--------------------------------------------------------------------------------
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, 2000
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 organization) Identification Number)
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 August 9, 2000: 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
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet at June 30, 2000 and
December 31, 1999
Consolidated Statement of Operations for the three and
six months ended June 30, 2000 and 1999
Consolidated Statement of Cash Flows for the six months
ended June 30, 2000 and 1999
Condensed Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
APPENDIX A - GLOSSARY OF DEFINED TERMS
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 103.9 $ 189.8
Marketable securities........................................................... 72.5 43.8
Receivables:
Trade........................................................................ 11.9 10.9
Other........................................................................ 6.4 9.1
Inventories..................................................................... 45.9 44.6
Prepaid expenses and other current assets....................................... 21.4 17.7
-------------- --------------
Total current assets......................................................... 262.0 315.9
Timber and timberlands, net of accumulated depletion of $184.7 and
$180.6, respectively............................................................ 252.5 254.1
Property, plant and equipment, net of accumulated depreciation of $98.5 and
$93.7, respectively............................................................. 99.3 100.4
Note receivable from MAXXAM Inc.................................................... 155.9 147.8
Investment in Kaiser Aluminum Corporation.......................................... 29.9 21.9
Deferred financing costs, net...................................................... 21.9 23.6
Deferred income taxes.............................................................. 98.6 100.3
Restricted cash and marketable securities.......................................... 129.1 158.9
Other assets....................................................................... 8.5 8.8
-------------- --------------
$ 1,057.7 $ 1,131.7
============== ==============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable................................................................ $ 6.4 $ 6.1
Accrued interest................................................................ 33.2 34.5
Accrued compensation and related benefits....................................... 9.3 3.7
Deferred income taxes........................................................... 7.1 7.0
Other accrued liabilities....................................................... 1.4 5.3
Short-term borrowings and current maturities of long-term debt.................. 21.8 16.0
-------------- --------------
Total current liabilities.................................................... 79.2 72.6
Long-term debt, less current maturities............................................ 928.1 969.4
Deferred income taxes.............................................................. 96.5 78.8
Other noncurrent liabilities....................................................... 25.5 45.8
-------------- --------------
Total liabilities............................................................ 1,129.3 1,166.6
-------------- --------------
Contingencies
Stockholder's deficit:
Common stock, $1.00 par value; 3,000 shares authorized; 1,000 shares issued..... - -
Additional capital.............................................................. 168.2 123.2
Accumulated deficit............................................................. (239.4) (157.7)
Accumulated other comprehensive loss - additional minimum pension liability..... (0.4) (0.4)
-------------- --------------
Total stockholder's deficit.................................................. (71.6) (34.9)
-------------- --------------
$ 1,057.7 $ 1,131.7
============== ==============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
----------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales:
Lumber and logs............................................... $ 51.0 $ 36.6 $ 94.7 $ 78.2
Other......................................................... 4.9 4.8 8.6 9.9
----------- ---------- ---------- -----------
55.9 41.4 103.3 88.1
----------- ---------- ---------- -----------
Operating expenses:
Cost of goods sold............................................ 38.7 36.2 71.8 76.0
Selling, general and administrative expenses.................. 3.8 4.4 7.8 7.9
Depletion and depreciation.................................... 4.9 4.2 9.5 9.1
----------- ---------- ---------- -----------
47.4 44.8 89.1 93.0
----------- ---------- ---------- -----------
Operating income (loss).......................................... 8.5 (3.4) 14.2 (4.9)
Other income (expense):
Gain on sale of Headwaters Timberlands........................ - - - 239.8
Equity in earnings (loss) of Kaiser Aluminum
Corporation................................................ 3.9 (5.6) 8.0 (19.1)
Investment, interest and other income (expense), net.......... 13.2 15.2 24.0 23.4
Interest expense.............................................. (19.9) (20.6) (40.1) (41.2)
----------- ---------- ---------- -----------
Income (loss) before income taxes and extraordinary item......... 5.7 (14.4) 6.1 198.0
Benefit (provision) in lieu of income taxes...................... (0.8) 3.6 0.8 (88.5)
----------- ---------- ---------- -----------
Income (loss) before extraordinary item.......................... 4.9 (10.8) 6.9 109.5
Extraordinary item:
Gain on repurchase of debt, net of income tax
provision of $1.0.......................................... - - 1.4 -
----------- ---------- ---------- -----------
Net income (loss)................................................ $ 4.9 $ (10.8) $ 8.3 $ 109.5
=========== ========== ========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
---------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................. $ 8.3 $ 109.5
Adjustments to reconcile net income to net cash used for operating activities:
Depletion and depreciation.......................................................... 9.5 9.1
Gain on sale of Headwaters Timberlands.............................................. - (239.8)
Extraordinary gain on repurchase of debt............................................ (1.4) -
Equity in undistributed loss (earnings) of Kaiser Aluminum Corporation.............. (8.0) 19.1
Amortization of deferred financing costs............................................ 1.2 1.2
Net purchases of marketable securities.............................................. (23.6) (23.6)
Net gain on marketable securities................................................... (5.1) (6.4)
Deferral of interest payment on note receivable from MAXXAM Inc..................... (8.1) -
Increase (decrease) in cash resulting from changes in:
Receivables......................................................................... (0.9) (8.5)
Inventories, net of depletion....................................................... (1.5) 12.6
Prepaid expenses and other assets................................................... (3.7) (0.6)
Accounts payable.................................................................... - 3.3
Accrued interest.................................................................... (1.4) (0.1)
Accrued and deferred income taxes................................................... (0.3) 88.5
Other liabilities................................................................... 1.9 0.7
Long-term assets and long-term liabilities.......................................... 1.0 (1.5)
---------- -----------
Net cash used for operating activities............................................ (32.1) (36.5)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from dispositions of property and investments............................. 0.1 298.4
Capital expenditures................................................................... (6.0) (17.6)
Restricted cash withdrawals used to acquire timberlands................................ 0.3 12.9
---------- -----------
Net cash provided by (used for) investing activities.............................. (5.6) 293.7
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit agreements....................................... 5.6 -
Redemptions, repurchases of and principal payments on long-term debt................... (18.1) (5.5)
Restricted cash (deposits) withdrawals, net............................................ 9.3 (290.2)
Dividends paid to stockholder.......................................................... (45.0) -
Other.................................................................................. - (0.2)
---------- -----------
Net cash used for financing activities............................................ (48.2) (295.9)
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................. (85.9) (38.7)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................................... 189.8 150.8
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................................ $ 103.9 $ 112.1
========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest............................................. $ 40.3 $ 40.1
Tax allocation payments from MAXXAM.................................................... 0.5 -
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Repurchases of debt using restricted cash and marketable securities.................... $ 20.1 $ -
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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 June 30, 2000, the consolidated results of
operations for the three and six months ended June 30, 2000 and 1999 and the
consolidated cash flows for the six months ended June 30, 2000 and 1999. The
Company is a wholly owned subsidiary of MAXXAM. Certain reclassifications of
prior period information have been made to conform to the current presentation.
There were no reconciling items between net income and comprehensive
income in either of the three and six month periods ended June 30, 2000 and
1999.
SFAS No. 133 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. 137 delayed the required implementation date of SFAS No.
133 to no later than January 1, 2001. SFAS No. 138, which amends certain
requirements of SFAS No. 133, was issued in June 2000. 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 or used so that
earnings and cash flows are subject to a reduced risk of volatility. Under SFAS
Nos. 133 and 138, 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 hedges relate. Kaiser will reflect changes in the
fair value of its open hedging positions as an increase or reduction in
stockholders' equity through comprehensive income. The impact of the changes in
the fair value of Kaiser's hedging positions 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 transactions to which the
hedges relate. 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.
SAB No. 101 provides interpretive guidance on the proper recognition,
presentation and disclosure of revenues in financial statements. The Company
believes its revenue recognition policies are in compliance with generally
accepted accounting principles and the related interpretive guidance set forth
in SAB No. 101; however, the Company is continuing to review these policies to
determine if any modifications are required. The implementation date of SAB No.
101 has been extended to December 2000.
2. HEADWATERS TRANSACTIONS
On March 1, 1999, the United States and California acquired the Headwaters
Timberlands, approximately 5,600 acres of timberlands containing a significant
amount of virgin old growth timber, from Salmon Creek and Pacific Lumber. Salmon
Creek received $299.9 million for its 4,900 acres, and for its 700 acres,
Pacific Lumber received the 7,700 acre Elk River Timberlands, which Pacific
Lumber contributed to Scotia LLC in June 1999. See Note 7 below for a discussion
of additional agreements entered into on March 1, 1999.
As a result of the disposition of the Headwaters Timberlands, the Company
recognized a pre-tax gain of $239.8 million ($142.1 million net of deferred
taxes) in 1999. This amount represents the gain attributable to the portion of
the Headwaters Timberlands for which the Company received $299.9 million in
cash. With respect to the remaining portion of the Headwaters Timberlands for
which the Company received the Elk River Timberlands, no gain has been
recognized as this represented an exchange of substantially similar productive
assets. These timberlands have been reflected in the Company's financial
statements at an amount which represents the Company's historical cost for the
timberlands which were transferred to the United States.
Scotia LLC and Pacific Lumber also entered into agreements with California
for the future sale of two timber properties known as the Owl Creek grove and
the Grizzly Creek grove. Under these agreements, Scotia LLC would sell the Owl
Creek grove to California, no later than June 30, 2001, for the lesser of the
appraised fair market value or $79.7 million, and California must purchase from
Pacific Lumber, no later than October 31, 2000, all or a portion of the Grizzly
Creek grove for a purchase price determined based on fair market value, but not
to exceed $20.0 million. California also has a five year option under these
agreements to purchase additional property in the Grizzly Creek grove. The sale
of the Owl Creek grove or Grizzly Creek grove will not be reflected in the
Company's financial statements until each has been concluded.
3. RESTRICTED CASH AND MARKETABLE SECURITIES
Cash and marketable securities include the following amounts which are
restricted (in millions):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents:
Amounts held as security for short positions in marketable securities.......... $ 34.7 $ 27.1
------------- --------------
Marketable securities, restricted:
Amounts held in SAR Account.................................................... 16.0 15.9
------------- --------------
Long-term restricted cash and marketable securities:
Amounts held in SAR Account....................................................... 143.8 153.2
Amounts held in Prefunding Account................................................ 3.0 3.3
Other amounts restricted under the Timber Notes Indenture......................... 0.3 0.4
Other long-term restricted cash................................................... 2.1 2.0
Less: Amounts attributable to Timber Notes held in SAR Account................... (20.1) -
------------- --------------
129.1 158.9
------------- --------------
Total restricted cash and marketable securities...................................... $ 179.8 $ 201.9
============= ==============
</TABLE>
4. INVENTORIES
Inventories consist of the following (in millions):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
Lumber........................................................ $ 28.2 $ 23.2
LOGS.......................................................... 17.7 21.4
-------------- --------------
$ 45.9 $ 44.6
============== ==============
</TABLE>
5. INVESTMENT IN KAISER
The Company owns the 27,938,250 Kaiser Shares, all of which are pledged as
collateral for the MGHI Notes as of June 30, 2000. Kaiser operates in several
principal aspects of the aluminum industry through the following business
segments: bauxite and alumina, primary aluminum, flat-rolled products and
engineered products. Kaiser uses a portion of its bauxite, alumina and primary
aluminum production for additional processing at certain downstream facilities.
Kaiser's common stock is publicly traded on the New York Stock Exchange under
the trading symbol "KLU." The Kaiser Shares represent a 35.1% equity interest in
Kaiser at June 30, 2000.
The market value for the Kaiser Shares based on the price per share quoted
at the close of business on August 9, 2000 was $120.5 million. There can be no
assurance that such value would be realized should the Company dispose of its
investment in the Kaiser Shares.
The following table contains summarized financial information of Kaiser (in
millions).
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Current assets................................................. $ 971.4 $ 973.9
Property, plant and equipment, net............................. 1,078.1 1,053.7
Other assets................................................... 1,149.9 1,171.2
-------------- --------------
Total assets........................................ $ 3,199.4 $ 3,198.8
============== ==============
Current liabilities............................................ $ 639.0 $ 637.9
Long-term debt, less current maturities........................ 995.8 972.5
Other liabilities.............................................. 1,358.8 1,405.4
Minority interests............................................. 117.1 117.7
Stockholders' equity........................................... 88.7 65.3
-------------- --------------
Total liabilities and stockholders' equity............. $ 3,199.4 $ 3,198.8
============== ==============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2000 1999 2000 1999
----------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales....................................................... $ 542.5 $ 525.0 $1,108.2 $ 1,004.4
Costs and expenses.............................................. (491.0) (524.3) (1,019.8) (1,036.7)
Other income (expenses), net.................................... (34.7) (26.2) (53.0) (52.6)
----------- ---------- ---------- -----------
Income (loss) before income taxes and minority interests........ 16.8 (25.5) 35.4 (84.9)
Credit (provision) for income taxes............................. (6.4) 8.6 (13.7) 28.8
Minority interests.............................................. 0.6 1.2 1.0 2.2
----------- ---------- ---------- -----------
Net income (loss)............................................... 11.0 (15.7) 22.7 (53.9)
Dividends on preferred stock.................................... - - - -
----------- ---------- ---------- -----------
Net income (loss) available to common stockholders.............. $ 11.0 $ (15.7) $ 22.7 $ (53.9)
=========== ========== ========== ===========
Equity in earnings (loss) of Kaiser............................. $ 3.9 $ (5.6) $ 8.0 $ (19.1)
=========== ========== ========== ===========
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following (in millions):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
6.55% Scotia LLC Class A-1 Timber Collateralized Notes due July 20, 2028........... $ 139.6 $ 152.6
7.11% Scotia LLC Class A-2 Timber Collateralized Notes due July 20, 2028........... 243.2 243.2
7.71% Scotia LLC Class A-3 Timber Collateralized Notes due July 20, 2028........... 463.3 463.3
12% MGHI Senior Secured Notes due August 1, 2003................................... 120.2 125.2
Other.............................................................................. 1.0 1.1
-------------- --------------
967.3 985.4
Less: Current maturities........................................................... (16.2) (16.0)
Timber Notes held in SAR Account............................................. (23.0) -
-------------- --------------
$ 928.1 $ 969.4
============== ==============
</TABLE>
The amount attributable to the Timber Notes held in the SAR Account of
$20.1 million reflected in Note 3 above represents the amount paid to acquire
$23.0 million of principal amount of Timber Notes. This repurchase resulted in
an extraordinary gain of $1.4 million, net of tax.
7. CONTINGENCIES
Regulatory and environmental matters play a significant role in the
Company's forest products business, which is subject to a variety of California
and federal laws and regulations, as well as the HCP and SYP and Pacific
Lumber's 2000 timber operator's license, dealing with timber harvesting
practices, threatened and endangered species and habitat for such species, and
air and water quality. As further described in Note 2 "Headwaters Transactions,"
on March 1, 1999, Pacific Lumber and MAXXAM consummated the Headwaters Agreement
with the United States and California. In addition to the transfer of the
Headwaters Timberlands described in Note 2, the SYP and the HCP were approved
and the Permits were issued.
The SYP complies with certain California Board of Forestry regulations
requiring timber companies to project timber growth and harvest on their
timberlands over a 100-year planning period and to demonstrate that their
projected average annual harvest for any decade within a 100-year planning
period will not exceed the average annual harvest level during the last decade
of the 100-year planning period. The SYP is effective for 10 years (subject to
review after five years) and may be amended by Pacific Lumber, subject to
approval by the CDF. Revised SYPs will be prepared every decade that address the
harvest level based upon reassessment of changes in the resource base and other
factors. The HCP and the Permits allow incidental "take" of certain species
located on the Company's timberlands which have been listed as endangered or
threatened under the ESA and/or CESA so long as there is no "jeopardy" to the
continued existence of such species. The HCP identifies the measures to be
instituted in order to minimize and mitigate the anticipated level of take to
the greatest extent practicable. The SYP is also subject to certain of these
provisions. The HCP and related Permits have a term of 50 years. The Company
believes that the SYP and the HCP should in the long- term expedite the
preparation and facilitate approval of its THPs, although the Company is
experiencing difficulties in the THP approval process as it implements these
agreements.
Under the Federal Clean Water Act, the EPA is required to establish TMDLs
in water courses that have been declared to be "water quality impaired." The EPA
and the North Coast Regional Water Quality Control Board are in the process of
establishing TMDLs for 17 northern California rivers and certain of their
tributaries, including nine water courses that flow within the Company's
timberlands. The Company expects this process to continue into 2010. In the
December 16, 1999 EPA report dealing with TMDLs on two of the nine water
courses, the agency indicated that the requirements under the HCP would
significantly address the sediment issues that resulted in TMDL requirements for
these water courses. Nevertheless, establishment of the final TMDL requirements
applicable to the Company's timberlands will be a lengthy process, and the final
TMDL requirements applicable to the Company's timberlands may require aquatic
protection measures that are different from or in addition to the prescriptions
to be developed pursuant to the watershed analysis process provided for in the
HCP.
Lawsuits are pending and threatened which seek to prevent the Company from
implementing the HCP and/or the SYP, implementing certain of the Company's
approved THPs or carrying out certain other operations. On December 2, 1997, the
Wrigley lawsuit and the Rollins lawsuit were filed against the Company, certain
of its subsidiaries and others. These actions allege, among other things, that
the defendants' logging practices have damaged the plaintiffs' properties and
property values by contributing to landslides (Rollins lawsuit) and the
destruction of certain watersheds (Wrigley lawsuit). The Company believes that
it has strong factual and legal defenses with respect to these matters; however,
there can be no assurance that they will not have a material adverse effect on
its financial position, results of operations or liquidity. On March 31, 1999,
the EPIC-SYP/Permits lawsuit was filed alleging various violations of the CESA
and the CEQA, and challenging, among other things, the validity and legality of
the Permits issued by California and the SYP. On March 31, 1999, the USWA
lawsuit was filed also challenging the validity and legality of the SYP. The
Company believes that appropriate procedures were followed throughout the public
review and approval process concerning the HCP and the SYP, and the Company is
working with the relevant government agencies to defend these challenges.
Although uncertainties are inherent in the final outcome of the EPIC-SYP/Permits
lawsuit and the USWA lawsuit, the Company believes that the resolution of these
matters should not result in a material adverse effect on its financial
condition, results of operations or the ability to harvest timber. While the
Company expects environmentally focused objections and lawsuits to continue, it
believes that the HCP, the SYP and the Permits should enhance its position in
connection with these continuing challenges and, over time, reduce or minimize
such challenges.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the financial statements
in Part I, Item 1 of this Report and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Item 8.
"Financial Statements and Supplementary Data" 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 Quarterly Report on Form 10-Q contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places in
this section, in Item 3. "Quantitative and Qualitative Disclosures About Market
Risk," and in Part II. Item 1. "Legal Proceedings." 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 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 Form
10-Q and the Form 10-K identify other factors that could cause such differences
between such forward-looking statements and actual results. 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's wholly owned subsidiary, MGI, and its operating
subsidiaries, Pacific Lumber and Britt, are engaged in forest products
operations. The Company's business is somewhat seasonal, and its net sales have
been historically higher in the months of April through November than in the
months of December through March. Management expects that the Company's revenues
and cash flows will continue to be seasonal. Accordingly, the Company's results
for any one quarter are not necessarily indicative of results to be expected for
the full year.
Due to Pacific Lumber's difficulties in implementing the Environmental
Plans and the resulting lower harvests on its property, Pacific Lumber's
production of redwood lumber has decreased. Furthermore, logging costs have
increased due to the harvest of smaller diameter logs and compliance with
environmental regulations and the Environmental Plans. Pacific Lumber has been
able to lessen the impact of these factors by instituting a number of measures
at its sawmills during the past several years designed to enhance the efficiency
of its operations, such as modernization and expansion of its manufactured
lumber facilities and other improvements in lumber recovery. See also
"--Trends."
The following table presents selected operational and financial
information for the three and six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
----------- ---------- ---------- -----------
(IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES)
<S> <C> <C> <C> <C>
Shipments:
Lumber: (1)
Redwood upper grades....................................... 3.8 6.4 7.3 14.2
Redwood common grades...................................... 41.2 28.9 76.6 67.6
Douglas-fir upper grades................................... 3.2 2.5 5.7 4.5
Douglas-fir common grades.................................. 19.8 12.4 38.9 27.7
Other...................................................... 1.7 1.9 4.7 4.4
----------- ---------- ---------- -----------
Total lumber............................................. 69.7 52.1 133.2 118.4
=========== ========== ========== ===========
Wood chips (2)................................................ 45.5 31.2 84.5 76.6
=========== ========== ========== ===========
Average sales price:
Lumber: (3)
Redwood upper grades....................................... $ 1,830 $ 1,499 $ 1,728 $ 1,454
Redwood common grades...................................... 759 625 750 588
Douglas-fir upper grades................................... 1,342 1,322 1,324 1,299
Douglas-fir common grades.................................. 372 450 398 410
Wood chips (4)................................................ 69 74 66 78
Net sales:
Lumber, net of discount....................................... $ 50.1 $ 36.6 $ 93.8 $ 78.2
Wood chips.................................................... 3.2 2.3 5.6 5.9
Cogeneration power............................................ 1.0 0.7 1.6 1.3
Other......................................................... 1.6 1.8 2.3 2.7
----------- ---------- ---------- -----------
Total net sales.......................................... $ 55.9 $ 41.4 $ 103.3 $ 88.1
=========== ========== ========== ===========
Operating income (loss).......................................... $ 8.5 $ (3.4) $ 14.2 $ (4.9)
=========== ========== ========== ===========
Operating cash flow (5).......................................... $ 13.4 $ 0.8 $ 23.7 $ 4.2
=========== ========== ========== ===========
Income (loss) before income taxes and extraordinary item (6)..... $ 5.7 $ (14.4) $ 6.1 $ 198.0
=========== ========== ========== ===========
Net income (loss) (7)............................................ $ 4.9 $ (10.8) $ 8.3 $ 109.5
=========== ========== ========== ===========
Capital expenditures............................................. $ 4.1 $ 5.2 $ 6.0 $ 17.6
=========== ========== ========== ===========
<FN>
---------------------------
(1) Lumber shipments are expressed in millions of board feet.
(2) Wood chip shipments are expressed in thousands of bone dry units of
2,400 pounds.
(3) Dollars per thousand board feet.
(4) Dollars per bone dry unit.
(5) Operating income before depletion and depreciation, also referred to as
"EBITDA."
(6) 1999 results include a $239.8 million gain on the sale of the Headwaters
Timberlands.
(7) 2000 results include an extraordinary gain of $1.4 million, net of tax,
on the repurchase of Timber Notes.
</FN>
</TABLE>
Net Sales
Net sales for the three and six month periods ended June 30, 2000
increased from the comparable 1999 periods. For the quarter, net sales increased
primarily due to higher shipments of common grade redwood and Douglas-fir lumber
and due to higher prices for redwood lumber. This improvement was offset
somewhat by lower shipments of upper grade redwood lumber due to continuing
reductions in the volume of logs available for the production of lumber
products. The failure of government agencies to approve THPs in a timely manner
continues to adversely affect log supply and disrupt the normal functioning of
business operations. Net sales for the six months ended June 30, 2000 increased
over the comparable prior year period due to higher prices for redwood lumber.
While shipments for common grade redwood and for upper and common grade
Douglas-fir lumber increased, this improvement was substantially offset by lower
shipments of upper grade redwood lumber.
Operating Income (Loss)
The Company had an increase in operating income for the three and six
months ended June 30, 2000 versus the comparable 1999 periods, primarily due to
increases in net sales discussed above. In addition, costs of sales and
operations as a percentage of net sales were lower due to increased efficiencies
at the sawmills and a reduction in logging costs.
Income (Loss) Before Income Taxes
Income before income taxes for the quarter ended June 30, 2000 increased
from the comparable 1999 period, primarily due to higher operating income
discussed above as well as increased equity in earnings from Kaiser. Income
before income taxes for the first half of 2000 decreased from the comparable
prior year period, principally due to the gain on the sale of the Headwaters
Timberlands of $239.8 million ($142.1 million net of deferred taxes) offset by
the operating income discussed above and increased equity in earnings from
Kaiser.
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 of June 30, 2000, the Company and its subsidiaries had cash and
marketable securities, including short and long-term restricted amounts, of
$305.5 million as well as long-term restricted cash of $129.1 million. Short and
long- term restricted cash and marketable securities includes $159.8 million
held in the SAR Account (including $20.1 million of repurchased Timber Notes).
The fair value of the SAR Account, including the acquired Timber Notes, as of
June 30, 2000 was $160.3 million.
Long-term debt, excluding current maturities, was $928.1 million as of
June 30, 2000 as compared to $969.4 million at December 31, 1999. The decrease
in long-term debt was primarily due to the repurchase of $23.0 million principal
amount of Timber Notes using $20.1 million of funds held in the SAR Account. In
addition, long-term debt declined as a result of principal payments on the
Timber Notes. On May 26, 2000, the Scotia LLC Line of Credit was extended for an
additional year to July 15, 2001. As of June 30, 2000, $5.6 million was
outstanding under the Scotia LLC Line of Credit which was subsequently paid on
July 20, 2000. On the July 20, 2000 note payment date for the Timber Notes,
Scotia LLC had $3.1 million in cash available to pay the $31.1 million of
interest due. Scotia LLC borrowed the remaining $28.0 million in funds under the
Scotia LLC Line of Credit. In addition, Scotia LLC repaid $2.9 million of
principal on the Timber Notes using funds held in the SAR Account.
As of June 30, 2000, $38.3 million of borrowings was available under the
Pacific Lumber Credit Agreement, no borrowings were outstanding and letters of
credit outstanding amounted to $12.6 million.
During the six months ended June 30, 2000, the Company repurchased $5.0
million of MGHI Notes, reducing the outstanding balance to $120.2 million.
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, 2000, the Company received an aggregate of $108.4 million
in dividends from MGI, $90.0 million of which were made available using proceeds
from the sale of the Headwaters Timberlands. The Company in turn paid a $45.0
million dividend to MAXXAM.
The Company anticipates that existing cash, cash equivalents, marketable
securities, funds available from the SAR Account and available sources of
financing will be sufficient to fund its working capital and capital expenditure
requirements for the next year. With respect to long-term liquidity, although
the Company believes that its existing cash and cash equivalents should provide
sufficient funds to meet the working capital and capital expenditure
requirements and the required debt service obligations for itself and its
subsidiaries, until such time as Pacific Lumber has adequate cash flows from
operations, and/or dividends from Scotia LLC, there can be no assurance that
this will be the case. Furthermore, 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 its
timber harvesting practices (see Note 7 to the Consolidated Financial
Statements), 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 MGI through
Pacific Lumber and Britt. Regulatory and environmental matters play a
significant role in Pacific Lumber's operations. See Note 7 to the Consolidated
Financial Statements and Item 1. "Business - Forest Products Operations" of the
Form 10-K for a discussion of these matters. Compliance with such laws,
regulations and judicial and administrative interpretations, and related
litigation have increased the cost of logging operations and at times have
delayed or reduced harvest. The Company's forest products segment has also been
adversely affected by a lack of available logs as a result of a severely
diminished supply of available THPs. Prior to the consummation of the Headwaters
Agreement on March 1, 1999, the reduced number of approved THPs was attributable
to several factors, including a significantly reduced level of THPs submitted by
Pacific Lumber to the CDF during the second half of 1998 and during the first
two months of 1999. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Trends" of the Form 10-K for a
discussion of other factors which affected THP submissions and approvals during
the above time period.
With the consummation of the Headwaters Agreement, Pacific Lumber has
completed its work in connection with preparation of the Environmental Plans;
however, significant additional work continues to be required in connection with
their implementation. As a result of the implementation process, 1999 was a
transition period for Pacific Lumber with respect to the filing and approval of
its THPs. The transition period has continued into 2000. The rate of submissions
and approvals of THPs during the six months ended June 30, 2000 is higher than
that for 1999. However, monthly submissions and approvals continue to be slower
than Pacific Lumber's expectations and slower than Pacific Lumber has
historically experienced prior to 1998. This is because government agencies have
failed to approve THPs in a timely manner. Nevertheless, Pacific Lumber
anticipates that after a transition period, the implementation of the
Environmental Plans will streamline the process of preparing THPs and
potentially shorten the time to obtain approval of THPs.
There can be no assurance that Pacific Lumber will not continue to
experience difficulties in receiving approvals of its THPs similar to those it
has been experiencing. Furthermore, there can be no assurance that certain
pending legal, regulatory and environmental matters or future governmental
regulations, legislation or judicial or administrative decisions, or adverse
weather conditions, 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 7 to the Consolidated Financial Statements for
further information regarding regulatory and legal proceedings affecting the
Company's operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for cautionary information with respect to
such forward-looking statements.
This item is not applicable for the Company and its subsidiaries; however,
Kaiser, the Company's equity investee, utilizes hedging transactions to lock-in
a specified price or range of prices for certain products which it sells or
consumes and to mitigate its exposure to changes in foreign currency exchange
rates. See Item 3. "Quantitative and Qualitative Disclosures about Market Risk"
from Kaiser's Quarterly Report on Form 10-Q filed for the period ended March 31,
2000 included as Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q
filed for the period ended March 31, 2000 for information relative to Kaiser's
hedging activities.
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. The following material
developments have occurred with respect to such legal proceedings subsequent to
the filing of the Form 10-K.
TIMBER HARVESTING LITIGATION
On March 10, 2000, the EPIC/THP 97-520 lawsuit was filed in the Superior
Court of Humboldt County. Plaintiffs allege that the CDF violated the Forest
Practices Act and the California Public Resources Code by approving an amendment
to THP 97-520 (which covers approximately 700 acres of timberlands adjoining the
Headwaters Timberlands) as a "minor" amendment. The plaintiffs seek an order
requiring the CDF to withdraw its approval of the minor amendment to THP 97-520,
and enjoining Pacific Lumber from harvesting under THP 97-520. In July 2000, the
Court issued a preliminary injunction enjoining Pacific Lumber from harvesting
under THP 97-520. It is impossible for the Company to assess the potential
impact of this matter in the short term, but it believes that an adverse outcome
in this matter will not in the long term have a material adverse effect on its
consolidated financial position, results of operations or liquidity.
With respect to the Rollins lawsuit described in the Form 10-K, on April
26, 2000, the Court dismissed four of the plaintiffs' ten causes of action,
including their allegations that the defendants had violated the California
business and professions code; on June 6, 2000, the Court dismissed another of
the plaintiffs' causes of action; and on June 20, 2000, the Court granted
summary judgment in favor of the defendants with respect to the plaintiffs'
claim for punitive damages.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
*27 Financial Data Schedule for the six months ended
June 30, 2000
* 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 have signed this report on behalf of
the Registrant and as the principal financial and accounting officers of the
Registrant.
MAXXAM GROUP HOLDINGS INC.
Date: August 10, 2000 By: /S/ PAUL N. SCHWARTZ
-----------------------------------
Paul N. Schwartz
Vice President, Chief Financial Officer
and Director
(Principal Financial Officer)
Date: August 10, 2000 By: /S/ ELIZABETH D. BRUMLEY
-------------------------------------
Elizabeth D. Brumley
Controller
(Principal Accounting Officer)
APPENDIX A
GLOSSARY OF DEFINED TERMS
Britt: Britt Lumber Co., Inc., an indirect wholly owned subsidiary of MGI
CDF: California Department of Forestry and Fire Protection
CEQA: California Environmental Quality Act
CESA: California Endangered Species Act
Company: MAXXAM Group Holdings Inc., a wholly owned subsidiary of MAXXAM
Environmental Plans: The HCP and the SYP
EPA: Environmental Protection Agency
EPIC-SYP/Permits lawsuit: An action entitled Environmental Protection
Information Association, Sierra Club v. California Department of Forestry and
Fire Protection, California Department of Fish and Game, The Pacific Lumber
Company, Scotia Pacific Company LLC, Salmon Creek Corporation, et al. (No.
99CS00639) filed on March 31, 1999 in the Superior Court of Sacramento County
EPIC/THP 97-520 lawsuit: A lawsuit entitled Environmental Protection Information
Center, Sierra Club v. California Department of Forestry and Fire Protection,
Does I-X, Scotia Pacific Holding Company, Pacific Lumber Company and Does XI-XX
(THP 520) (No. CV-000170) filed on March 10, 2000 in the Superior Court of
Humboldt County
ESA: The federal Endangered Species Act
Forest Practice Act: The California Forest Practice 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, 1999
HCP: The habitat conservation plan covering multiple species approved on March
1, 1999 in connection with the consummation of the Headwaters Agreement
Headwaters Agreement: The September 28, 1996 agreement between Pacific Lumber,
Scotia LLC, Salmon Creek, the United States and California which provided 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 which were sold to the United States and
California on March 1, 1999
Kaiser: Kaiser Aluminum Corporation, an equity investee of the Company engaged
in aluminum operations
Kaiser Shares: 27,938,250 shares of the common stock of Kaiser, all of which are
pledged as collateral for the MGHI Notes
MAXXAM: MAXXAM Inc.
MGHI Notes: 12% Senior Secured Notes of the Company due August 1, 2003
MGI: MAXXAM Group Inc., a wholly owned subsidiary of the Company
Pacific Lumber: The Pacific Lumber Company, a 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 $60.0 million, all of
which may be used for revolving borrowings, $20.0 million of which may be used
for standby letters of credit and $30.0 million of which may be used for
timberland acquisitions.
Permits: The incidental take permits issued by the United States and California
pursuant to the HCP
Prefunding Account: Restricted cash held in an account by the trustee under the
indenture governing the Timber Notes to enable Scotia LLC to acquire timberlands
Rollins lawsuit: An action entitled Jennie Rollins, et al. v. Charles Hurwitz,
John Campbell, Pacific Lumber, MAXXAM Group Holdings Inc., Scotia Pacific
Holding Company, MAXXAM Group Inc., MAXXAM Inc., Barnum Timber Company (No.
9700400) filed on December 2, 1997 in the Superior Court of Humboldt County
Salmon Creek: Salmon Creek LLC, a wholly owned subsidiary of Pacific Lumber
SAR Account: Funds held in a reserve account to support principal payments on
the Timber Notes
Scotia LLC: Scotia Pacific Company LLC, a limited liability company wholly owned
by Pacific Lumber
Scotia LLC Line of Credit: The agreement between a group of lenders and Scotia
LLC pursuant to which it may borrow in order to pay interest on the Timber Notes
SFAS No. 133: Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities"
SFAS No. 137: Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of Effective Date
of SFAS No. 133"
SFAS No. 138: Statement of Financial Accounting Standards No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities - An Amendment
of FASB Statement No. 133"
SYP: The sustained yield plan approved on March 1, 1999 in connection with the
consummation of the Headwaters Agreement
THP: Timber harvesting plan required to be filed with and approved by the CDF
prior to the harvesting of timber
Timber Notes: Scotia LLC's $867.2 million original aggregate principal amount of
6.55% Series B Class A-1 Timber Collateralized Notes, 7.11% Series B Class A-2
Timber Collateralized Notes and 7.71% Series B Class A-3 Timber Collateralized
Notes due July 20, 2028
Timber Notes Indenture: The indenture governing the Timber Notes
TMDLs: Total maximum daily load limits
USWA lawsuit: An action entitled United Steelworkers of America, AFL-CIO, CLC,
and Donald Kegley v. California Department of Forestry and Fire Protection, The
Pacific Lumber Company, Scotia Pacific Company LLC and Salmon Creek Corporation
(No. 99CS00626) filed on March 31, 1999 in the Superior Court of Sacramento
County
Wrigley lawsuit: An action entitled Kristi Wrigley, et al. v. Charles Hurwitz,
John Campbell, Pacific Lumber, MAXXAM Group Holdings Inc., Scotia Pacific
Holding Company, MAXXAM Group Inc., MAXXAM Inc., Scotia Pacific Company LLC and
Federated Development Company (No. 9700399) filed on December 2, 1997 in the
Superior Court of Humboldt County
