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 MARCH 31, 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 April 29, 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.
<PAGE>
TABLE OF CONTENTS
PAGE
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet at March 31, 1998 and
December 31, 1997 3
Consolidated Statement of Operations for the three
months ended March 31, 1998 and 1997 4
Consolidated Statement of Cash Flows for the three
months ended March 31, 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 10
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature S-1
<PAGE>
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 81,790 $ 91,753
Marketable securities 49,253 51,324
Receivables:
Trade 11,183 19,269
Other 3,200 6,667
Inventories 55,993 61,355
Prepaid expenses and other current assets 8,095 13,080
------------ ------------
Total current assets 209,514 243,448
Timber and timberlands, net of accumulated
depletion of $170,372 and $169,167,
respectively 298,794 299,153
Property, plant and equipment, net of
accumulated depreciation of $78,834
and $76,420, respectively 103,037 103,388
Note receivable from MAXXAM Inc. 125,875 125,000
Investment in Kaiser Aluminum Corporation 45,713 41,402
Deferred financing costs, net 24,871 25,739
Deferred income taxes 60,063 58,767
Restricted cash 28,108 28,434
Other assets 4,513 4,209
------------ ------------
$ 900,488 $ 929,540
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 3,248 $ 3,535
Accrued interest 11,434 30,838
Accrued compensation and related benefits 8,311 12,544
Deferred income taxes 10,784 10,882
Other accrued liabilities 1,773 1,631
Long-term debt, current maturities 20,607 19,429
------------ ------------
Total current liabilities 56,157 78,859
Long-term debt, less current maturities 884,500 892,896
Other noncurrent liabilities 30,148 28,976
------------ ------------
Total liabilities 970,805 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 (193,485) (194,359)
------------ ------------
Total stockholder's deficit (70,317) (71,191)
------------ ------------
$ 900,488 $ 929,540
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Net sales:
Lumber and logs $ 48,502 $ 60,266
Other 3,405 6,549
------------ ------------
51,907 66,815
------------ ------------
Operating expenses:
Cost of goods sold 33,064 38,045
Selling, general and administrative expenses 3,171 3,404
Depletion and depreciation 5,617 6,547
------------ ------------
41,852 47,996
------------ ------------
Operating income 10,055 18,819
Other income (expense):
Equity in earnings of Kaiser Aluminum
Corporation 4,311 --
Investment, interest and other income 8,476 4,398
Interest expense (23,819) (23,697)
------------ ------------
Loss before income taxes (977) (480)
Credit in lieu of income taxes 1,851 168
------------ ------------
Net income (loss) $ 874 $ (312)
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 874 $ (312)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depletion and depreciation 5,617 6,547
Equity in undistributed earnings of
Kaiser Aluminum Corporation (4,311) --
Amortization of deferred financing
costs and discounts on long-term
debt 4,426 4,032
Net gain on asset dispositions (1,827) --
Net sales of marketable securities 4,356 22
Net (gain) loss on marketable
securities (2,285) 243
Deferral of interest payment on note
receivable from MAXXAM Inc. (875) --
Increase (decrease) in cash resulting from
changes in:
Receivables 12,862 (1,615)
Inventories, net of depletion 3,357 5,761
Prepaid expenses and other assets (57) (1,914)
Accounts payable (1,288) (169)
Accrued interest (19,404) (13,568)
Other liabilities (2,836) (3,442)
Accrued and deferred income taxes (1,835) (165)
Other 2 70
------------ ------------
Net cash used for operating
activities (3,224) (4,510)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,770) (2,258)
Net proceeds from sale of assets 6,481 11
------------ ------------
Net cash provided by (used for)
investing activities 3,711 (2,247)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions, repurchases of and principal
payments on long-term debt (10,776) (8,756)
Restricted cash withdrawals, net 326 202
------------ ------------
Net cash used for financing activities (10,450) (8,554)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (9,963) (15,311)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 91,753 73,595
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 81,790 $ 58,284
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 38,796 $ 33,244
Income taxes paid 50 --
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
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 noted 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 March 31, 1998, the
consolidated results of operations for the three months ended March 31,
1998 and 1997 and consolidated cash flows for the three months ended March
31, 1998 and 1997. The Company is a wholly owned subsidiary of MAXXAM.
SFAS No. 130 was issued in June 1997 with the adoption required
for fiscal years beginning after December 31, 1997. 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). For the quarters ended March 31, 1998 and 1997,
there is not a significant difference between "traditional" net income and
comprehensive net income as the amount of the adjustments required to
arrive at comprehensive income is not significant.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Lumber $ 48,957 $ 49,734
Logs 7,036 11,621
------------ ------------
$ 55,993 $ 61,355
============ ============
</TABLE>
3. RESTRICTED CASH
Restricted cash represents the amount held by the trustee under
the indenture governing the 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 March 31,
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 April 29, 1998 was $291,600.
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 March 31, 1998, both filed with the SEC.
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Current assets $ 1,008,700 $ 1,045,600
Property, plant and equipment, net 1,162,500 1,171,800
Other assets 792,600 796,500
------------ ------------
Total assets $ 2,963,800 $ 3,013,900
============ ============
Current liabilities $ 543,000 $ 594,100
Long-term debt, less current maturities 962,600 962,900
Other liabilities 1,201,600 1,212,200
Minority interests 126,100 127,700
Stockholders' equity 130,500 117,000
------------ ------------
Total liabilities and stockholders' equity $ 2,963,800 $ 3,013,900
============ ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 597,000 547,400
Costs and expenses (552,200) (516,100)
Other expenses (27,200) (24,900)
------------ ------------
Income before income taxes and minority
interests 17,600 6,400
Provision for income taxes (6,200) (2,400)
Minority interests 600 (1,400)
------------ ------------
Net income 12,000 2,600
Dividends on preferred stock -- (2,100)
------------ ------------
Net income available to common stockholders $ 12,000 $ 500
============ ============
Equity in earnings of Kaiser $ 4,311 $ --
============ ============
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized Notes
due July 20, 2015 $ 309,192 $ 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 120,883 117,325
12% MGHI Senior Secured Notes due August 1, 2003 130,000 130,000
Other 587 590
------------ ------------
905,107 912,325
Less: current maturities (20,607) (19,429)
------------ ------------
$ 884,500 $ 892,896
============ ============
</TABLE
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 Pacific (Pacific Lumber having harvesting rights on
approximately 300 of such acres). 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 7,800 acres of timberlands to be acquired
from a third party. As part of the Headwaters Agreement, the Pacific
Lumber Parties agreed to not 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 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. On February 27,
1998, Pacific Lumber, MAXXAM and various government agencies entered into
the HCP/SYP Agreement regarding certain understandings that they had
reached regarding the Multi-Species HCP, the Permits and the SYP. The
HCP/SYP Agreement provides that the Permits and Multi-Species HCP would
have a term of 50 years, and would limit the activities which could be
conducted by Pacific Lumber in twelve forest groves to those which would
not be detrimental to marbled murrelet habitat. These groves aggregate
approximately 8,000 acres and consist of substantial quantities of virgin
and residual old growth redwood and Douglas-fir timber.
The Company believes that the HCP/SYP Agreement 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 the 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. Pacific
Lumber is attempting to include in the Multi-Species HCP a resolution of
the effect of potential regulatory limits by the EPA on sedimentation,
temperature and other factors for seventeen northern California rivers
and certain of their tributaries, including rivers within Pacific Lumber's
timberlands. These limitations would be aimed at protecting water quality.
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 HCP/SYP Agreement 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.
The HCP/SYP Agreement also contains certain provisions relating
to the SYP. The Company expects Pacific Lumber to propose 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 that timber
companies 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. An approved SYP is
expected to be valid for ten years, although it would be subject to review
after five years. Thereafter, revised SYPs will be prepared every decade
that address the LTSY harvest level based upon reassessment of changes in
the resource base and other factors.
The final terms of the SYP, the Multi-Species HCP and the Permits
are subject to additional negotiation and agreement among the parties as
well as public review and comment. While the parties are working
diligently to complete the Multi-Species HCP and the SYP as well as the
other closing conditions contained in the Headwaters Agreement, there can
be no assurance that the Headwaters Agreement will be consummated or that
an 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 governmental
agencies on the grounds that such restrictions constitute an uncompensated
governmental taking of private property for public use.
In the event that a Multi-Species HCP is not approved, Pacific
Lumber will not enjoy the benefits of a more streamlined THP preparation
and review process. Furthermore, if a Multi-Species HCP acceptable to
Pacific Lumber is not approved, it is impossible for the Company to
determine the potential adverse effect of the listings of the marbled
murrelet and coho salmon or the EPA's potential regulatory limitations
on river sedimentation 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.
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 subsequent
to the filing 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 months ended
March 31, 1998 and 1997.
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1998 1997
------------ ------------
(In millions of dollars,
except shipments
and prices)
<S> <C> <C>
Shipments:
Lumber: (1)
Redwood upper grades 10.2 13.0
Redwood common grades 53.9 57.2
Douglas-fir upper grades 1.9 2.5
Douglas-fir common grades 9.2 19.4
Other 2.5 3.9
------------ ------------
Total lumber 77.7 96.0
============ ============
Logs (2) -- 2.5
============ ============
Wood chips (3) 32.2 60.2
============ ============
Average sales price:
Lumber: (4)
Redwood upper grades $ 1,491 $ 1,322
Redwood common grades 506 505
Douglas-fir upper grades 1,269 1,211
Douglas-fir common grades 352 486
Logs (4) 382 478
Wood chips (5) 62 75
Net sales:
Lumber, net of discount $ 48.5 $ 59.1
Logs -- 1.2
Wood chips 2.0 4.5
Cogeneration power .6 1.0
Other .8 1.0
------------ ------------
Total net sales $ 51.9 $ 66.8
============ ============
Operating income $ 10.1 $ 18.8
============ ============
Operating cash flow (6) $ 15.7 $ 25.4
============ ============
Loss before income taxes $ (1.0) $ ( .5)
============ ============
Net income (loss) $ .9 $ ( .3)
============ ============
Capital expenditures $ 2.8 $ 2.3
============ ============
<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."
</TABLE>
Net sales
Net sales for the quarter ended March 31, 1998 decreased from the
comparable prior year quarter due primarily to lower shipments of lumber,
logs, and chips and to lower average realized prices for common grade
Douglas-fir lumber. This impact was partially offset by higher average
realized prices for upper and common grade redwood lumber. The decrease in
volumes was due largely to well-above-normal rainfall during the 1998
period which reduced demand, hindered logging operations, slowed
production, and inhibited shipments.
Operating income
Operating income for the three months ended March 31, 1998
decreased from the comparable prior year period, principally due to the
decrease in net sales discussed above.
Loss before income taxes
Loss before income taxes for the three months ended March 31,
1998 increased from the comparable 1997 period principally due to lower
operating income discussed above. This impact was partially offset by
equity in earnings from Kaiser, higher earnings on marketable securities
and a gain on the sale of a non-timber property. As discussed in Note 4 to
the Consolidated Financial Statements, the Company began reflecting its
equity share of earnings in Kaiser in September 1997.
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.
The Pacific Lumber Credit Agreement and the indentures governing
the Pacific Lumber Senior Notes and the Timber Notes contain various
covenants which, among other things, limit the ability of Pacific Lumber
and Scotia Pacific to incur additional indebtedness and liens, to engage in
transactions with affiliates, to pay dividends and to make investments. As
of March 31, 1998, under the most restrictive of these covenants,
approximately $17.2 million of dividends could be paid by Pacific Lumber to
its parent.
As of March 31, 1998, $30.3 million of borrowings was available
under the Pacific Lumber Credit Agreement, of which $4.9 million was
available for letters of credit and $20.6 million was restricted to
timberland acquisitions. As of March 31, 1998, $9.4 million of borrowings
were outstanding and letters of credit outstanding amounted to $15.1 million.
The indenture governing the MGI Notes, among other things,
restricts the ability of MGI to incur additional indebtedness, engage in
transactions with affiliates, pay dividends and make investments. During
the three months ended March 31, 1998, no dividends were paid.
The indenture governing the MGHI Notes, among other things,
restrict the ability of the Company to incur additional indebtedness and
liens, engage in transactions with affiliates, pay dividends and make
investments. During the three months ended March 31, 1998, no dividends
were paid by the Company.
As of March 31, 1998, the Company had consolidated long-term debt
of $856.4 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 Timber Notes offset by $3.6 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 litigation and governmental regulation
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. Pacific Lumber is subject
to certain pending matters which could have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity. There can be no assurance that these pending matters or future
governmental regulations, legislation or judicial or administrative
decisions would not have a material adverse effect on the Company. See
Part II. Item 1. "Legal Proceedings" and Note 6 to the Condensed
Consolidated Financial Statements for further information regarding
regulatory and environmental factors and the Headwaters Agreement
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
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:
27 Financial Data Schedule
B. REPORTS ON FORM 8-K:
None.
<PAGE>
SIGNATURE
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: May 1, 1998 By: /s/ Paul N. Schwartz
Paul N. Schwartz
Vice President
<PAGE>
APPENDIX A
GLOSSARY OF DEFINED TERMS
BOF: California Board of Forestry
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
HCP/SYP 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
Headwaters Agreement: The September 28, 1996 agreement between 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
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 Timber Notes
LTSY: Long-term sustained yield
MAXXAM: MAXXAM Inc.
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, net of discount
MGI Notes: MGI Discount Notes and MGI Senior Notes
MGI Senior Notes: 11-1/4% MGI Senior Secured Notes due August 1, 2003
Multi-Species HCP: The habitat conservation plan covering multiple species
contemplated by the Headwaters Agreement
NMFS: National Marine Fisheries Service
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
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
Scotia Pacific: Scotia Pacific Holding Company, a wholly owned subsidiary
of Pacific Lumber
SEC: Securities and Exchange Commission
SFAS No. 130: Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income"
SYP: Sustained yield plan establishing long-term sustained yield harvest
levels for a company's timberlands
THP: Timber harvesting plan required to be filed with and approved by the
CDF prior to the harvesting of timber
Timber Notes: the 7.95% Scotia Pacific Timber Collateralized Notes due
July 20, 2015
USFWS: United States Fish and Wildlife Service
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet and consolidated statement of operations
and is qualified in its entirety by reference to such consolidated financial
statements together with the related footnotes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 81,790
<SECURITIES> 49,253
<RECEIVABLES> 11,183
<ALLOWANCES> 0
<INVENTORY> 55,993
<CURRENT-ASSETS> 209,514
<PP&E> 181,871
<DEPRECIATION> 78,834
<TOTAL-ASSETS> 900,488
<CURRENT-LIABILITIES> 56,157
<BONDS> 905,107
0
0
<COMMON> 1
<OTHER-SE> (70,318)
<TOTAL-LIABILITY-AND-EQUITY> 900,488
<SALES> 51,907
<TOTAL-REVENUES> 51,907
<CGS> 33,064
<TOTAL-COSTS> 33,064
<OTHER-EXPENSES> 8,788
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,819
<INCOME-PRETAX> (977)
<INCOME-TAX> (1,851)
<INCOME-CONTINUING> 874
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 874
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
