expenses and other assets (1,243) (2,438)
Accounts payable 1,521 440
Accrued interest (388) 5,802
Other liabilities (3,126) (34)
Accrued and deferred income taxes (4,182) 3,017
Other - 108
------------ ------------
Net cash provided by operating
activities 44,360 43,907
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,961) (6,034)
Net proceeds from sale of assets 6,561 69
------------ ------------
Net cash provided by (used for)
investing activities 600 (5,965)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (10,821) (8,801)
Dividends paid (2,500) -
Restricted cash withdrawals, net 326 202
------------ ------------
Net cash used for financing
activities (12,995) (8,599)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 31,965 29,343
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 91,753 73,595
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 123,718 $ 102,938
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 39,116 $ 33,404
Income taxes paid 50 -
Tax allocation payments to MAXXAM Inc. 4 169
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Timber and timberlands acquired subject to
long-term debt $ - $ 6,413
<FN>
The accompanying notes are an integral part of these financial statements.
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. GENERAL
The information contained in the following notes to the
consolidated financial statements is condensed from that which would appear
in the annual consolidated financial statements; accordingly, the
consolidated financial statements included herein should be reviewed in
conjunction with the consolidated financial statements and related notes
thereto contained in the Form 10-K filed by the Company. Any capitalized
terms used but not defined in these Condensed Notes to Consolidated
Financial Statements are defined in the "Glossary of Defined Terms"
contained in Appendix A. All references to the "Company" include MAXXAM
Group Holdings Inc. and its subsidiary companies unless otherwise indicated
or the context indicates otherwise. Accounting measurements at interim
dates inherently involve greater reliance on estimates than at year end.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the entire year.
The consolidated financial statements included herein are
unaudited; however, they include all adjustments of a normal recurring
nature which, in the opinion of management, are necessary to present fairly
the consolidated financial position of the Company at June 30, 1998, the
consolidated results of operations for the three and six months ended June
30, 1998 and 1997 and consolidated cash flows for the six months ended June
30, 1998 and 1997. The Company is a wholly owned subsidiary of MAXXAM.
SFAS No. 130 was issued in June 1997 was adopted by the Company
as of January 1, 1998. SFAS No. 130 requires the presentation of an
additional income measure (termed "comprehensive income"), which adjusts
traditional net income for certain items that previously were only
reflected as direct charges to equity (such as minimum pension
liabilities). As the amount of the adjustments to arrive at comprehensive
income is not significant, there is not a significant difference between
"traditional" net income and comprehensive income for the three and six
months ended June 30, 1998 and 1997.
SFAS No. 133, issued in June 1998, requires companies to
recognize all derivative instruments as assets or liabilities in the
balance sheet and to measure those instruments at fair value. Kaiser, the
Company's equity investee, has hedging programs which use various
derivative products to "lock-in" a price (or range of prices) for products
sold/used so that earnings and cash flows are subject to reduced risk of
volatility. Under SFAS No. 133, Kaiser will be required to "mark-to-
market" its hedging positions at the end of each period in advance of the
period of recognition for the transactions to which the hedge relates.
Pursuant to SFAS No. 130, Kaiser will reflect changes in the fair value of
its open hedging positions as an increase or reduction in stockholders'
equity through comprehensive income. Under SFAS No. 130, the impact of the
changes in the fair value of financial instruments will be reversed from
comprehensive income (net of any fluctuations in other "open" positions)
and will be reflected in traditional net income upon occurrence of the
transaction to which the hedge relates. Under the equity method of
accounting which the Company follows in accounting for its investment in
Kaiser, the Company will reflect its equity share of Kaiser's adjustments
to stockholder's equity through comprehensive income.
2. INVENTORIES
Inventories consist of the following:
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
Lumber $ 43,235 $ 49,734
Logs 10,757 11,621
------------- -------------
$ 53,992 $ 61,355
============= =============
3. RESTRICTED CASH
Restricted cash represents the amount held by the trustee under
the indenture governing the Old Timber Notes of the Company's indirect
wholly owned subsidiary, Scotia Pacific.
4. INVESTMENT IN KAISER
Subsequent to its formation, the Company received, as a capital
contribution from MAXXAM, 27,938,250 Pledged Kaiser Shares. Kaiser is an
integrated producer and marketer of alumina, primary aluminum and
fabricated aluminum products. Kaiser's common stock is publicly traded on
the New York Stock Exchange under the trading symbol "KLU." The Pledged
Kaiser Shares represent a 35.3% equity interest in Kaiser at June 30, 1998.
The Company follows the equity method of accounting for its investment in
Kaiser.
The Company and MAXXAM are entities under common control;
accordingly, the Company has recorded its investment in Kaiser at MAXXAM's
historical cost. During the first quarter of 1993, losses exhausted
Kaiser's equity with respect to its common stockholders. The Company
recorded its equity share of such losses in January 1993 up to the amount
of its investment in the Pledged Kaiser Shares. From January 1993 until
August 1997, cumulative losses with respect to the results of operations
attributable to Kaiser's common stockholders exceeded cumulative earnings.
However, this was no longer the case when equity attributable to Kaiser's
common stockholders increased upon conversion of the PRIDES into Kaiser
common stock. As a result, the Company recorded a $33,400 adjustment to
reduce the stockholder's deficit reflecting the Company's 35.4% equity
interest in the impact of the PRIDES conversion on the common stockholders.
In addition, the Company began recording its equity in Kaiser's results of
operations.
The market value for the Pledged Kaiser Shares based on the price
per share quoted at the close of business on July 30, 1998 was $256,697.
There can be no assurance that such value would be realized should the
Company dispose of its investment in the Pledged Kaiser Shares. The
following table contains summarized financial information of Kaiser. For
more information regarding Kaiser's financial condition and operations,
reference is made to Kaiser's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 and Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, both filed with the SEC.
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
Current assets $ 1,060,400 $ 1,045,600
Property, plant and equipment, net 1,159,500 1,171,800
Other assets 792,000 796,500
------------- -------------
Total assets $ 3,011,900 $ 3,013,900
============= =============
Current liabilities $ 565,200 $ 594,100
Long-term debt, less current maturities 962,500 962,900
Other liabilities 1,216,200 1,212,200
Minority interests 120,700 127,700
Stockholders' equity 147,300 117,000
------------- -------------
Total liabilities and
stockholders' equity $ 3,011,900 $ 3,013,900
============= =============
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales $ 614,800 $ 597,100 $ 1,211,800 $ 1,144,500
Costs and expenses (559,500) (542,100) (1,111,700) (1,058,200)
Restructuring of operations - (19,700) - (19,700)
Other expenses (29,600) (31,300) (56,800) (56,200)
------------ ------------ ------------ ------------
Income before income taxes and
minority interests 25,700 4,000 43,300 10,400
Credit (provision) for income
taxes (9,000) 11,000 (15,200) 8,600
Minority interests - (1,300) 600 (2,700)
------------ ------------ ------------ ------------
Net income 16,700 13,700 28,700 16,300
Dividends on preferred stock - (2,100) - (4,200)
------------ ------------ ------------ ------------
Net income available to common $ 16,700 $ 11,600 $ 28,700 $ 12,100
stockholders ============ ============ ============ ============
Equity in earnings of Kaiser $ 5,819 $ - $ 10,130 $ -
============ ============ ============ ============
5. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
7.95% Scotia Pacific Timber Collateralized Notes
due July 20, 2015 $ 309,191 $ 319,965
10-1/2% Pacific Lumber Senior Notes due March 1,
2003 235,000 235,000
Pacific Lumber Credit Agreement 9,445 9,445
11-1/4% MGI Senior Secured Notes due August 1,
2003 100,000 100,000
12-1/4% MGI Senior Secured Discount Notes due
August 1, 2003, net of discount 124,511 117,325
12% MGHI Senior Secured Notes due August 1, 2003 130,000 130,000
Other 543 590
------------ ------------
908,690 912,325
Less: current maturities (20,607) (19,429)
------------ ------------
$ 888,083 $ 892,896
============ ============
See Note 7 for discussion of (i) the issuance of the Timber Notes
on July 20, 1998, (ii) the prepayment of the Old Timber Notes and outstanding
borrowings under the Pacific Lumber Credit Agreement and (iii) the
redemption of the Pacific Lumber Senior Notes and MGI Notes.
6. CONTINGENCIES
Pacific Lumber's business is subject to a variety of California
and federal laws and regulations dealing with timber harvesting, threatened
and endangered species and habitat for such species, and air and water
quality. Compliance with such laws and regulations plays a significant
role in Pacific Lumber's business. While compliance with such laws,
regulations and judicial and administrative interpretations, together with
the cost of litigation incurred in connection with certain timber
harvesting operations of Pacific Lumber, have increased the costs of
Pacific Lumber, they have not had a significant adverse effect on the
Company's financial position, results of operations or liquidity. However,
these laws and related administrative actions and legal challenges have
severely restricted the ability of Pacific Lumber to harvest virgin old
growth timber, and to a lesser extent, residual old growth timber on its
timberlands.
On September 28, 1996, the Pacific Lumber Parties entered into
the Headwaters Agreement with the United States and California which
provides the framework for the acquisition by the United States and
California of the Headwaters Timberlands. A substantial portion of the
Headwaters Timberlands contains virgin old growth timber. Approximately
4,900 of these acres are owned by Salmon Creek, with the remaining acreage
being owned by Scotia LLC (Pacific Lumber owning the timber and related
timber harvesting rights on this acreage). The Headwaters Timberlands
would be transferred in exchange for (a) cash or other consideration from
the United States and California having an aggregate fair market value of
$300 million, and (b) approximately 7,700 acres of timberlands to be
acquired by the government from a third party. As part of the Headwaters
Agreement, the Pacific Lumber Parties agreed not to enter the Headwaters
Timberlands to conduct any logging or salvage operations.
Closing of the Headwaters Agreement is subject to various
conditions, including federal and California funding, approval of an SYP,
approval of a Multi-Species HCP, issuance of the Permits, acquisitions of
the third party timberlands and the issuance of certain tax agreements
satisfactory to the Pacific Lumber Parties.
In November 1997, President Clinton signed an appropriations bill
which contains authorization for the expenditure of $250 million of federal
funds towards consummation of the Headwaters Agreement. These funds remain
available until March 1, 1999 and their availability is subject to, among
other things, contribution by California of its $130 million portion of
funding for the Headwaters Agreement. While the State of California has not
enacted legislation providing funds for its portion of the acquisition
contemplated by the Headwaters Agreement, on May 11, 1998, California Governor
Wilson announced that he would request that funding of California's portion be
included as part of the Budget Bill. The Budget Bill is subject to approval by
the California Senate and Assembly and signature by the Governor. As of the
date of this Report, funding of California's portion of the purchase price under
the Headwaters Agreement had not yet been included in the Budget Bill. While
a separate bill has been introduced in the California Senate which would fund
California's portion of the purchase price, this bill would impose additional
restrictions on Pacific Lumber, including more restrictions on harvesting in
streamside buffers. While Pacific Lumber is working diligently toward approval
of funding (without such restrictions) for California's portion of the purchase
price as part of the Budget Bill prior to the March 1, 1999 expiration of the
federal funding, there can be no assurance that Pacific Lumber will be
successful or that the terms of any legislation which may be enacted will be
acceptable to Pacific Lumber.
On July 14, 1998, the proposed SYP and Multi-Species HCP were
made available to the public for review and comment. The proposed Multi-
Species HCP and related Permits would have a term of 50 years, and would
limit the activities which could be conducted by Pacific Lumber in eleven
forest groves to those which would not be detrimental to marbled murrelet
habitat. These groves aggregate approximately 7,600 acres and consist of
substantial quantities of virgin and residual old growth redwood and
Douglas-fir timber.
The Company believes that submission of the proposed SYP and
Multi-Species HCP for public review and comment is a favorable development
that enhances its position in connection with legal and regulatory
challenges to Pacific Lumber's THPs as well as the prospects for
consummation of the Headwaters Agreement, the approval of the Multi-Species
HCP and SYP and the issuance of the Permits. Several species, including
the northern spotted owl, the marbled murrelet and the coho salmon, have
been listed as endangered or threatened under the ESA and/or the CESA.
Pacific Lumber has developed federal and state northern spotted owl
management plans which permit harvesting activities to be conducted so long
as Pacific Lumber adheres to certain measures designed to protect the
northern spotted owl. The potential impact of the listings of the marbled
murrelet and the coho salmon is more uncertain. If the Multi-Species HCP
is approved, Pacific Lumber would be issued the Permits, which would allow
limited incidental "take" of listed species so long as there was no
"jeopardy" to the continued existence of such species, and the Multi-Species
HCP would identify the measures to be instituted in order to minimize and
mitigate the anticipated level of take to the greatest extent possible.
The Multi-Species HCP would not only provide for Pacific Lumber's
compliance with habitat requirements for currently listed species, it would
also provide greater certainty and protection for Pacific Lumber with
regard to identified species that may be listed in the future.
Lawsuits are pending or threatened which seek to prevent Pacific
Lumber from implementing certain of its approved THPs or other operations.
While challenges with respect to Pacific Lumber's young growth timber have
historically been limited, a lawsuit relating to the coho salmon was
recently filed under the ESA which relates to a significant number of THPs
covering young growth timber of Pacific Lumber. While the Company expects
these environmentally focused objections and lawsuits to continue, it
believes that the proposed Multi-Species HCP will enhance Pacific Lumber's
position in connection with these challenges. The Company also believes
that the Multi-Species HCP would expedite the preparation and facilitate
approval of its THPs.
With respect to the SYP, Pacific Lumber has proposed an LTSY
which is approximately 10% less than Pacific Lumber's average timber
harvest over the last three years. If the SYP is approved by the CDF,
Pacific Lumber will have complied with certain BOF regulations requiring
timber companies to project timber growth and harvest on their timberlands
over a 100-year planning period and establish an LTSY harvest level. The
SYP must demonstrate that the average annual harvest over any rolling ten-
year period will not exceed the LTSY harvest level and that Pacific
Lumber's projected timber inventory is capable of sustaining the LTSY
harvest level in the last decade of the 100-year planning period. The
SYP is expected to be valid for ten years, although it would be subject
to review after five years. Thereafter, revised SYPs would be prepared
every decade that address the LTSY harvest level based upon reassessment of
changes in the resource base and other factors.
After the public review and comment process is completed, the
regulatory agencies will determine whether to approve or disapprove the SYP
and Multi-Species HCP. While the parties are working diligently to
complete the closing conditions contained in the Headwaters Agreement,
there can be no assurance that the Headwaters Agreement will be consummated
or that the SYP, Multi-Species HCP or Permits acceptable to Pacific Lumber
will be approved. If the Headwaters Agreement is not consummated and
Pacific Lumber is unable to harvest or is severely limited in harvesting on
various of its timberlands, it intends to continue and/or expand its
takings litigation seeking just compensation from the appropriate
government agencies on the grounds that such restrictions constitute an
uncompensated governmental taking of private property for public use.
In the event that the Multi-Species HCP is not approved, Pacific
Lumber will not enjoy the benefits of a more streamlined THP preparation
and review process. Furthermore, it is impossible for the Company to
determine the potential adverse effect of (i) the listings of the marbled
murrelet and coho salmon if the Multi-Species HCP as approved is not
acceptable to Pacific Lumber or (ii) the EPA's potential regulations
regarding water quality on the Company's financial position, results
of operations or liquidity until such time as the various regulatory and
legal issues are resolved; however, if Pacific Lumber is unable to harvest,
or is severely limited in harvesting, on significant amounts of its
timberlands, such effect could be materially adverse to the Company.
7. SUBSEQUENT EVENT
On July 20, 1998, Scotia LLC, a recently formed limited liability
company wholly owned by Pacific Lumber, issued the Timber Notes which consist
of an aggregate of $867.2 million of Class A-1, Class A-2 and Class A-3
timber collateralized notes which are due on July 20, 2028 and have an
overall effective interest rate of 7.43% per annum. Net proceeds from the
offering were used primarily to prepay the Old Timber Notes and to redeem
the Pacific Lumber Senior Notes and the MGI Notes effective August 19, 1998.
The Company expects to recognize an extraordinary loss of $41.8 million,
net of the related income tax benefit of $23.6 million, in the quarter
ended September 30, 1998 for the early extinguishment of the Old Timber
Notes, Pacific Lumber Senior Notes and MGI Notes. Concurrently with the
issuance of the Timber Notes, (i) Scotia Pacific was merged into Scotia
LLC, (ii) Pacific Lumber transferred to Scotia LLC approximately 13,500
acres of timberlands and the timber and timber harvesting rights with
respect to an additional 19,700 acres of timberlands, and (iii) Scotia
LLC transferred to Pacific Lumber the timber and timber harvesting rights
related to approximately 1,400 acres of timberlands.
Under the Timber Notes Indenture, the business activities of
Scotia LLC are generally limited to the ownership and operation of its
timber and timberlands. The Timber Notes are senior secured obligations of
Scotia LLC and are not obligations of, or guaranteed by, Pacific Lumber or
any other person. The Timber Notes are secured by a lien on (i) Scotia
LLC's timber and timberlands (representing $246.2 million of the Company's
consolidated balance at June 30, 1998), and (ii) substantially all of
Scotia LLC's other property. Interest on the Timber Notes is further
secured by the $63.5 million Timber Notes Line of Credit. The Timber Notes
Indenture permits Scotia LLC to have outstanding up to $75.0 million of
non-recourse indebtedness to acquire additional timberlands, to issue
additional timber notes provided certain conditions are met (including
repayment or redemption of the $160.7 million Class A-1 Timber Notes)
and to incur indebtedness under the Timber Notes Line of Credit.
The Timber Notes are structured to link, to the extent of cash
available, the deemed depletion of Scotia LLC's timber (through the harvest
and sale of logs) to the required amortization of the Timber Notes. The
required amount of amortization on any Timber Note payment date is
determined by various mathematical formulas set forth in the Timber Notes
Indenture. The minimum amount of principal which Scotia LLC must pay (on a
cumulative basis and subject to available cash) through any Timber Note
payment date in order to avoid an Event of Default is referred to as
Minimum Principal Amortization. If the Timber Notes were amortized in
accordance with Minimum Principal Amortization, the final installment of
principal would be paid on July 20, 2028. The minimum amount of principal
which Scotia LLC must pay (on a cumulative basis) through any Timber Note
payment date in order to avoid payment of prepayment or deficiency premiums
is referred to as Scheduled Amortization. If all payments of principal are
made in accordance with Scheduled Amortization, the payment date on which
Scotia LLC will pay the final installment of principal is January 20, 2014.
Such final installment would include a single bullet principal payment of
$463.3 million related to the Class A-3 Timber Notes.
Principal and interest on the Timber Notes are payable semi
annually on January 20 and July 20. The Timber Notes are redeemable at the
option of Scotia LLC at any time. The redemption price of the Timber Notes
is equal to the sum of the principal amount, accrued interest and a
prepayment premium calculated based upon the yield of like-term Treasury
securities plus 50 basis points.
The indenture for the MGHI Notes provided that in the event the
27,938,250 shares of Kaiser common stock which it owns were released from
the pledge securing the MGI Notes, the Company would pledge 16,055,000 of
such shares. In connection with the redemption of the MGI Notes and the
issuance of the Timber Notes, the Company agreed to amend the indenture for
the MGHI Notes to, among other things, pledge all of the 27,938,250 shares
of Kaiser common stock which it owns.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the response to
Part I, Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any
capitalized terms used but not defined in this Item are defined in the
"Glossary of Defined Terms" contained in Appendix A.
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements appear in several places in this Form
10-Q. Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates," "will,"
"should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of
strategy. Readers are cautioned that any such forward-looking statements
are not guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in
the forward-looking statements as a result of various factors. These
factors include the effectiveness of management's strategies and decisions,
general economic and business conditions, developments in technology, new
or modified statutory or regulatory requirements and changing prices and
market conditions. This section and the Form 10-K identify other factors
that could cause such differences. No assurance can be given that these
are all of the factors that could cause actual results to vary materially
from the forward-looking statements.
RESULTS OF OPERATIONS
The Company engages in forest products operations principally
through its subsidiaries, Pacific Lumber and Britt. The Company's business
is seasonal in that the forest products business generally experiences
lower first quarter sales due largely to the general decline in
construction-related activity during the winter months. Accordingly, the
Company's results for any one quarter are not necessarily indicative of
results to be expected for the full year. The following table presents
selected operational and financial information for the three and six months
ended June 30, 1998 and 1997.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES)
Shipments:
Lumber: (1)
Redwood upper grades 11.9 13.3 22.1 26.3
Redwood common
grades 59.6 67.6 113.5 124.8
Douglas-fir upper
grades 1.6 2.5 3.5 5.0
Douglas-fir common
grades 12.1 17.1 21.3 36.5
Other 3.2 4.9 5.7 8.8
------------ ------------ ------------ ------------
Total lumber 88.4 105.4 166.1 201.4
============ ============ ============ ============
Logs (2) 1.3 4.1 1.3 6.6
============ ============ ============ ============
Wood chips (3) 48.6 62.1 80.8 122.3
============ ============ ============ ============
Average sales price:
Lumber: (4)
Redwood upper grades $ 1,513 $ 1,423 $ 1,503 $ 1,373
Redwood common
grades 550 546 529 527
Douglas-fir upper
grades 1,296 1,153 1,281 1,181
Douglas-fir common
grades 331 497 340 491
Logs (4) 414 359 414 404
Wood chips (5) 75 76 70 76
Net sales:
Lumber, net of discount $ 57.3 $ 68.6 $ 105.8 $ 127.7
Logs .5 1.5 .5 2.7
Wood chips 3.7 4.7 5.7 9.2
Cogeneration power 1.2 1.2 1.8 2.2
Other .8 .8 1.6 1.9
------------ ------------ ------------ ------------
Total net sales $ 63.5 $ 76.8 $ 115.4 $ 143.7
============ ============ ============ ============
Operating income $ 14.7 $ 24.3 $ 24.8 $ 43.1
============ ============ ============ ============
Operating cash flow (6) $ 20.5 $ 31.0 $ 36.2 $ 56.3
============ ============ ============ ============
Income before income taxes $ 2.4 $ 8.4 $ 1.4 $ 7.9
============ ============ ============ ============
Net income $ 3.6 $ 5.0 $ 4.5 $ 4.7
============ ============ ============ ============
Capital expenditures $ 3.2 $ 10.2 $ 6.0 $ 12.4
============ ============ ============ ============
<FN>
- ---------------
(1) Lumber shipments are expressed in millions of board feet.
(2) Log shipments are expressed in millions of feet, net Scribner scale.
(3) Wood chip shipments are expressed in thousands of bone dry units of
2,400 pounds.
(4) Dollars per thousand board feet.
(5) Dollars per bone dry unit.
(6) Operating income before depletion and depreciation, also referred to
as "EBITDA."
Net sales
Net sales declined from $76.9 million and $143.7 million in the
second quarter and first half of 1997, respectively, to $63.5 million and
$115.4 million for the second quarter and first half of 1998, respectively,
primarily due to lower shipments of lumber, logs and wood chips. This
decrease was principally due to the inclement weather during the 1998
periods, combined with wet weather operating restrictions and the
applicability of logging restrictions during the nesting seasons for the
northern spotted owl and the marbled murrelet, which factors have
restricted the Company's harvesting and transporting of logs to its mills.
These difficulties in harvesting and transporting logs affected the types
of logs available for the mills and the Company's ability to produce a
desirable mix of lumber products which in turn adversely affected sales.
The poor weather conditions also had an unfavorable impact on demand for
the Company's lumber products and its ability to ship its products using
rail transportation. The Company expects that its revenues in the third
quarter of 1998 will increase materially over the second quarter of 1998,
as it will, assuming normal rainfall patterns during such quarter, be able
to conduct operations in areas where it has been restricted due to
inclement weather, wet weather operating restrictions and the nesting
seasons which end during the third quarter of 1998, and therefore be able
to achieve normal levels of lumber production as well as a more desirable
mix of lumber products.
Operating income
Operating income for the three and six months ended June 30, 1998
decreased from the comparable prior year periods primarily due to the
decrease in net sales discussed above.
Income before income taxes
Income before income taxes for the three and six months ended
June 30, 1998 decreased from the comparable 1997 periods, primarily due to
the decrease in operating income discussed above. This impact was
partially offset by equity in earnings from Kaiser. As discussed in Note 4
to the Consolidated Financial Statements, the Company began reflecting its
equity share of earnings in Kaiser in September 1997. Results for the
second quarter of 1998 were also affected by a decrease in investment
income from marketable securities.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See above for cautionary information with respect to
such forward-looking statements.
As discussed further in Note 7 to the Consolidated Financial
Statements, on July 20, 1998, Scotia LLC issued $867.2 million of Timber
Notes. Proceeds from the offering were used primarily to prepay the Old
Timber Notes and to redeem the Pacific Lumber Senior Notes and the MGI
Notes effective August 19, 1998.
The Pacific Lumber Credit Agreement and the indenture governing
the Timber Notes contain various covenants which, among other things, limit
the ability of Pacific Lumber and Scotia LLC to incur additional
indebtedness and liens, to engage in transactions with affiliates, to pay
dividends and to make investments. As of June 30, 1998, under the most
restrictive of these covenants, approximately $24.6 million of dividends
could be paid by Pacific Lumber to its parent.
As of June 30, 1998, $31.1 million of borrowings was available
under the Pacific Lumber Credit Agreement, of which $5.6 million was
available for letters of credit and $20.5 million was restricted to
timberland acquisitions. As of June 30, 1998, $9.4 million of borrowings
were outstanding and letters of credit outstanding amounted to $14.4
million. All of the $9.4 million of borrowings were repaid on July 20,
1998 in connection with the issuance of the Timber Notes.
The indenture governing the MGHI Notes, among other things,
restricts the ability of the Company to incur additional indebtedness and
liens, engage in transactions with affiliates, pay dividends and make
investments. During the six months ended June 30, 1998, $2.5 million of
dividends were paid by the Company.
As of June 30, 1998, the Company had consolidated long-term debt
of $860.0 million (net of current maturities and restricted cash deposited
in the Liquidity Account) as compared to $864.5 million at December 31,
1997. The decrease in long-term debt was primarily due to $10.8 million in
principal payments on the Old Timber Notes offset by $7.2 million in
accretion of discount on the MGI Discount Notes. The Company anticipates
that cash flow from operations, together with existing cash, cash
equivalents, marketable securities and available sources of financing, will
be sufficient to fund its working capital and capital expenditure
requirements for the next year. With respect to its long-term liquidity,
the Company believes that its existing cash and cash equivalents, together
with its ability to generate sufficient levels of cash from operations and
its ability to obtain both short- and long-term financing, should provide
sufficient funds to meet its working capital and capital expenditure
requirements. However, due to its highly leveraged condition, the Company
is more sensitive than less leveraged companies to factors affecting its
operations, including governmental regulation and litigation affecting
timber harvesting practices (see "--Trends" below), increased competition
from other lumber producers or alternative building products and general
economic conditions.
TRENDS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See above for cautionary information with respect to
such forward-looking statements.
The Company's forest products operations are conducted by Pacific
Lumber and Britt. Pacific Lumber's operations are subject to a variety of
California and federal laws and regulations dealing with timber harvesting,
threatened and endangered species and habitat for such species, and air and
water quality. Moreover, these laws and regulations are modified from time
to time and are subject to judicial and administrative interpretation.
Compliance with such laws, regulations and judicial and administrative
interpretations, together with the cost of litigation incurred in
connection with certain timber harvesting operations of Pacific Lumber,
have increased the cost of logging operations. There can be no assurance
that certain pending regulatory and environmental matters or future
governmental regulations, legislation or judicial or administrative
decisions would not have a material adverse effect on the Company's
financial position, results of operations or liquidity. See Part II. Item
1. "Legal Proceedings" and Note 6 to the Condensed Consolidated Financial
Statements for further information regarding regulatory and legal
proceedings affecting the Company's operations.
Judicial or regulatory actions adverse to Pacific Lumber,
increased regulatory delays and inclement weather in northern California,
independently or collectively, could impair Pacific Lumber's ability to
maintain adequate log inventories and force Pacific Lumber to temporarily
idle or curtail operations at certain lumber mills from time to time.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 27, 1998, an action entitled Mateel Environmental Justice
Foundation v. Pacific Lumber, et. al. (No. 995329) was filed against MGI,
Scotia Pacific, Pacific Lumber and Salmon Creek in the California Superior
Court, San Francisco County. This action alleges, among other things,
violations of California's unfair competition law of the business and
professions code based on citations and violations (primarily water quality
related) issued against certain defendants since 1994 in connection with a
substantial number of THPs. The plaintiff seeks, among other things, an
injunction prohibiting alleged unlawful actions and requiring corrective
action, disgorgement of profits, appointment of a receiver to ensure
compliance with the law and any judgment, and financial security with
respect to future THPs to ensure full compliance with the Forest Practice
Act. The Company does not believe that this matter will have a material
adverse effect upon its business or financial condition.
Reference is made to Item 3 of the Form 10-K for information
concerning material legal proceedings with respect to the Company. No
material developments have occurred with respect to such legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
4.1 Indenture between Scotia LLC and State Street Bank and Trust
Company ("State Street"), as Trustee, regarding the Timber
Notes (incorporated herein by reference to Exhibit 4.1 to
the Quarterly Report on Form 10-Q of MAXXAM for the quarter
ended June 30, 1998, File No. 1-3924; the "MAXXAM June 30,
1998 10-Q")
4.2 Deed of Trust, Security Agreement, Financing Statement,
Fixture Filing and Assignment of Proceeds among Scotia LLC,
Fidelity National Title Insurance Company, as Trustee, and
State Street, as Collateral Agent (incorporated herein by
reference to Exhibit 4.2 to the MAXXAM June 30, 1998 10-Q)
4.3 Credit Agreement among Scotia LLC, Bank of America National
Trust and Savings Association and other financial
institutions party thereto (incorporated herein by reference
to Exhibit 4.3 to the MAXXAM June 30, 1998 10-Q)
*10.1 New Master Purchase Agreement between Pacific Lumber and
Scotia LLC
*10.2 New Services Agreement between Pacific Lumber and Scotia LLC
*10.3 New Additional Services Agreement between Pacific Lumber and
Scotia LLC
*10.4 New Reciprocal Rights Agreement among Pacific Lumber, Scotia
LLC and Salmon Creek
*10.5 New Environmental Indemnification Agreement between Pacific
Lumber and Scotia LLC
*27 Financial Data Schedule
* Included with this filing.
B. REPORTS ON FORM 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized, who has signed this report on
behalf of the Registrant and as the principal accounting officer of the
Registrant.
MAXXAM GROUP HOLDINGS INC.
Date: July 31, 1998 By: /S/ PAUL N. SCHWARTZ
Paul N. Schwartz
Vice President, Chief Financial
Officer and Director
Date: July 31, 1998 By: /S/ ELIZABETH D. BRUMLEY
Elizabeth D. Brumley
Assistant Controller
(Principal Accounting Officer)
APPENDIX A
GLOSSARY OF DEFINED TERMS
BOF: California Board of Forestry
Britt: Britt Lumber Co., Inc., an indirect, wholly owned subsidiary of MGI
Budget Bill: California's 1998-99 budget bill
CDF: California Department of Forestry
CESA: California Endangered Species Act
Company: MAXXAM Group Holdings Inc., a wholly owned subsidiary of MAXXAM
EPA: Environmental Protection Agency
ESA: The federal Endangered Species Act
Form 10-K: The Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the fiscal year ended December 31,
1997
HCP: Habitat Conservation Plan
Headwaters Agreement: The September 28, 1996 agreement among the Pacific
Lumber Parties, the United States and California which provides the
framework for the acquisition by the United States and California of the
Headwaters Timberlands
Headwaters Timberlands: Approximately 5,600 acres of Pacific Lumber's
timberlands consisting of two forest groves commonly referred to as the
Headwaters Forest and the Elk Head Springs Forest
Kaiser: Kaiser Aluminum Corporation, an equity investee of the Company
engaged in aluminum operations
Liquidity Account: A liquidity account maintained by Scotia Pacific with
respect to the Old Timber Notes
LTSY: Long-term sustained yield
MAXXAM: MAXXAM Inc., including its subsidiaries unless otherwise noted or
the context indicates otherwise
MGHI Notes: 12% MGHI Senior Secured Notes due August 1, 2003
MGI: MAXXAM Group Inc., a wholly owned subsidiary of the Company
MGI Discount Notes: 12-1/4% MGI Senior Secured Discount Notes due August
1, 2003
MGI Notes: MGI Discount Notes and MGI Senior Notes
MGI Senior Notes: 11-1/4% MGI Senior Secured Notes due August 1, 2003
Minimum Principal Amortization: The minimum amount of principal on the
Timber Notes which Scotia LLC must pay (on a cumulative basis and subject
to available cash) through any Timber Note payment date in order to avoid
an Event of Default (as defined in the Timber Note Indenture)
Multi-Species HCP: The HCP covering multiple species contemplated by the
Headwaters Agreement
NMFS: National Marine Fisheries Service
Old Timber Notes: The 7.95% Scotia Pacific Timber Collateralized Notes due
July 20, 2015
Pacific Lumber: The Pacific Lumber Company, an indirect, wholly owned
subsidiary of MGI
Pacific Lumber Credit Agreement: The revolving credit agreement between
Pacific Lumber and a bank which provides for borrowings of up to
$60,000,000 of which $20,000,000 may be used for standby letters of credit
and $30,000,000 is restricted to timberland acquisitions.
Pacific Lumber Parties: Pacific Lumber, including its subsidiaries and
affiliates, and MAXXAM
Pacific Lumber Senior Notes: 10-1/2% Pacific Lumber Senior Notes due March
1, 2003
Permits: The incidental take permits related to the Multi-Species HCP
Pledged Kaiser Shares: The 27,938,250 shares of common stock of Kaiser
pledged as security for the MGI Notes
Pre-Permit Agreement: A February 27, 1998 Pre-Permit Application Agreement
in Principle entered into by Pacific Lumber, MAXXAM and various government
agencies regarding certain understandings that they had reached regarding
the Multi-Species HCP, the Permits and the SYP
PRIDES: 8,855,550 8.255% Preferred Redeemable Increased Dividend Equity
Securities issued by Kaiser during the first quarter of 1994; all
outstanding shares were converted into 7,227,848 shares of Kaiser common
stock in August 1997
Salmon Creek: Salmon Creek Corporation, a wholly owned subsidiary of
Pacific Lumber
Scheduled Amortization: The minimum amount of principal on the Timber
Notes which Scotia LLC must pay (on a cumulative basis) through any Timber
Note payment date in order to avoid payment of prepayment or deficiency
premiums.
Scotia LLC: Scotia Pacific Company LLC, a limited liability company
wholly owned by Pacific Lumber
Scotia Pacific: Scotia Pacific Holding Company, a wholly owned subsidiary
of Pacific Lumber, which was merged into Scotia LLC on July 20, 1998
SEC: Securities and Exchange Commission
SFAS No. 130: Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income"
SFAS No. 133: Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
SYP: The sustained yield plan establishing LTSY harvest levels for Pacific
Lumber's timberlands
THP: Timber harvesting plan required to be filed with and approved by the
CDF prior to the harvesting of timber
Timber Note Indenture: The indenture dated July 20, 1998 governing the
Timber Notes
Timber Notes: The Scotia LLC 6.55% Class A-1, 7.11% Class A-2 and 7.71%
Class A-3 Timber Collateralized Notes due July 20, 2028
Timber Notes Line of Credit: A line of credit agreement provided as
security for the payment of interest on the Timber Notes
USFWS: United States Fish and Wildlife Service