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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1994
Commission File Number 1-8857
MAXXAM GROUP INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-1310680
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
5847 SAN FELIPE, SUITE 2600
HOUSTON, TEXAS 77057
(Address of Principal (Zip Code)
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 1, 1994: 100
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.
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<PAGE>
MAXXAM GROUP INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at June 30, 1994 and December 31,
1993 . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Operations for the three and six
months ended June 30, 1994 and 1993 . . . . . . . . . 4
Consolidated Statement of Cash Flows for the six months ended
June 30, 1994 and 1993 . . . . . . . . . . . . . . . . 5
Condensed Notes to Consolidated Financial Statements . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
June 30, December 31,
1994 1993
---------------- ----------------
(Unaudited)
(In thousands of dollars)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 25,752 $ 39,001
Marketable securities . . . . . . . . . . . . . . . . . 28,859 17,775
Receivables:
Trade . . . . . . . . . . . . . . . . . . . . . . . 12,851 15,910
Other . . . . . . . . . . . . . . . . . . . . . . . 7,185 4,212
Inventories . . . . . . . . . . . . . . . . . . . . . . 73,162 73,413
Prepaid expenses and other current assets . . . . . . . 3,289 3,189
---------------- ----------------
Total current assets . . . . . . . . . . . . . . . 151,098 153,500
Timber and timberlands, net of depletion of $179,167 and
$171,007 at June 30, 1994 and December 31, 1993,
respectively . . . . . . . . . . . . . . . . . . . . . . 359,053 365,511
Property, plant and equipment, net of accumulated depreciation
of $54,121 and $50,090 at June 30, 1994 and December 31,
1993, respectively . . . . . . . . . . . . . . . . . . . 103,799 102,780
Deferred financing costs, net . . . . . . . . . . . . . . . . 31,592 32,725
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 62,814 58,371
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . 33,430 33,562
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 8,501 9,572
---------------- ----------------
$ 750,287 $ 756,021
================ ================
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 7,677 $ 2,871
Accrued interest . . . . . . . . . . . . . . . . . . . . 25,914 26,216
Accrued compensation and related benefits . . . . . . . 11,785 7,782
Deferred income taxes . . . . . . . . . . . . . . . . . 14,132 14,132
Other accrued liabilities . . . . . . . . . . . . . . . 4,496 4,543
Long-term debt, current maturities . . . . . . . . . . . 13,366 16,093
---------------- ----------------
Total current liabilities . . . . . . . . . . . . . 77,370 71,637
Long-term debt, less current maturities . . . . . . . . . . . 769,342 772,310
Other noncurrent liabilities . . . . . . . . . . . . . . . . 30,382 28,125
---------------- ----------------
Total liabilities . . . . . . . . . . . . . . . . . 877,094 872,072
---------------- ----------------
Contingencies
Stockholder's deficit:
Common stock, $.08-1/3 par value; 1,000 shares
authorized; 100 shares issued . . . . . . . . . . . - -
Additional capital . . . . . . . . . . . . . . . . . . . 81,287 81,287
Accumulated deficit . . . . . . . . . . . . . . . . . . (208,094) (197,338)
---------------- ----------------
Total stockholder's deficit . . . . . . . . . . . . (126,807) (116,051)
---------------- ----------------
$ 750,287 $ 756,021
================ ================
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1994 1993 1994 1993
------------- ------------- ------------- -------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Net sales:
Lumber and logs . . . . . . . . . . . . $ 56,232 $ 54,014 $ 109,885 $ 102,738
Other . . . . . . . . . . . . . . . . . 6,744 3,993 9,804 8,006
------------- ------------- ------------- -------------
62,976 58,007 119,689 110,744
------------- ------------- ------------- -------------
Operating expenses:
Costs of goods sold (exclusive of
depletion and depreciation) . . . . 31,059 31,578 64,191 57,927
Depletion and depreciation . . . . . . . 5,250 6,613 11,315 12,842
Selling, general and administrative . . 4,023 4,819 8,333 8,745
------------- ------------- ------------- -------------
40,332 43,010 83,839 79,514
------------- ------------- ------------- -------------
Operating income . . . . . . . . . . . . . . 22,644 14,997 35,850 31,230
Other income (expense):
Investment, interest and other income . 1,918 1,561 9,637 4,598
Interest expense . . . . . . . . . . . . (19,230) (19,806) (38,320) (41,178)
------------- ------------- ------------- -------------
Income (loss) from continuing operations
before income taxes, extraordinary items
and cumulative effect of changes in
accounting principles . . . . . . . . . 5,332 (3,248) 7,167 (5,350)
Provision in lieu of income taxes . . . . . . (2,186) (345) (3,057) (384)
------------- ------------- ------------- -------------
Income (loss) from continuing operations
before extraordinary items and cumulative
effect of changes in accounting
principles . . . . . . . . . . . . . . . 3,146 (3,593) 4,110 (5,734)
Loss from net assets transferred to MAXXAM,
net of minority interests and related
income taxes . . . . . . . . . . . . . . - (20,900) - (501,270)
------------- ------------- ------------- -------------
Income (loss) before extraordinary items and
cumulative effect of changes in
accounting principles . . . . . . . . . 3,146 (24,493) 4,110 (507,004)
Extraordinary items:
Loss on litigation settlement, net of
related credit in lieu of income
taxes of $6,312 . . . . . . . . . . (14,866) - (14,866) -
Loss on early extinguishment of debt, net
of related credit in lieu of income
taxes of $5,566 . . . . . . . . . . - - - (10,802)
Cumulative effect of changes in accounting
principles:
Postretirement benefits other than
pensions, net of related credit in
lieu of income taxes of $1,566 . . - - - (2,348)
Accounting for income taxes . . . . . . - - - 14,916
------------- ------------- ------------- -------------
Net loss . . . . . . . . . . . . . . . . . . $ (11,720) $ (24,493) $ (10,756) $ (505,238)
============= ============= ============= =============
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1994 1993
-------------- --------------
(In thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (10,756) $ (505,238)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depletion and depreciation . . . . . . . . . . . . . . . . . . . . . . 11,315 12,842
Amortization of deferred financing costs and discounts on long-term
debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,852 2,021
Net gains on marketable securities . . . . . . . . . . . . . . . . . . (522) (3,177)
Loss from net assets transferred to MAXXAM, net . . . . . . . . . . . . - 501,270
Extraordinary loss on early extinguishment of debt, net . . . . . . . . - 10,802
Incurrence of financing costs . . . . . . . . . . . . . . . . . . . . . - (27,255)
Cumulative effect of changes in accounting principles, net . . . . . . - (12,568)
Increase in other liabilities . . . . . . . . . . . . . . . . . . . . . 6,045 29
Increase in accounts payable . . . . . . . . . . . . . . . . . . . . . 4,806 7,322
Decrease in inventories . . . . . . . . . . . . . . . . . . . . . . . . 1,420 2,603
Decrease in receivables . . . . . . . . . . . . . . . . . . . . . . . . 1,357 11,059
Increase in accrued and deferred income taxes . . . . . . . . . . . . . (3,255) (785)
Decrease in accrued interest . . . . . . . . . . . . . . . . . . . . . (302) (16,060)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 318
-------------- --------------
Net cash provided by (used for) operating activities . . . . . . . 16,153 (16,817)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of marketable securities . . . . . . . . . . . . . . . . . . . (11,815) (15,316)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,462) (6,569)
Increase in net assets transferred to MAXXAM . . . . . . . . . . . . . . . . - (6,283)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (78) 12
-------------- --------------
Net cash used for investing activities . . . . . . . . . . . . . . (18,355) (28,156)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions, repurchase of and principal payments on long-term debt . . . . (8,147) (553,118)
Net payments under revolving credit agreements . . . . . . . . . . . . . . . (2,900) -
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . - 620,000
Restricted cash deposits . . . . . . . . . . . . . . . . . . . . . . . . . . - (35,000)
-------------- --------------
Net cash provided by (used for) financing activities . . . . . . . (11,047) 31,882
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . (13,249) (13,091)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . 39,001 54,254
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . . $ 25,752 $ 41,163
============== ==============
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Reduction of margin borrowings for marketable securities . . . . . . . . . . $ 1,020 $ -
Timber and timberlands acquired subject to loan from seller . . . . . . . . 850 -
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest . . . . . . . . . . . . . . . . . $ 32,770 $ 55,217
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
</TABLE>
<PAGE>
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 Annual Report on Form 10-K filed by MAXXAM Group
Inc. with the Securities and Exchange Commission for the fiscal year ended
December 31, 1993 (the "Form 10-K"). All references to the "Company"
include MAXXAM Group Inc. and its subsidiary companies unless otherwise
indicated or the context indicates otherwise. Accounting measurements at
interim dates inherently involve greater reliance on estimates than at year
end. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the entire year.
The consolidated financial statements included herein are
unaudited; however, they include all adjustments of a normal recurring
nature which, in the opinion of management, are necessary to present fairly
the consolidated financial position of the Company at June 30, 1994, the
consolidated results of operations for the three and six months ended June
30, 1994 and 1993 and consolidated cash flows for the six months ended June
30, 1994 and 1993. Certain reclassifications of prior period information
have been made to conform to the current presentation. The Company is a
wholly owned subsidiary of MAXXAM Inc. ("MAXXAM").
2. CASH AND CASH EQUIVALENTS
At June 30, 1994 and December 31, 1993, cash and cash equivalents
includes $13,363 and $20,280, respectively, which is reserved for debt
service payments on the 7.95% Timber Collateralized Notes due 2015.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
-------------- --------------
<S> <C> <C>
Lumber . . . . . . . . . . . . . . . . . . . . $ 57,134 $ 52,354
Logs . . . . . . . . . . . . . . . . . . . . . 16,028 21,059
-------------- --------------
$ 73,162 $ 73,413
============== ==============
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
------------- -------------
<S> <C> <C>
7.95% Timber Collateralized Notes due July 20, 2015 . . . . . . . . . . $ 368,857 $ 376,953
11-1/4% Senior Secured Notes due August 1, 2003 . . . . . . . . . . . . 100,000 100,000
12-1/4% Senior Secured Discount Notes due August 1, 2003, net of
discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,001 73,499
10-1/2% Senior Notes due March 1, 2003 . . . . . . . . . . . . . . . . 235,000 235,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850 2,951
------------- -------------
782,708 788,403
Less: current maturities . . . . . . . . . . . . . . . . . . . . . . . (13,366) (16,093)
------------- -------------
$ 769,342 $ 772,310
============= =============
</TABLE>
<PAGE>
5. INVESTMENT, INTEREST AND OTHER INCOME
In February 1994, The Pacific Lumber Company ("Pacific Lumber," a
wholly owned subsidiary of the Company) received a franchise tax refund of
$7,243, the substantial portion of which represents interest, from the
State of California relating to tax years 1972 through 1985. This amount
is included in investment, interest and other income for the six months
ended June 30, 1994.
6. LOSS FROM NET ASSETS TRANSFERRED TO MAXXAM
The loss from net assets transferred to MAXXAM was as follows:
<TABLE>
<CAPTION>
Three Six
Months Months
Ended Ended
June 30, June 30,
1993 1993
------------- -------------
<S> <C> <C>
Net sales:
Aluminum operations . . . . . . . . . . . . . . . $ 432,193 $ 874,806
Real estate and other . . . . . . . . . . . . . . 6,516 14,275
------------- -------------
438,709 889,081
------------- -------------
Costs and expenses:
Aluminum operations . . . . . . . . . . . . . . . 464,597 934,440
Real estate and other . . . . . . . . . . . . . . 10,464 19,926
------------- -------------
475,061 954,366
------------- -------------
Loss before income taxes, minority interests,
extraordinary item and cumulative effect of
changes in accounting principles . . . . . . . . . (36,352) (65,285)
Income taxes . . . . . . . . . . . . . . . . . . . . . 13,380 25,145
Minority interests . . . . . . . . . . . . . . . . . . 2,072 3,666
------------- -------------
Loss before extraordinary item and cumulative effect of
changes in accounting principles . . . . . . . . . (20,900) (36,474)
Extraordinary item:
Loss on redemption of debt, net of related
benefits for income taxes and minority
interests of $11,249 and $2,791,
respectively . . . . . . . . . . . . . . . . - (19,045)
Cumulative effect of changes in accounting principles:
Postretirement and postemployment benefits, net of
related benefits for income taxes and
minority interests of $237,682 and $64,554,
respectively . . . . . . . . . . . . . . . . - (440,519)
Accounting for income taxes . . . . . . . . . . . - (5,232)
------------- -------------
Loss from net assets transferred to MAXXAM . . . . . . $ (20,900) $ (501,270)
============= =============
</TABLE>
7. LOSS ON LITIGATION SETTLEMENT AND CONTINGENCIES
On May 17, 1994, MAXXAM and Pacific Lumber announced that an
agreement in principle had been reached to settle class and related
individual claims brought by former stockholders of Pacific Lumber against
MAXXAM, the Company, Pacific Lumber, former directors of Pacific Lumber and
others concerning the Company's acquisition of Pacific Lumber. Of the
pending approximately $52,000 settlement, approximately $33,000 was paid by
insurance carriers of MAXXAM and Pacific Lumber,
<PAGE>
approximately $14,800 was paid by Pacific Lumber and the balance was paid
by other defendants and through the assignment of certain claims. The
settlement is subject to certain contingencies, including a fairness
hearing which will be held at a yet unspecified time. The above described
cash payments are being held in the registry of the court pending
satisfaction of these contingencies. In the second quarter of 1994, the
Company recorded an extraordinary loss of $14,866 related to the settlement
and associated costs, net of benefits for federal and state income taxes of
$6,312.
The Company's operations are subject to a variety of California
and, in some cases, federal laws and regulations dealing with timber
harvesting, endangered species, water quality and air and water pollution.
The Company does not expect that compliance with such existing laws and
regulations will have a material adverse effect on the Company's future
operating results. There can be no assurance, however, that future
legislation, governmental regulations or judicial or administrative
decisions would not adversely affect the Company or its ability to sell
lumber, logs or timber.
Various groups and individuals have filed objections with the
California Department of Forestry ("CDF") regarding the CDF's actions and
rulings with respect to certain of the Company's timber harvesting plans
("THPs"), and the Company expects that such groups and individuals will
continue to file objections to the Company's THPs. In addition, lawsuits
are pending which seek to prevent the Company from implementing certain of
its approved THPs. These challenges have severely restricted Pacific
Lumber's ability to harvest virgin old growth redwood timber on its
property during the past few years, as well as substantial amounts of
virgin Douglas-fir timber which are located in virgin old growth redwood
stands. No assurance can be given as to the extent of such litigation in
the future. The Company believes that environmentally focused challenges
to its THPs are likely to occur in the future. Although such challenges
have delayed or prevented the Company from conducting a portion of its
operations, to date such challenges have not had a material adverse effect
on the Company's consolidated financial position or results of operations.
It is, however, impossible to predict the future nature or degree of such
challenges or their ultimate impact on the operating results or
consolidated financial position of the Company.
The Company is also involved in various claims, lawsuits and
proceedings relating to a wide variety of other matters. While there are
uncertainties inherent in the ultimate outcome of such matters and it is
impossible to presently determine the ultimate costs that may be incurred,
management believes the resolution of such uncertainties and the incurrence
of such costs should not have a material adverse effect on the Company's
consolidated financial position or results of operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the response to
Part I, Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any
capitalized terms used but not defined in this Item have the same meaning
given to them in the Form 10-K.
RESULTS OF OPERATIONS
The Company's business is highly seasonal in that the Company has
historically experienced lower first and fourth quarter sales due largely
to the general decline in construction related activity during the winter
months. Accordingly, the Company's results for any one quarter are not
necessarily indicative of results to be expected for the full year. The
following table presents selected operational and financial information for
the three and six months ended June 30, 1994 and 1993. The information
presented in the table is in millions of dollars except shipments and
prices.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shipments:
Lumber(1):
Redwood upper grades . . . . . . . 12.8 17.0 25.7 32.8
Redwood common grades . . . . . . . 55.7 48.3 105.1 93.9
Douglas-fir upper grades . . . . . 1.9 3.0 4.4 6.2
Douglas-fir common grades . . . . . 16.5 12.7 31.9 27.5
------------ ------------ ------------ ------------
Total lumber . . . . . . . . . 86.9 81.0 167.1 160.4
============ ============ ============ ============
Logs(2) . . . . . . . . . . . . . . . . 4.8 .8 10.3 .8
============ ============ ============ ============
Wood chips(3) . . . . . . . . . . . . . 64.9 34.7 95.2 71.2
============ ============ ============ ============
Average sales price:
Lumber(4):
Redwood upper grades . . . . . . . $ 1,469 $ 1,270 $ 1,437 $ 1,242
Redwood common grades . . . . . . . 458 496 453 477
Douglas-fir upper grades . . . . . 1,373 1,224 1,391 1,167
Douglas-fir common grades . . . . . 426 439 445 433
Logs(4) . . . . . . . . . . . . . . . . 638 714 658 709
Wood chips(5) . . . . . . . . . . . . . 85 78 81 79
Net sales:
Lumber, net of discount . . . . . . . . $ 53.1 $ 53.4 $ 103.1 $ 102.1
Logs . . . . . . . . . . . . . . . . . . 3.1 .6 6.8 .6
Wood chips . . . . . . . . . . . . . . . 5.6 2.7 7.7 5.7
Cogeneration power . . . . . . . . . . . .9 1.0 1.5 1.7
Other . . . . . . . . . . . . . . . . . .3 .3 .6 .6
------------ ------------ ------------ ------------
Total net sales . . . . . . . $ 63.0 $ 58.0 $ 119.7 $ 110.7
============ ============ ============ ============
Operating income . . . . . . . . . . . . . . $ 22.6 $ 15.0 $ 35.9 $ 31.2
============ ============ ============ ============
Income (loss) from continuing operations
before income taxes, extraordinary items
and cumulative effect of changes in
accounting principles . . . . . . . . . $ 5.3 $ (3.2) $ 7.2 $ (5.4)
============ ============ ============ ============
Loss from net assets transferred to MAXXAM,
net of minority interests and related
income taxes . . . . . . . . . . . . . . $ - $ (20.9) $ - $ (501.3)
============ ============ ============ ============
Net loss . . . . . . . . . . . . . . . . . . $ (11.7) $ (24.5) $ (10.8) $ (505.2)
============ ============ ============ ============
Capital expenditures . . . . . . . . . . . . $ 2.5 $ 4.6 $ 6.5 $ 6.6
============ ============ ============ ============
<FN>
- --------------------
(1) Lumber shipments are expressed in millions of board feet.
(2) Log shipments are expressed in millions of board 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.
</TABLE>
<PAGE>
Shipments
Lumber shipments for the second quarter of 1994 were 86.9 million
board feet, an increase of 7% from 81.0 million board feet for the second
quarter of 1993. This increase was principally due to a 15% increase in
redwood common lumber shipments, partially offset by a 25% decrease in
shipments of upper grade redwood lumber. Log shipments for the second
quarter of 1994 were 4.8 million feet (net Scribner scale), an increase
from .8 million feet for the second quarter of 1993.
Lumber shipments for the six months ended June 30, 1994 were
167.1 million board feet, an increase of 4% from 160.4 million board feet
for the six months ended June 30, 1993. This increase was principally due
to a 12% increase in redwood common lumber shipments, partially offset by a
22% decrease in shipments of upper grade redwood lumber. Log shipments for
the six months ended June 30, 1994 were 10.3 million feet (net Scribner
scale), an increase from .8 million feet for the six months ended June 30,
1993.
Old growth trees constitute Pacific Lumber's principal source of
upper grade redwood lumber. Due to the severe restrictions on Pacific
Lumber's ability to harvest virgin old growth timber on its property (see
"Trends" under Item 7 of the Form 10-K), Pacific Lumber's supply of upper
grade lumber has decreased in some premium product categories. Pacific
Lumber has been able to lessen the impact of these decreases by augmenting
its production facilities to increase its recovery of upper grade lumber
from smaller diameter logs and increasing the production of manufactured
upper grade lumber products through its end and edge glue facility (which
is currently being expanded). However, unless Pacific Lumber is able to
sustain the harvest level of old growth trees it has experienced in recent
years, Pacific Lumber expects that its supply of premium upper grade lumber
products will decrease from current levels and that its manufactured lumber
products will constitute a higher percentage of its shipments of upper
grade lumber products.
Net sales
Revenues from net sales of lumber and logs for the second quarter
of 1994 increased by approximately 4% from the second quarter of 1993.
This increase was principally due to increased shipments of redwood common
lumber, a 16% increase in the average realized price of upper grade redwood
lumber and increased log shipments, partially offset by decreased shipments
of upper grade redwood lumber and an 8% decrease in the average realized
price of redwood common lumber. The increase in other sales for the second
quarter of 1994 as compared to the second quarter of 1993 was attributable
to increased sales of wood chips.
Revenues from net sales of lumber and logs for the six months
ended June 30, 1994 increased by approximately 7% from the six months ended
June 30, 1993. This increase was principally due to increased log
shipments, increased shipments of redwood common lumber, a 16% increase in
the average realized price of upper grade redwood lumber and a 19% increase
in the average realized price of upper grade Douglas-fir lumber, partially
offset by decreased shipments of upper grade redwood lumber and a 5%
decrease in the average realized price of redwood common lumber. The
increase in other sales for the six months ended June 30, 1994 as compared
to the six months ended June 30, 1993 was attributable to increased sales
of wood chips.
Operating income
Operating income for the second quarter of 1994 increased by
approximately 51% as compared to the second quarter of 1993. Operating
income for the six months ended June 30, 1994 increased by approximately
15% as compared to the six months ended June 30, 1993. These increases
were principally due to higher sales of logs and wood chips, improved
sawmill productivity and lower purchases of lumber
<PAGE>
and logs from third parties in 1994 compared to 1993. For the six months
ended June 30, 1993, cost of goods sold was reduced by $1.2 million for an
additional business interruption insurance claim as a result of the April
1992 earthquake.
Pacific Lumber's cost of producing lumber products has continued
to increase as a result of compliance with evolving environmental
regulations, litigation associated with its timber harvesting plans and
greater costs attributable to processing larger numbers of smaller diameter
logs and producing manufactured products.
Income (loss) from continuing operations before income taxes,
extraordinary items and cumulative effect of changes in
accounting principles
Income from continuing operations before income taxes,
extraordinary items and cumulative effect of changes in accounting
principles increased for the second quarter of 1994 and the six months
ended June 30, 1994 as compared to the same periods in 1993. These
increases resulted from the increases in operating income, higher
investment, interest and other income and decreased interest expense.
Investment, interest and other income for the six months ended June 30,
1994 includes the receipt of a franchise tax refund of $7.2 million (as
described in Note 5 to the Condensed Notes to Consolidated Financial
Statements). Interest expense decreased due to lower interest rates
resulting from the refinancing of the Company's long-term debt in March and
August of 1993.
Extraordinary item -- loss on litigation settlement
The litigation settlement in the second quarter of 1994 (as
described in Note 7 to the Condensed Notes to Consolidated Financial
Statements) resulted in an extraordinary loss of $14.9 million, net of
related income taxes of $6.3 million. The extraordinary loss consists of
Pacific Lumber's $14.8 million cash payment to the settlement fund, a $2.0
million accrual for additional contingent claims and $4.4 million of
related legal fees. See also "Pacific Lumber Merger Litigation" under Part
II, Item 1 of this Report.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
As of June 30, 1994, the Company had consolidated long-term debt
of $735.9 million (net of current maturities and restricted cash deposited
in the Liquidity Account) as compared to $738.7 million at December 31,
1993. The decrease in long-term debt was primarily due to principal
payments on the Timber Notes.
The Company conducts its operations through its principal
operating subsidiaries, Pacific Lumber and Britt Lumber Co., Inc.
("Britt"). The indentures governing the Pacific Lumber Senior Notes and
the Timber Notes and Pacific Lumber's Revolving Credit Agreement contain
various covenants which, among other things, limit the payment of dividends
and restrict transactions between Pacific Lumber and its affiliates. As of
June 30, 1994, under the most restrictive of these covenants, approximately
$5.6 million of dividends may be paid by Pacific Lumber. In May 1994, the
Revolving Credit Agreement was amended to extend its maturity date to May
31, 1997 and modify the dividend restriction existing at December 31, 1993.
On February 24, 1994, Pacific Lumber paid dividends of $5.7 million which
represented the entire amount permitted at December 31, 1993. Pacific
Lumber paid an additional $12.3 million of dividends in June 1994 as a
result of the amendment to the Revolving Credit Agreement and Pacific
Lumber's operating results for the four months ended April 30, 1994.
<PAGE>
The indenture governing the MGI Notes contains various covenants
which, among other things, limit the payment of dividends and restrict
transactions between the Company and its affiliates. At June 30, 1994,
under the most restrictive of these covenants, no dividends may be paid by
the Company.
The Company anticipates that cash flows from operations, together
with existing cash, marketable securities and available sources of
financing, will be sufficient to fund the working capital and capital
expenditures requirements of the Company and its respective subsidiaries
for the foreseeable future; however, due to its highly leveraged condition,
the Company is more sensitive than less leveraged companies to factors
affecting its operations, including governmental regulation affecting its
timber harvesting practices, increased competition from other lumber
producers or alternative building products and general economic conditions.
On July 20, 1994, SPHC repaid approximately $5.0 million of the
aggregate principal amount outstanding on the Timber Notes in accordance
with Scheduled Amortization.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Form 10-K and Part II, Item 1
of the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1994 (the "Form 10-Q") for information concerning material
legal proceedings with respect to the Company. The following material
developments have occurred with respect to such legal proceedings. Any
capitalized or italicized terms used but not defined in this Item have the
same meaning given to them in the Form 10-K and the Form 10-Q.
PACIFIC LUMBER MERGER LITIGATION
With respect to the In re Ivan F. Boesky multidistrict securities
litigation matter, on May 17, 1994, MAXXAM and Pacific Lumber announced
that an agreement in principle had been reached to settle class and related
individual claims brought by former stockholders of Pacific Lumber against
MAXXAM, the Company, Pacific Lumber, former directors of Pacific Lumber and
others concerning the Company's acquisition of Pacific Lumber. The
settlement would resolve the Fries State, Omicini, Thompson State, Russ,
Fries Federal, Thompson Federal, Boesky and American Red Cross actions
described in the Form 10-K. Of the pending approximately $52.0 million
settlement, approximately $33.0 million was paid by insurance carriers of
MAXXAM and Pacific Lumber, approximately $14.8 million was paid by Pacific
Lumber, and the balance was paid by other defendants and through the
assignment of certain claims. The settlement is subject to certain
contingencies, including a fairness hearing which will be held at a yet
unspecified time in the United States District Court, Southern District of
New York (notice of which hearing will be furnished to claimants). The
above described cash payments are being held in the registry of the court
pending satisfaction of these contingencies.
Management believes the settlement of these claims is in the best
interest of the Company. See also Note 7 to the Condensed Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations -
- - Extraordinary item -- loss on litigation settlement" in Part I of this
Report.
With respect to the Russ case, the Court has scheduled a status
conference for January 6, 1995, but has directed the parties to file
dismissal papers with the Court in the event that the above-described
Boesky settlement is approved and finalized prior to the next scheduled
status conference.
PACIFIC LUMBER ENVIRONMENTAL LITIGATION
With respect to the Sierra Club, et al. v. State Board of
Forestry, et al. (No. 82371) action, on July 21, 1994, the California
Supreme Court issued its opinion affirming the decision of the Court of
Appeal and directing the Superior Court to issue an order compelling the
BOF to rescind its approval of the two THPs in question.
With respect to the Marbled Murrelet, et al. v. Bruce Babbitt, et
al.(No. C93-1400) action, the Court has rescheduled the trial date to
August 15, 1994.
With respect to the Lost Coast League v. The California
Department of Forestry, et al. (No. 94DR0046) action, after a trial on the
merits, on July 14, 1994, the Court issued its decision setting aside the
CDF's approval of the THP in question.
<PAGE>
With respect to the EPIC v. California Department of Forestry, et
al. (No. 94CP0317) action, following the Superior Court's denial of
plaintiff's application for a temporary restraining order, plaintiff sought
an emergency stay of harvesting from the Court of Appeal. On May 17, 1994,
the Court of Appeal denied plaintiff's request for an emergency stay of
harvesting in connection with the six THPs involved in this litigation.
On July 20, 1994, an action entitled EPIC v. California
Department of Forestry, et al. (No. 94DR0198) was filed in Superior Court
of Humboldt County against the CDF, Pacific Lumber and SPHC. This action
relates to a THP for approximately 97 acres of residual old growth timber
("THP 94-187"), all of such acres containing timber of SPHC. Plaintiff
seeks to set aside the CDF's approval of THP 94-187 and to prevent
harvesting in accordance with the THP.
ITEM 5. OTHER INFORMATION
In Part I, Item 1, "Business--Regulatory and Environmental
Factors" of the Form 10-K, a bill is described which relates to
approximately 54,000 acres of Pacific Lumber's timberlands. A similar bill
has been introduced in the U.S. Senate by Senator Barbara Boxer (D-CA).
Since these bills are subject to amendment, it is premature to assess the
ultimate content of these bills, the likelihood of any of the bills
passing, or the impact of either of these bills on the financial position
or results of operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
4.1 Second Amendment, dated as of May 26, 1994, to
Pacific Lumber's Revolving Credit Agreement
(incorporated herein by reference to Exhibit 4.2
to the Quarterly Report on Form 10-Q of MAXXAM
Inc. for the quarter ended June 30, 1994; File No.
1-3924)
B. REPORTS ON FORM 8-K:
On June 2, 1994, the Company filed a Current Report on
Form 8-K, dated June 2, 1994, describing under Item 5
the settlement of the Pacific Lumber merger litigation
(see "-- Pacific Lumber Merger Litigation" under Part
II, Item 1 of this Report for a description of such
settlement).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized, who has signed this report on
behalf of the Registrant and as the chief financial officer of the
Registrant.
MAXXAM GROUP INC.
Date: August 10, 1994 By: JOHN T. LA DUC
John T. La Duc
Vice President and Chief Financial
Officer
