FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1994 Commission File Number 1-8857
MAXXAM GROUP INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 13-1310680
(State or other (I.R.S. Employer
jurisdiction Identification Number)
of incorporation or
organization)
5847 SAN FELIPE, SUITE 2600 77057
HOUSTON, TEXAS (Zip Code)
(Address of Principal
Executive Offices)
Registrant's telephone number, including area code: (713) 975-7600
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
None.
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 / /
All of the Registrant's voting stock is held by an affiliate of the
Registrant.
Number of shares of Common Stock outstanding at March 15, 1995: 100
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION (J)(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS
FORM WITH THE REDUCED DISCLOSURE FORMAT.
DOCUMENTS INCORPORATED BY REFERENCE:
The consolidated financial statements and notes thereto of Kaiser Aluminum
Corporation and The Pacific Lumber Company are incorporated herein by
reference under Part IV and included as Exhibits 99.1 and 99.2 hereto,
respectively.
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PART I
ITEM 1. BUSINESS
GENERAL
MAXXAM Group Inc. and its wholly owned subsidiaries are
collectively referred to herein as the "Company" or "MGI" unless otherwise
indicated or the context indicates otherwise. The Company is a wholly
owned subsidiary of MAXXAM Inc. ("MAXXAM"). The Company engages almost
exclusively in forest products operations through its wholly owned
subsidiaries, The Pacific Lumber Company and its wholly owned subsidiaries
(collectively referred to herein as "Pacific Lumber," unless the context
indicates otherwise), and Britt Lumber Co., Inc. ("Britt"). Pacific
Lumber, which has been in continuous operation for 125 years, engages in
all principal aspects of the lumber industry--the growing and harvesting of
redwood and Douglas-fir timber, the milling of logs into lumber products
and the manufacturing of lumber into a variety of value-added finished
products. Britt manufactures redwood and cedar fencing and decking
products from small diameter logs, a substantial portion of which Britt
acquires from Pacific Lumber (which cannot efficiently process them in its
own mills).
PACIFIC LUMBER OPERATIONS
Timberlands
Pacific Lumber owns and manages approximately 189,000 acres of
commercial timberlands in Humboldt County in northern California. These
timberlands contain approximately three-quarters redwood and one-quarter
Douglas-fir timber. Pacific Lumber's acreage is virtually contiguous, is
located in close proximity to its sawmills and contains an extensive (1,100
mile) network of roads. These factors significantly reduce harvesting
costs and facilitate Pacific Lumber's forest management techniques. The
extensive roads throughout Pacific Lumber's timberlands facilitate log
hauling, serve as fire breaks and allow Pacific Lumber's foresters access
to employ forest stewardship techniques which protect the trees from forest
fires, erosion, insects and other damage.
Approximately 179,000 acres of Pacific Lumber's timberlands are
owned by Scotia Pacific Holding Company (the "SPHC Timberlands"), a special
purpose Delaware corporation and wholly owned subsidiary of Pacific Lumber
("SPHC"). Pacific Lumber has the exclusive right to harvest (the "Pacific
Lumber Harvest Rights") approximately 8,000 non-contiguous acres of the
SPHC Timberlands consisting substantially of virgin old growth redwood and
virgin old growth Douglas-fir timber located on numerous small parcels
throughout the SPHC Timberlands. Substantially all of SPHC's assets,
including the SPHC Timberlands and the GIS (defined below), are pledged as
security for SPHC's 7.95% Timber Collateralized Notes due 2015 (the "Timber
Notes"). Pacific Lumber harvests and purchases from SPHC all or
substantially all of the logs harvested from the SPHC Timberlands. See "--
Relationships With SPHC and Britt Lumber" for a description of this and
other relationships among Pacific Lumber, SPHC and Britt.
The forest products industry grades lumber in various
classifications according to quality. The two broad categories within
which all grades fall, based on the absence or presence of knots, are
called "upper" and "common" grades, respectively. "Old growth" trees,
often defined as trees which have been growing for approximately 200 years
or longer, have a higher percentage of upper grade lumber than "young
growth" trees (those which have been growing for less than 200 years).
"Virgin" old growth trees are located in timber stands that have not
previously been harvested. "Residual" old growth trees are located in
timber stands which have been selectively harvested in the past.
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Pacific Lumber has engaged in extensive efforts, at relatively
low cost, to supplement the natural regeneration of timber and increase the
amount of timber on its timberlands. Regeneration of redwood timber
generally is accomplished through the natural growth of redwood sprouts
from the stump remaining after a redwood tree is harvested. Such new
redwood sprouts grow quickly, thriving on existing mature root systems. In
addition, Pacific Lumber supplements natural redwood generation by planting
redwood seedlings. Douglas-fir timber grown on Pacific Lumber's
timberlands is regenerated almost entirely by planting seedlings. During
the 1993-94 planting season (December through March), Pacific Lumber
planted approximately 554,000 redwood and Douglas-fir seedlings.
Harvesting Practices
The ability of Pacific Lumber to sell logs or lumber products
will depend, in part, upon its ability to obtain regulatory approval of
timber harvesting plans ("THPs"). THPs are required to be filed with the
California Department of Forestry ("CDF") prior to the harvesting of timber
and are designed to comply with existing environmental laws and
regulations. The CDF's evaluation of proposed THPs incorporates review and
analysis of such THPs provided by several California and federal agencies
and public comments received with respect to such THPs. An approved THP is
applicable to specific acreage and specifies the harvesting method and
other conditions relating to the harvesting of the timber covered by such
THP. The method of harvesting as set forth in a THP is chosen from among a
number of accepted methods based upon suitability to the particular site
conditions. Pacific Lumber maintains a detailed geographical information
system covering its timberlands (the "GIS"). The GIS covers numerous
aspects of Pacific Lumber's properties, including timber type, tree class,
wildlife data, roads, rivers and streams. By carefully monitoring and
updating this data base, Pacific Lumber's foresters are able to develop
detailed THPs which are required to be filed with and approved by the CDF
prior to the harvesting of timber. Pacific Lumber also utilizes a Global
Positioning System ("GPS") which allows precise location of geographic
features through satellite positioning. Use of the GPS greatly enhances
the quality and efficiency of GIS data.
Pacific Lumber principally harvests trees through selective
harvesting, which harvests only a portion of the trees in a given area, as
opposed to clearcutting, which harvests an entire area of trees in one
logging operation. Selective harvesting generally accounts for over 90%
(by volume on a net board foot basis) of Pacific Lumber's timber harvest in
any given year. Harvesting by clearcutting is used only when selective
harvesting methods are impractical due to unique conditions. Selective
harvesting allows the remaining trees to obtain more light, nutrients and
water thereby promoting faster growth rates. Due to the size of its
timberlands and conservative harvesting practices, Pacific Lumber has
historically conducted harvesting operations on approximately 5% of its
timberlands in any given year.
See also Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Trends."
Production Facilities
Pacific Lumber owns four highly mechanized sawmills and related
facilities located in Scotia, Fortuna and Carlotta, California. The
sawmills historically have been supplied almost entirely from timber
harvested from Pacific Lumber's timberlands. Since 1986, Pacific Lumber
has implemented numerous technological advances which have increased the
operating efficiency of its production facilities and the recovery of
finished products from its timber. Over the past three years, Pacific
Lumber's annual lumber production has averaged approximately 259 million
board feet, with approximately 286, 228 and 264 million board feet produced
in 1994, 1993 and 1992, respectively. Pacific Lumber operates a finishing
plant which processes rough lumber into a variety of finished products such
as trim, fascia, siding and paneling. These finished products include the
industry's largest variety of customized trim and fascia patterns. Pacific
Lumber also enhances the value
<PAGE>
of some grades of common grade lumber by cutting out knot-free pieces and
reassembling them into longer or wider pieces in Pacific Lumber's
state-of-the-art end and edge glue plant. The result is a standard sized
upper grade product which can be sold at a significant premium over common
grade products.
Pacific Lumber dries the majority of its upper grade lumber
before it is sold. Upper grades of redwood lumber are generally air-dried
for six to eighteen months and then kiln-dried for seven to twenty-four
days to produce a dimensionally stable and high quality product which
generally commands higher prices than "green" lumber (which is lumber sold
before it has been dried). Upper grade Douglas-fir lumber is generally
kiln-dried immediately after it is cut. Pacific Lumber owns and operates
34 kilns, having an annual capacity of approximately 95 million board feet,
to dry its upper grades of lumber efficiently in order to produce a
quality, premium product. Pacific Lumber also maintains several large
enclosed storage sheds which hold approximately 25 million board feet of
lumber.
In addition, Pacific Lumber owns and operates a modern
25-megawatt cogeneration power plant which is fueled almost entirely by the
wood residue from Pacific Lumber's milling and finishing operations. This
power plant generates substantially all of the energy requirements of
Scotia, California, the town adjacent to Pacific Lumber's timberlands owned
by Pacific Lumber where several of its manufacturing facilities are
located. Pacific Lumber sells surplus power to Pacific Gas and Electric
Company. In 1994, the sale of surplus power to Pacific Gas and Electric
Company accounted for approximately 2% of Pacific Lumber's total revenues.
Products
Lumber. Pacific Lumber primarily produces and markets lumber.
In 1994, Pacific Lumber sold approximately 272 million board feet of
lumber, which accounted for approximately 82% of Pacific Lumber's total
revenues. Lumber products vary greatly by the species and quality of the
timber from which it is produced. Lumber is sold not only by grade (such
as "upper" grade versus "common" grade), but also by board size and the
drying process associated with the lumber.
Redwood lumber is Pacific Lumber's largest product category,
constituting approximately 77% of Pacific Lumber's total lumber revenues
and 63% of Pacific Lumber's total revenues in 1994. Redwood is
commercially grown only along the northern coast of California and
possesses certain unique characteristics which permit it to be sold at a
premium to many other wood products. Such characteristics include its
natural beauty, superior ability to retain paint and other finishes,
dimensional stability and innate resistance to decay, insects and
chemicals. Typical applications include exterior siding, trim and fascia
for both residential and commercial construction, outdoor furniture, decks,
planters, retaining walls and other specialty applications. Redwood also
has a variety of industrial applications because of its chemical resistance
and because it does not impart any taste or odor to liquids or solids.
Upper grade redwood lumber, which is derived primarily from old
growth trees and is characterized by an absence of knots and other defects
and a very fine grain, is used primarily in more costly and distinctive
interior and exterior applications. During 1994, upper grade redwood
lumber products accounted for approximately 17% of Pacific Lumber's total
lumber production volume (on a net board foot basis), 41% of its total
lumber revenues and 33% of its total revenues.
Common grade redwood lumber, Pacific Lumber's largest volume
product, has many of the same aesthetic and structural qualities of redwood
uppers, but has some knots, sapwood and a coarser grain. Such lumber is
commonly used for construction purposes, including outdoor structures such
as decks, hot tubs and fencing. In 1994, common grade redwood lumber
accounted for approximately 58% of Pacific Lumber's total lumber production
volume (on a net board foot basis), 36% of its total lumber revenues and
29% of its total revenues.
<PAGE>
Douglas-fir lumber is used primarily for new construction and
some decorative purposes and is widely recognized for its strength, hard
surface and attractive appearance. Douglas-fir is grown commercially along
the west coast of North America and in Chile and New Zealand. Upper grade
Douglas-fir lumber is derived primarily from old growth Douglas-fir timber
and is used principally in finished carpentry applications. In 1994, upper
grade Douglas-fir lumber accounted for approximately 3% of Pacific Lumber's
total lumber production volume (on a net board foot basis), 7% of its total
lumber revenues and 5% of its total revenues. Common grade Douglas-fir
lumber is used for a variety of general construction purposes and is
largely interchangeable with common grades of other whitewood lumber. In
1994, common grade Douglas-fir lumber accounted for approximately 20% of
Pacific Lumber's total lumber production volume, 13% of its total lumber
revenues and 10% of its total revenues.
Logs. Pacific Lumber currently sells certain logs that, due to
their size or quality, cannot be efficiently processed by its mills into
lumber. The purchasers of these logs are largely Britt, and surrounding
mills which do not own sufficient timberlands to support their mill
operations. In 1994, log sales accounted for approximately 9% of Pacific
Lumber's total revenues. See "--Relationships With SPHC and Britt Lumber"
below. Except for the agreement with Britt described below, Pacific Lumber
does not have any significant contractual relationships with any third
parties relating to the purchase of logs. Pacific Lumber has historically
not purchased significant quantities of logs from third parties; however,
Pacific Lumber may from time to time purchase logs from third parties for
processing in its mills or for resale to third parties if, in the opinion
of management, economic factors are advantageous to Pacific Lumber. See
also Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations--Operating Income" for a
description of 1993 log purchases by Pacific Lumber due to inclement
weather conditions.
Wood Chips. In 1990, Pacific Lumber installed a whole-log
chipper to produce wood chips from hardwood trees which were previously
left as waste. These chips primarily are sold to third parties for the
production of facsimile and other specialty papers. In 1994, hardwood
chips accounted for approximately 4% of Pacific Lumber's total revenues.
Pacific Lumber also produces softwood chips from the wood residue and waste
from its milling and finishing operations. These chips are sold to third
parties for the production of wood pulp and paper products. In 1994,
softwood chips accounted for approximately 4% of Pacific Lumber's total
revenues.
Backlog and Seasonality
Pacific Lumber's backlog of sales orders at December 31, 1994 and
1993 was approximately $11.9 million and $16.0 million, respectively, the
substantial portion of which was delivered in the first quarter of the
succeeding fiscal year. Pacific Lumber has historically experienced lower
first and fourth quarter sales due largely to the general decline in
construction-related activity during the winter months. As a result,
Pacific Lumber's results in any one quarter are not necessarily indicative
of results to be expected for the full year.
Marketing
The housing, construction and remodeling markets are the primary
markets for Pacific Lumber's lumber products. Pacific Lumber's policy is
to maintain a wide distribution of its products both geographically and in
terms of the number of customers. Pacific Lumber sells its lumber products
throughout the country to a variety of accounts, the large majority of
which are wholesalers, followed by retailers, industrial users, exporters
and manufacturers. Upper grades of redwood and Douglas-fir lumber are sold
throughout the entire United States, as well as to export markets. Common
grades of redwood lumber are sold principally west of the Mississippi
river, with California accounting for approximately 55% of these sales in
1994. Common grades of Douglas-fir lumber are sold primarily in
California. In 1994, no single customer accounted for more than 4% of
Pacific Lumber's total revenues. Exports of lumber accounted for
approximately 4% of Pacific Lumber's total lumber
<PAGE>
revenues in 1994. Pacific Lumber markets its products through its own
sales staff which focuses primarily on domestic sales.
Pacific Lumber actively follows trends in the housing,
construction and remodeling markets in order to maintain an appropriate
level of inventory and assortment of product. Due to its high quality
products, large inventory, competitive prices and long history, Pacific
Lumber believes that it has a strong degree of customer loyalty.
Competition
Pacific Lumber's lumber is sold in highly competitive markets.
Competition is generally based upon a combination of price, service and
product quality. Pacific Lumber's products compete not only with other
wood products but with metals, masonry, plastic and other construction
materials made from non-renewable resources. The level of demand for
Pacific Lumber's products is dependent on such broad factors as overall
economic conditions, interest rates and demographic trends. In addition,
competitive considerations, such as total industry production and
competitors' pricing, as well as the price of other construction products,
affect the sales prices for Pacific Lumber's lumber products. Pacific
Lumber currently enjoys a competitive advantage in the upper grade redwood
lumber market due to the quality of its timber holdings and relatively low
cost production operations. Competition in the common grade redwood and
Douglas-fir lumber market is more intense, and Pacific Lumber competes with
numerous large and small lumber producers.
Employees
As of March 1, 1995, Pacific Lumber had approximately 1,520
employees.
Relationships With SPHC and Britt Lumber
In March 1993, Pacific Lumber consummated its offering of $235
million of 10-1/2% Senior Notes due 2003 (the "Pacific Lumber Senior
Notes") and SPHC consummated its offering of $385 million of Timber Notes.
Upon the closing of such offerings, Pacific Lumber, SPHC and Britt entered
into a variety of agreements. Pacific Lumber and SPHC entered into a
Services Agreement (the "Services Agreement") and an Additional Services
Agreement (the "Additional Services Agreement"). Pursuant to the Services
Agreement, Pacific Lumber provides operational, management and related
services with respect to the SPHC Timberlands containing timber of SPHC
("SPHC Timber") not performed by SPHC's own employees. Such services
include the furnishing of all equipment, personnel and expertise not within
the SPHC's possession and reasonably necessary for the operation and
maintenance of the SPHC Timberlands containing the SPHC Timber. In
particular, Pacific Lumber is required to regenerate SPHC Timber, prevent
and control loss of the SPHC Timber by fires, maintain a system of roads
throughout the SPHC Timberlands, take measures to control the spread of
disease and insect infestation affecting the SPHC Timber and comply with
environmental laws and regulations, including measures with respect to
waterways, habitat, hatcheries and endangered species. Pacific Lumber also
is required (to the extent necessary) to assist SPHC personnel in updating
the GIS and to prepare and file, on SPHC's behalf, all pleadings and
motions and otherwise diligently pursue appeals of any denial of any THP
and related matters. As compensation for these and the other services to
be provided by Pacific Lumber, SPHC pays a fee which is adjusted on January
1 of each year based on a specified government index relating to wood
products. The fee was $114,000 per month in 1994 and is expected to be
approximately $115,000 per month in 1995. Pursuant to the Additional
Services Agreement, SPHC provides Pacific Lumber with a variety of
services, including (a) assisting Pacific Lumber to operate, maintain and
harvest its own timber properties, (b) updating and providing access to the
GIS with respect to information concerning Pacific Lumber's own timber
properties, and (c) assisting Pacific Lumber with its statutory and
regulatory compliance. Pacific Lumber pays SPHC a fee for such services
equal to the actual cost of providing such services, as determined in
accordance with generally accepted accounting principles.
<PAGE>
Pacific Lumber and SPHC also entered into a Master Purchase
Agreement (the "Master Purchase Agreement"). The Master Purchase Agreement
governs all purchases of logs by the Company from SPHC. Each purchase of
logs by Pacific Lumber from SPHC is made pursuant to a separate log
purchase agreement (which incorporates the terms of the Master Purchase
Agreement) for the SPHC Timber covered by an approved THP. Each log
purchase agreement generally constitutes an exclusive agreement with
respect to the timber covered thereby, subject to certain limited
exceptions. The purchase price must be at least equal to the SBE Price (as
defined below). The Master Purchase Agreement provides that if the
purchase price equals or exceeds (i) the price for such species and
category thereof set forth on the structuring schedule applicable to the
Timber Notes, and (ii) the SBE Price, then such price shall be deemed to be
the fair market value of such logs. The Master Purchase Agreement defines
the "SBE Price," for any species and category of timber, as the stumpage
price for such species and category as set forth in the most recent
"Harvest Value Schedule" published by the California State Board of
Equalization applicable to the timber sold during the period covered by
such Harvest Value Schedule. Such Harvest Value Schedules are published
for purposes of computing yield taxes and generally are released every six
months. As Pacific Lumber purchases logs from SPHC pursuant to the Master
Purchase Agreement, Pacific Lumber is responsible, at its own expense, for
harvesting and removing the standing SPHC Timber covered by approved THPs
and, thus, the purchase price is based upon "stumpage prices." Title to
the harvested logs does not pass to Pacific Lumber until the logs are
transported to Pacific Lumber's log decks and measured. Substantially all
of SPHC's revenues are derived from the sale of logs to Pacific Lumber
under the Master Purchase Agreement.
Pacific Lumber, SPHC and Salmon Creek Corporation, a wholly owned
subsidiary of Pacific Lumber ("Salmon Creek"), also entered into a
Reciprocal Rights Agreement granting to each other certain reciprocal
rights of egress and ingress through their respective properties in
connection with the operation and maintenance of such properties and their
respective businesses. In addition, Pacific Lumber entered into an
Environmental Indemnification Agreement with SPHC pursuant to which Pacific
Lumber agreed to indemnify SPHC from and against certain present and future
liabilities arising with respect to hazardous materials, hazardous
materials contamination or disposal sites, or under environmental laws with
respect to the SPHC Timberlands.
Pacific Lumber entered into an agreement with Britt (the "Britt
Agreement") which governs the sale of logs by Pacific Lumber and Britt to
each other, the sale of hog fuel (wood residue) by Britt to Pacific Lumber
for use in Pacific Lumber's cogeneration plant, the sale of lumber by
Pacific Lumber and Britt to each other, and the provision by Pacific Lumber
of certain administrative services to Britt (including accounting,
purchasing, data processing, safety and human resources services). The
logs which Pacific Lumber sells to Britt and which are used in Britt's
manufacturing operations are sold at approximately 75% of applicable SBE
prices (to reflect the lower quality of these logs). Logs which either
Pacific Lumber or Britt purchases from third parties and which are then
sold to each other are transferred at the actual cost of such logs. Hog
fuel is sold at applicable market prices, and administrative services are
provided by Pacific Lumber based on Pacific Lumber's actual costs and an
allocable share of Pacific Lumber's overhead expenses consistent with past
practice.
BRITT LUMBER OPERATIONS
Business
Britt is located in Arcata, California, approximately 45 miles
north of Pacific Lumber's headquarters. Britt's primary business is the
processing of small diameter redwood logs into wood fencing products for
sale to retail and wholesale customers. Britt was incorporated in 1965 and
operated as an independent manufacturer of fence products until July 1990,
when it was purchased by a subsidiary of the Company. Britt purchases
small diameter (6 to 14 inch) and short length (6 to 12 feet) redwood logs
from Pacific Lumber and a variety of different diameter and different
length logs from various timberland owners. Britt processes logs at its
mill into
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a variety of different fencing products, including "dog-eared" 1" x 6"
fence stock in six and eight foot lengths, 4" x 4" fence posts in 6 through
12 foot lengths, and other fencing products in 6 through 12 foot lengths.
Britt's purchases of logs from third parties are generally consummated
pursuant to short-term contracts of twelve months or less. See "--Pacific
Lumber Operations--Relationships With SPHC and Britt Lumber" for a
description of Britt's log purchases from Pacific Lumber.
Marketing
In 1994, Britt sold approximately 79 million board feet of lumber
products to approximately 83 different customers. Over one-half of its
sales were in northern California. The remainder of its 1994 sales were in
southern California, Arizona, Colorado, Hawaii, Nevada, Oregon and
Washington. The largest and top five of such customers accounted for
approximately 35% and 81%, respectively, of such 1994 sales. Britt markets
its products through its own sales person to a variety of customers,
including distribution centers, industrial remanufacturers, wholesalers and
retailers.
Facilities and Employees
Britt's manufacturing operations are conducted on 12 acres of
land, 10 acres of which are leased on a long-term fixed-price basis from an
unrelated third party. Fence production is conducted in a 46,000 square
foot mill. An 18 acre log sorting and storage yard is located one quarter
of a mile away. The mill was constructed in 1980, and capital expenditures
to enhance its output and efficiency are made on a yearly basis. Britt's
(single shift) mill capacity, assuming 40 production hours per week, is
estimated at 40.3 million board feet of fencing products per year. As of
March 1, 1995, Britt employed approximately 100 people.
Competition
Management estimates that Britt accounted for approximately one
quarter of the redwood fence market in 1994 in competition with the
northern California mills of Louisiana Pacific, Georgia Pacific and Eel
River.
REGULATORY AND ENVIRONMENTAL FACTORS
Regulatory and environmental issues play a significant role in
Pacific Lumber's forest products operations. Pacific Lumber's forest
products operations are subject to a variety of California, and in some
cases, federal laws and regulations dealing with timber harvesting,
endangered species, and air and water quality. These laws include the
California Forest Practice Act (the "Forest Practice Act"), which requires
that timber harvesting operations be conducted in accordance with detailed
requirements set forth in the Forest Practice Act and in the regulations
promulgated thereunder by the California Board of Forestry (the "BOF"). The
federal Endangered Species Act (the "ESA") and the California Endangered
Species Act (the "CESA") provide in general for the protection and
conservation of specifically listed fish, wildlife and plants which have
been declared to be endangered or threatened. The California Environmental
Quality Act ("CEQA") provides, in general, for protection of the
environment of the state, including protection of air and water quality and
of fish and wildlife. In addition, the California Water Quality Act
requires, in part, that Pacific Lumber's operations be conducted so as to
reasonably protect the water quality of nearby rivers and streams. For
instance, in March and May 1994, the BOF approved additional rules
providing for among other things, inclusion of additional information in
THPs (concerning, among other things, timber generation systems, the
presence or absence of fish, wildlife and plant systems, potentially
impacted watersheds and compliance with long term sustained yield
objectives) and modification of certain timber harvesting practices
(including the creation of buffer zones between harvest areas and increases
in the amount of timber required to be retained in a harvest area). See
also Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Trends" for a description of the sustained yield
regulations. Pacific Lumber does not expect that compliance with such
existing laws and regulations will have a material adverse effect on its
timber harvesting practices or future operating
<PAGE>
results. There can be no assurance, however, that future legislation,
governmental regulations or judicial or administrative decisions would not
adversely affect Pacific Lumber.
Various groups and individuals have filed objections with the CDF
regarding the CDF's actions and rulings with respect to certain of Pacific
Lumber's THPs, and the Company expects that such groups and individuals
will continue to file objections to certain of Pacific Lumber's THPs. In
addition, lawsuits are pending which seek to prevent Pacific Lumber from
implementing certain of its approved THPs. These challenges have severely
restricted Pacific Lumber's ability to harvest virgin old growth timber on
its property during the past few years. To date, litigation with respect
to Pacific Lumber's THPs relating to young growth and residual old growth
timber has been limited; however, no assurance can be given as to the
extent of such litigation in the future. See Item 3. "Legal Proceedings--
Timber Harvesting Litigation."
In June 1990, the U.S. Fish and Wildlife Service (the "USFWS")
designated the northern spotted owl as threatened under the ESA. The owl's
range includes all of Pacific Lumber's timberlands. The ESA and its
implementing regulations (and related California regulations) generally
prohibit harvesting operations in which individual owls might be killed,
displaced or injured or which result in significant habitat modification
that could impair the survival of individual owls or the species as a
whole. Since 1988, biologists have conducted inventory and habitat
utilization studies of northern spotted owls on Pacific Lumber's
timberlands. Pacific Lumber has developed and the USFWS has given its full
concurrence to a comprehensive wildlife management plan for the northern
spotted owl (the "Owl Plan"). By incorporating the Owl Plan into each THP
filed with the CDF, Pacific Lumber is able to expedite the approval process
with respect to its THPs. Both federal and state agencies continue to
review and consider possible additional regulations regarding the northern
spotted owl. It is uncertain if such additional regulations will become
effective or their ultimate content.
In March 1992, the marbled murrelet was approved for listing as
endangered under the CESA. Pacific Lumber has incorporated, and will
continue to incorporate as required, additional mitigation measures into
its THPs to protect and maintain habitat for marbled murrelets on its
timberlands. The California Department of Fish and Game (the "CDFG")
requires Pacific Lumber to conduct pre-harvest marbled murrelet surveys and
to provide certain other site specific mitigations in connection with its
THPs covering virgin old growth timber and unusually dense stands of
residual old growth timber. Such surveys can only be conducted during
April to July, the murrelets' nesting and breeding season. Accordingly,
such surveys are expected to delay the review and approval process with
respect to certain of the THPs filed by Pacific Lumber. The results of
such surveys could prevent Pacific Lumber from conducting certain of its
harvesting operations. In October 1992, the USFWS issued its final rule
listing the marbled murrelet as a threatened species under the ESA in the
tri-state area of Washington, Oregon and California. In January 1994, the
USFWS proposed designation of critical habitat for the marbled murrelet
under the ESA. This proposal is subject to public comment, hearings and
possible future modification. Both federal and state agencies continue to
review and consider possible additional regulations regarding the marbled
murrelet. It is uncertain if such additional regulations will become
effective or their ultimate content.
Pacific Lumber's wildlife biologist is conducting research
concerning the marbled murrelet on Pacific Lumber's timberlands and is
currently developing a comprehensive management plan for the marbled
murrelet (the "Murrelet Plan") similar to the Owl Plan. Pacific Lumber is
continuing to work with the USFWS and the other government agencies on the
Murrelet Plan. It is uncertain when the Murrelet Plan will be completed.
Laws and regulations dealing with Pacific Lumber's operations are
subject to change and new laws and regulations are frequently introduced
concerning the California timber industry. From time to time, bills are
introduced in the California legislature and the U.S. Congress which relate
to the business of Pacific Lumber,
<PAGE>
including the protection and acquisition of old growth and other
timberlands, endangered species, environmental protection and the
restriction, regulation and administration of timber harvesting practices.
Because such 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 any of these bills on the financial position or
results of operations of the Company. Furthermore, any bills which are
passed are subject to executive veto and court challenge. In addition to
existing and possible new or modified statutory enactments, regulatory
requirements, administrative and legal actions, the California timber
industry remains subject to potential California or local ballot
initiatives and evolving federal and California case law which could affect
timber harvesting practices. It is, however, impossible to assess the
effect of such matters on the future operating results or consolidated
financial position of the Company.
ITEM 2. PROPERTIES
A description of the Company's properties is included under Item
1 above.
ITEM 3. LEGAL PROCEEDINGS
MERGER LITIGATION
As a result of the below-described settlement of the In Re Ivan
F. Boesky Multidistrict Securities Litigation (the "Boesky Settlement"),
all material stockholder claims against the Company and other defendants
have been resolved and have been dismissed or are in the process of being
dismissed.
During the mid-to-late 1980's, Pacific Lumber was named as
defendant along with several other entities and individuals, including
MAXXAM and MGI, in various class, derivative and other actions brought in
the Superior Court of Humboldt County by former stockholders of Pacific
Lumber relating to the cash tender offer (the "Tender Offer") for the
shares of Pacific Lumber by a subsidiary of MGI and the subsequent merger
(the "Merger"), as a result of which Pacific Lumber became a wholly owned
subsidiary of MGI (the "Humboldt County Lawsuits"). As of the date the
Court approved the Boesky Settlement, the Humboldt County Lawsuits which
remained open were captioned: Fries, et al. v. Carpenter, et al. (No.
76328) ("Fries State"); Omicini, et al. v. The Pacific Lumber Company, et
al. (No. 76974) ("Omicini"); Thompson, et al. v. Elam, et al. (No. 78467)
("Thompson State"); and Russ, et al. v. Milken, et al. (No. DR-85429)
("Russ"). The Humboldt County Lawsuits generally alleged, among other
things, that in documents filed with the Securities and Exchange Commission
(the "Commission"), the defendants made false statements concerning, among
other things, the estimated value of Pacific Lumber's assets, financing for
the Tender Offer and the Merger and minority stockholders' appraisal
rights, and that the individual directors of Pacific Lumber breached
certain fiduciary duties owed stockholders and other constituencies of
Pacific Lumber. MGI and MAXXAM were alleged to have aided and abetted
these violations and committed other wrongs. The Thompson State, Omicini
and Fries State suits seek compensatory damages in excess of $1 billion,
exemplary damages in excess of $750 million, rescission and other relief.
The Russ suit did not specify the amount of damages sought.
In 1988, two lawsuits similar to the Humboldt County Lawsuits
were filed in the United States District Court, Central District of
California-- Fries, et al. v. Hurwitz, et al. (No. 88-3493 RMT) ("Fries
Federal") and Thompson, et al. v. MAXXAM Group Inc., et al. (No. 88-06274)
("Thompson Federal"). These actions sought damages and relief similar to
that sought in the Humboldt County Lawsuits. In May 1989, the Thompson
Federal and Fries Federal actions were consolidated in the In re Ivan F.
Boesky Multidistrict Securities Litigation in the United States District
Court, Southern District of New York (MDL No. 732 M 21-45-MP) ("Boesky").
An additional action filed in November 1989, entitled American Red Cross,
et al. v. Hurwitz, et al. (No. 89 Civ
<PAGE>
7722) ("American Red Cross"), was also consolidated with the Boesky action.
The American Red Cross action contained allegations and sought damages and
relief similar to that contained in the Humboldt County Lawsuits.
At a fairness hearing held on November 17, 1994, the Court
approved a settlement of, and dismissed with prejudice, the pending federal
actions against the settling defendants. The actions dismissed with
prejudice include specifically: In Re Ivan F. Boesky Multidistrict
Securities Litigation; the Fries Federal action; the Thompson Federal
action; and the American Red Cross, et al. v. Hurwitz, et al. action. The
court's order also provides for the dismissal of all other shareholder
claims against the defendants, including dismissal of the Fries State,
Omicini, and Russ actions in their entirety, and all shareholder claims in
the Thompson State action. Of the approximately $52 million settlement,
approximately $33 million was paid by insurance carriers of the Company,
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. Dismissals have already been entered or are
in process with respect to all of the dismissed actions.
In September 1989, seven past and present employees of Pacific
Lumber brought an action against Pacific Lumber, MAXXAM, MGI, certain
current and former directors and officers of Pacific Lumber, MAXXAM and
MGI, and First Executive Life Insurance Company ("First Executive")
(subsequently dismissed as a defendant) in the United States District
Court, Northern District of California, entitled Kayes, et al. v. Pacific
Lumber Company, et al. (No. C89-3500) ("Kayes"). Plaintiffs purport to be
participants in or beneficiaries of Pacific Lumber's former Retirement Plan
(the "Retirement Plan") for whom a group annuity contract was purchased
from Executive Life Insurance Company ("Executive Life") in 1986 after
termination of the Retirement Plan. The Kayes action alleges that the
Pacific Lumber, MAXXAM and MGI defendants breached their ERISA fiduciary
duties to participants and beneficiaries of the Retirement Plan by
purchasing the group annuity contract from First Executive and selecting
First Executive to administer the annuity payments. Plaintiffs seek, among
other things, a new group annuity contract on behalf of the Retirement Plan
participants and beneficiaries. This case was dismissed on April 14, 1993
and was refiled as Jack Miller, et al. v. Pacific Lumber Company, et al.
(No. C-89-3500-SBA) ("Miller") on April 26, 1993; the Miller case was
dismissed on May 14, 1993. These dismissals have been appealed. On
October 3, 1994, the U.S. House of Representatives approved a bill amending
ERISA, which had previously been passed by the U.S. Senate, and is
intended, in part, to overturn the U.S. District Court's dismissal of the
Miller action and to make available certain remedies not previously
provided under ERISA. On October 22, 1994, the President signed this
legislation (the Pension Annuitants' Protection Act of 1994). As a result
of the passage of this legislation, the Miller plaintiffs have asked the
U.S. Ninth Circuit Court of Appeals to vacate the U. S. District Court
judgment dismissing their case and to remand the case to the U.S. District
Court; defendants have opposed this request. It is uncertain what effect,
if any, this legislation will have on the pending appeal or the final
disposition of this case. The defendants and plaintiff in the DOL civil
action have invited the Miller plaintiffs to participate in the court-
supervised settlement discussions concerning the Miller and DOL civil
actions.
In June 1991, the U.S. Department of Labor filed a civil action
entitled Lynn Martin, Secretary of the U.S. Department of Labor v. The
Pacific Lumber Company, et al. (No. 91-1812-RHS) ("DOL civil action") in
the United States District Court, Northern District of California, against
Pacific Lumber, MAXXAM, MGI and certain of their current and former
officers and directors. The allegations in the DOL civil action are
substantially similar to that in the Kayes action. The DOL civil action has
been stayed pending resolution of the Kayes and Miller appeals. Formal
settlement negotiations continue to be overseen by the court in this
matter.
Management is of the opinion that the outcome of the foregoing
litigation should not have a material adverse effect on the Company's
consolidated financial position or results of operations.
<PAGE>
TIMBER HARVESTING LITIGATION
Various actions, similar to each other, have been filed against
Pacific Lumber, MAXXAM, MGI, various state officials and others, alleging,
among other things, violations of the Forest Practice Act, the CEQA, ESA,
CESA, and/or related regulations. These actions seek to prevent Pacific
Lumber from harvesting certain of its THPs.
The EPIC v. The California Department of Forestry, et al. (No.
90CP0341) action in Superior Court of Humboldt County, filed by the
Environmental Protection Information Center ("EPIC") in May 1990, relates
to a THP for approximately 378 acres of virgin old growth timber. A nearly
identical action in Superior Court of Humboldt County, entitled Sierra Club
v. The California Department of Forestry, et al. (No. 90CP0405), was
brought by the Sierra Club in June 1990. These actions were subsequently
consolidated and after a trial on the merits, the Superior Court in June
1992 issued its judgment in favor of Pacific Lumber and affirming the BOF's
approval of this THP. The trial court's decision was appealed by the
Company; however, the Company has decided to withdraw the THP
involved in the above-referenced litigation and moot the appeal.
The EPIC, et al. v. California State Board of Forestry, et al.
(No. 91CP244) action in the Superior Court of Humboldt County, filed by the
Sierra Club and EPIC in 1991, relates to a THP for approximately 237 acres
of virgin old growth timber ("THP 90-237"). After the Superior Court
reversed the BOF's approval of this THP, certain modifications were made to
the THP which was then unanimously approved by the BOF. The Superior Court
later issued judgment in favor of Pacific Lumber. On appeal, the Court of
Appeal in October 1993 affirmed the trial court's judgment approving THP
90-237. In April 1993, EPIC filed another action with respect to THP 90-
237 entitled Marbled Murrelet, et al. v. Bruce Babbitt, Secretary,
Department of Interior, et al. (No. C93-1400) in the U.S. District Court
for the Northern District of California, alleging an unlawful "taking" of
the marbled murrelet under the ESA. The Court dismissed the federal and
state agency defendants and limited plaintiffs' claims against Pacific
Lumber. In January 1994, plaintiffs appealed the dismissal of the state
and federal defendants. Harvesting was stayed pending outcome of a trial
which commenced in August 1994 and concluded in September 1994. On
February 24, 1995, the judge ruled that THP 237 is occupied by the marbled
murrelet and permanently enjoined implementation of THP 237 in order to
protect the marbled murrelet.
On March 10, 1995, the Sierra Club and EPIC filed an action
entitled Sierra Club and EPIC v. The California Department of Forestry,
Scotia Pacific Holding Co., et al. (No. 95 DR 0072) in Superior Court of
Humboldt County. This action relates to an exemption for forest health
which SPHC had previously filed covering SPHC timberlands. The plaintiffs
allege, among other things, that the defendants have violated the CEQA, the
CESA and the Forest Practice Act and seek, among other things, to stay all
operations authorized by the exemption.
The Company's management believes that the matters described
above are unlikely to have a material adverse effect on the Company's
consolidated financial position or results of operations. See Item 1.
"Business--Regulatory and Environmental Factors" above for a general
description of regulatory and similar matters which could affect Pacific
Lumber's timber harvesting practices and future operating results.
ZERO COUPON NOTE LITIGATION
In April 1989, an action was filed against the Company, MAXXAM,
MAXXAM Properties Inc. ("MPI," a wholly owned subsidiary of MGI) and
certain of MAXXAM's directors in the Court of Chancery of the State
<PAGE>
of Delaware, entitled Progressive United Corporation v. MAXXAM Inc., et
al., Civil Action No. 10785. Plaintiff purports to bring this action as a
stockholder of MAXXAM derivatively on behalf of MAXXAM and MPI. In May
1989, a second action containing substantially similar allegations was
filed in the Court of Chancery of the State of Delaware, entitled Wolf v.
Hurwitz, et al. (No. 10846) and the two cases were consolidated
(collectively, the "Zero Coupon Note" actions). The Zero Coupon Note
actions relate to a Put and Call Agreement between MPI and Mr. Charles
Hurwitz (Chairman of the Board of the Company, MAXXAM and MPI), as well as
a predecessor agreement (the "Prior Agreement"). Among other things, the
Put and Call Agreement provided that Mr. Hurwitz had the option (the
"Call") to purchase from MPI certain notes (or the common stock of MAXXAM
into which they were converted) for $10.3 million. In July 1989, Mr.
Hurwitz exercised the Call and acquired 990,400 shares of MAXXAM's common
stock. The Zero Coupon Note actions generally allege that in entering into
the Prior Agreement Mr. Hurwitz usurped a corporate opportunity belonging
to MAXXAM, that the Put and Call Agreement constituted an alleged waste of
corporate assets of MAXXAM and MPI, and that the defendant directors
breached their fiduciary duties in connection with these matters.
Plaintiffs seek to have the Put and Call Agreement declared null and void,
among other remedies.
OTHER LITIGATION MATTERS
The Company is involved in various other claims, lawsuits and
other proceedings relating to a wide variety of matters. While
uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management believes that the resolution of such uncertainties and
the incurrence of such costs should not have a material adverse effect on
the Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is held entirely by MAXXAM.
Accordingly, the Company's common stock is not traded on any stock exchange
and has no established public trading market. The Company declared and
paid cash dividends on its common stock of $20.0 million in 1993. No
dividends were declared or paid in 1994. As of December 31, 1994,
approximately $4.9 million of dividends could be paid by the Company. See
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Condition and Investing and Financing
Activities" and Note 5 to the Consolidated Financial Statements appearing
in Item 8.
The 11-1/4% Senior Secured Notes due 2003 (the "MGI Senior
Notes") and the 12-1/4% Senior Secured Discount Notes due 2003 (the "MGI
Discount Notes," which, together with the MGI Senior Notes, are referred to
collectively as the "MGI Notes") are secured by the Company's pledge of
100% of the common stock of Pacific Lumber, Britt and MPI, and by a pledge
of 28 million common shares of Kaiser Aluminum Corporation ("Kaiser") that
are owned by MAXXAM. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition and
Investing and Financing Activities" and Note 5 to the Consolidated
Financial Statements appearing in Item 8.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As a result of the Forest Products Group Formation (as discussed
in Note 1 to the Consolidated Financial Statements), the Company's
financial statements have been restated to present the historical results
of operations relating to the net assets transferred to MAXXAM pursuant to
the Forest Products Group Formation. Such restatement has been made with
respect to all periods presented in this Report in a manner similar to that
which would be presented if the Company had discontinued the operations
relating to such net assets.
<PAGE>
RESULTS OF OPERATIONS
The following should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto appearing in Item
8. The following table presents selected historical operational and
financial information for the years ended December 31, 1994 and 1993.
<TABLE>
<CAPTION>
Years Ended
December 31,
1994 1993
(In millions of dollars,
except shipments
and prices)
<S> <C> <C>
Shipments:
Lumber: (1)
Redwood upper grades 52.9 68.3
Redwood common grades 218.4 184.7
Douglas-fir upper grades 8.6 10.7
Douglas-fir common grades and other 66.3 46.4
---------- ----------
Total lumber 346.2 310.1
========== ==========
Logs (2) 17.7 18.6
========== ==========
Wood chips (3) 210.3 156.8
========== ==========
Average sales price:
Lumber: (4)
Redwood upper grades $ 1,443 $ 1,275
Redwood common grades 460 469
Douglas-fir upper grades 1,420 1,218
Douglas-fir common grades 444 447
Logs (4) 615 704
Wood chips (5) 83 81
Net sales:
Lumber, net of discount $ 216.5 $ 202.6
Logs 10.9 13.1
Wood chips 17.4 12.7
Cogeneration power 3.5 3.8
Other 1.3 1.2
---------- ----------
Total net sales $ 249.6 $ 233.4
========== ==========
Operating income $ 77.8 $ 53.0
========== ==========
Operating cash flow (6) $ 103.8 $ 78.8
========== ==========
Income (loss) from continuing operations before income
taxes, extraordinary items and cumulative effect of
changes in accounting principles $ 14.8 $ (17.7)
========== ==========
Loss from net assets transferred to MAXXAM, net of minority
interests and related income taxes $ - $ (513.0)
========== ==========
Net income (loss) $ 3.6 $ (531.9)
========== ==========
<FN>
(1) Lumber shipments are expressed in millions of board feet.
(2) Log shipments are expressed in millions of feet, net Scribner scale.
(3) Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds.
(4) Dollars per thousand board feet.
(5) Dollars per bone dry unit.
(6) Operating income before depletion and depreciation, also referred to as "EBITDA."
</TABLE>
Shipments
Lumber shipments to third parties in 1994 were 346.2 million
board feet, an increase of 12% from 310.1 million board feet in 1993. This
increase was attributable to an 18% increase in redwood common lumber
shipments and a 43% increase in shipments of common grade Douglas-fir and
other lumber, partially offset by a 23% decrease in shipments of upper
grade redwood lumber. Log shipments in 1994 were 17.7 million feet (net
Scribner scale), a decrease of 5% from 18.6 million feet in 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"), 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 was expanded during 1994).
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 1994 increased by
approximately 5% from 1993. This increase was principally due to increased
shipments of redwood common lumber, a 13% increase in the average realized
price of upper grade redwood lumber and increased shipments of common grade
Douglas-fir and other lumber, partially offset by decreased shipments of
upper grade redwood lumber, a 2% decrease in the average realized price of
redwood common lumber and a 13% decrease in the average realized price of
log sales. The increase in other sales for 1994 as compared to 1993 was
attributable to increased sales of wood chips reflecting higher demand from
pulp mills.
Operating income
Operating income for 1994 increased by approximately 47% as
compared to 1993. This increase was principally due to higher sales of
lumber and wood chips, lower purchases of lumber and logs from third
parties, improved sawmill productivity and reduced overhead costs. The
Company arranged for the purchase of a significant number of logs early in
1993 in response to concerns regarding inclement weather conditions
hindering logging activities on the Company's timberlands during the first
five months of 1993. The cost associated with the purchase of logs from
third parties significantly exceeds the Company's cost to harvest its own
timber. As a result of the Company's last-in, first-out (LIFO) methodology
of accounting for inventories, a substantial portion of the additional cost
associated with the purchased logs was charged to cost of sales in the
third quarter of 1993. Cost of goods sold for 1993 was reduced by a $1.2
million business interruption insurance claim as a result of the April 1992
earthquake.
Cost of goods sold as a percentage of sales was approximately 52%
and 58% for 1994 and 1993, respectively. The decrease for 1994 reflects
the impact of purchased logs in 1993 as discussed above. Logging costs
have increased primarily due to the harvest of smaller diameter logs and,
to a lesser extent, compliance with environmental regulations relating to
the harvesting of timber and litigation costs incurred in connection with
certain THPs filed by Pacific Lumber. See "--Trends." During the past few
years, the Company has significantly increased its production capacity for
manufactured lumber products by assembling knot-free pieces of common grade
lumber into wider and longer pieces in the Company's end and edge glue
plant. This manufactured lumber results in a significant increase in
lumber recovery and produces a standard size upper
<PAGE>
grade product which is sold at a premium price compared to common grade
products of similar dimensions. The Company has instituted a number of
measures at its sawmills during the past several years designed to enhance
the efficiency of its operations such as expansion of its manufactured
lumber facilities and other improvements in lumber recovery, automated
lumber handling and the modification of its production scheduling to
increase cogeneration power revenues.
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 1994 as compared to 1993. This increase resulted
from the increase in operating income, higher investment, interest and
other income and decreased interest expense. Investment, interest and
other income for 1994 includes the receipt of a franchise tax refund of
$7.2 million (as described in Note 1 to the Consolidated Financial
Statements) and net gains on marketable securities of $1.7 million.
Investment, interest and other income for 1993 includes net gains on
marketable securities of $6.4 million. Interest expense decreased due to
lower interest rates resulting from the refinancing of the Company's long-
term debt during 1993.
Credit (provision) in lieu of income taxes
The credit in lieu of income taxes for 1994 includes a credit
relating to reserves the Company no longer believes are necessary.
Loss from net assets transferred to MAXXAM
The loss from net assets transferred to MAXXAM for 1993 was
$513.0 million. The operations associated with these net assets consist
primarily of aluminum operations conducted by Kaiser and the real estate
management and development operations of Palmas del Mar. Aluminum
operations incurred losses for 1993 of $501.3 million, consisting of (a)
losses before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles of $74.4 million, (b)
benefits for minority interests of $3.6 million and income taxes of $31.1
million, (c) an extraordinary loss on the redemption of debt of $19.0
million, net of related benefits for minority interests of $2.8 million and
income taxes of $11.3 million, and (d) losses attributable to the
cumulative effect of changes in accounting principles for postretirement
benefits other than pensions and postemployment benefits of $440.5 million,
net of related benefits for minority interests of $64.6 million and income
taxes of $237.7 million, and income taxes of $2.0 million. Real estate
operations, together with the other net assets transferred to MAXXAM
pursuant to the Forest Products Group Formation, incurred losses before
income taxes, extraordinary item and cumulative effect of changes in
accounting principles of $8.5 million and losses attributable to the
cumulative effect of the change in accounting principle for income taxes of
$3.2 million for 1993. See Notes 1 and 2 to the Consolidated Financial
Statements.
Extraordinary items
The litigation settlement in the second quarter of 1994 (as
described in Note 9 to the 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 Item 3.
"Legal Proceedings--Merger Litigation."
The refinancing of Pacific Lumber's outstanding public
indebtedness on March 23, 1993, consisting of the 12% Series A Senior
Notes, the 12.2% Series B Senior Notes and the 12-1/2% Senior Subordinated
Debentures (collectively, the "Old Pacific Lumber Securities"), and the
Company's 12-3/4% Notes on August 4, 1993
<PAGE>
resulted in an extraordinary loss of $17.2 million, net of related income
taxes of $8.9 million. The extraordinary loss consists primarily of the
redemption premiums paid and the write-off of unamortized deferred
financing costs on the Old Pacific Lumber Securities and the 12-3/4% Notes.
See Note 5 to the Consolidated Financial Statements.
Cumulative effect of changes in accounting principles
As of January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109") and
Statement of Financial Accounting Standards No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions ("SFAS 106") as more fully
described in Notes 6 and 7 to the Consolidated Financial Statements. The
cumulative effect of the change in accounting principle for the adoption of
SFAS 109 increased results of operations by $14.9 million. The cumulative
effect of the change in accounting principle for the adoption of SFAS 106
reduced results of operations by $2.3 million, net of related income taxes
of $1.6 million. The new accounting method has no effect on the Company's
cash outlays for postretirement benefits, nor will the cumulative effect of
the change in accounting principle affect the Company's compliance with its
existing debt covenants. The Company reserves the right to amend or
terminate these benefits.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
The Company conducts its operations primarily through its
subsidiaries. Creditors of the Company's subsidiaries have priority with
respect to the assets and earnings of such subsidiaries over the claims of
the creditors of the Company, including the holders of the MGI Notes. As
of December 31, 1994, the indebtedness of the subsidiaries reflected on the
Company's Consolidated Balance Sheet was $599.7 million. The indentures
governing the Pacific Lumber Senior Notes and the Timber Notes (the "Timber
Note Indenture") and Pacific Lumber's Revolving Credit Agreement contain
various covenants which, among other things, restrict transactions between
Pacific Lumber and its affiliates and the payment of dividends. Pacific
Lumber can pay dividends in an amount that is generally equal to 50% of
Pacific Lumber's consolidated net income plus depletion and cash dividends
received from SPHC (for periods subsequent to March 1, 1993), exclusive of
the net income and depletion of SPHC so long as any Timber Notes are
outstanding. As of December 31, 1994, under the most restrictive of these
covenants, approximately $20.8 million of dividends could be paid by
Pacific Lumber. Pacific Lumber paid an aggregate of $24.5 million of
dividends in 1994.
As of December 31, 1994, the Company had consolidated working
capital of $102.5 million and long-term debt of $736.4 million (net of
current maturities and restricted cash deposited in a liquidity account for
the benefit of the holders of the Timber Notes) as compared to $81.9
million and $738.7 million, respectively, at December 31, 1993. The
decrease in long-term debt was primarily due to principal payments on the
Timber Notes. 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.
Substantially all of the Company's consolidated assets are owned
by Pacific Lumber and a significant portion of Pacific Lumber's
consolidated assets are owned by SPHC. The Company expects that Pacific
Lumber will provide a major portion of the Company's future operating cash
flow. Pacific Lumber is dependent upon SPHC for a significant portion of
its operating cash flow. The holders of the Timber Notes have priority
over
<PAGE>
the claims of creditors of Pacific Lumber with respect to the assets and
cash flow of SPHC and the holders of the Pacific Lumber Senior Notes will
have priority over the claims of creditors of the Company with respect to
the assets and cash flows of Pacific Lumber. Under the terms of the Timber
Note Indenture, SPHC will not have available cash for distribution to
Pacific Lumber unless SPHC's cash flow from operations exceeds the amounts
required by the Timber Note Indenture to be reserved for the payment of
current debt service (including interest, principal and premiums) on the
Timber Notes, capital expenditures and certain other operating expenses.
The Timber Note Indenture prohibits SPHC from incurring any additional
indebtedness for borrowed money and limits the business activities of SPHC
to the ownership and operation of its timber and timberlands and actions
reasonably incidental thereto. The Timber Notes are structured to link, to
the extent of cash available, the deemed depletion of SPHC's timber
(through the harvest and sale of logs) to required amortization of the
Timber Notes. The required amount of amortization due on any Timber Note
payment date is determined by various mathematical formulas set forth in
the Timber Note Indenture. The minimum amount of principal which SPHC must
pay (on a cumulative basis) through any Timber Note payment date in order
to avoid an Event of Default (as defined in the Timber Note Indenture) is
referred to as Rated Amortization. Rated Amortization on the Timber Notes
is as follows: years ending December 31, 1995 - $5.7 million; 1996 - $8.3
million; 1997 - $8.5 million; 1998 - $8.7 million; 1999 - $10.2 million;
thereafter - $322.4 million. If all payments of principal are made in
accordance with Rated Amortization, the payment date on which SPHC will pay
the final installment of principal is July 20, 2015. The amount of
principal which SPHC must pay through each Timber Note payment date in
order to avoid payment of prepayment or deficiency premiums is referred to
as Scheduled Amortization. If all payments of principal are made in
accordance with Scheduled Amortization, the payment date on which SPHC will
pay the final installment of principal is July 20, 2009. Scheduled
Amortization on the Timber Notes is as follows: years ending December 31,
1995 - $13.6 million; 1996 - $14.1 million; 1997 - $16.2 million; 1998 -
$19.3 million; 1999 - $21.7 million; thereafter - $278.9 million. During
1993, 1994 and on January 20, 1995, SPHC repaid approximately $8.0 million,
$13.1 million and $8.2 million, respectively, of the aggregate principal
amount outstanding on the Timber Notes in accordance with Scheduled
Amortization.
The Company expects that, consistent with SPHC's purposes and its
need to fund operating and capital expenses, substantially all of SPHC's
available cash will be periodically distributed to Pacific Lumber. Once
appropriate provision is made for current debt service on the Timber Notes
and expenditures for operating and capital costs, and in the absence of
certain Trapping Events (as defined in the Timber Note Indenture) or
outstanding judgments, the Timber Note Indenture does not limit monthly
distributions of available cash from SPHC to Pacific Lumber. In the event
SPHC's cash flows are not sufficient to generate distributable funds to
Pacific Lumber, Pacific Lumber's ability to pay interest on the Pacific
Lumber Senior Notes and to service its other indebtedness would be
materially impaired and the Company's ability to pay interest on the MGI
Notes and its other indebtedness would also be materially impaired. SPHC
paid $88.9 million and $58.3 million of dividends to Pacific Lumber during
the year ended December 31, 1994 and the period from March 23, 1993 to
December 31, 1993, respectively.
The indenture governing the MGI Notes, among other things,
restricts the ability of the Company to incur additional indebtedness,
engage in transactions with affiliates, pay dividends and make investments.
As of December 31, 1994, under the most restrictive of these covenants,
approximately $4.9 million of dividends could be paid by the Company. The
MGI Notes are senior indebtedness of the Company; however, they are
effectively subordinate to the liabilities of the Company's subsidiaries,
which include the Timber Notes and the Pacific Lumber Senior Notes.
<PAGE>
The MGI Senior Notes require annual interest payments of $11.3
million. The Company's annual interest expense on the MGI Discount Notes
currently aggregates approximately $9.3 million. The MGI Discount Notes
will require annual interest payments of $15.5 million beginning on
February 1, 1999. As of December 31, 1994, the Company (excluding Pacific
Lumber and its subsidiary companies) had cash and marketable securities of
approximately $37.1 million. The Company believes, although there can be
no assurance, that the aggregate dividends that will be available to it
from Pacific Lumber and Britt, during the four year period in which cash
interest will not be payable on the MGI Discount Notes, will exceed the
Company's cash interest payments on the MGI Senior Notes. When cash
interest payments on the MGI Discount Notes commence on February 1, 1999,
the Company believes that it will be able to make such cash interest
payments out of its then existing cash resources and from cash expected to
be available to it from Pacific Lumber and Britt.
On June 23, 1993, Pacific Lumber entered into a new Revolving
Credit Agreement with a bank which provides for borrowings of up to $30.0
million, of which $15.0 million may be used for standby letters of credit.
As of December 31, 1994, $19.7 million of borrowings was available under
the Revolving Credit Agreement, of which $4.7 million was available for
letters of credit. No borrowings were outstanding as of December 31, 1994,
and letters of credit outstanding amounted to $10.3 million. 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. The Revolving Credit Agreement is secured by Pacific Lumber's trade
receivables and inventories and contains covenants substantially similar to
those contained in the indenture governing the Pacific Lumber Senior Notes.
During the years ended December 31, 1994 and 1993, Pacific
Lumber's operating income before depletion and depreciation ("operating
cash flow") amounted to $95.9 million and $76.6 million, respectively,
which exceeded interest accrued on all of its indebtedness in those years
by $39.8 million and $17.4 million, respectively. The Company believes
that Pacific Lumber's and SPHC's level of operating cash flow and other
available sources of financing will enable them to meet the debt service
requirements on the Pacific Lumber Senior Notes and the Timber Notes,
respectively.
Capital expenditures for Pacific Lumber and Britt were made to
improve production efficiency and reduce operating costs. Capital
expenditures of the Company's subsidiaries were $11.3 million and $11.1
million for the years ended December 31, 1994 and 1993, respectively.
Capital expenditures for 1995 are expected to be $10 million and for the
1996 - 1997 period are estimated to be between $5 million and $10 million
per year. Capital expenditures attributable to the reconstruction of
Pacific Lumber's commercial facilities destroyed by the April 1992
earthquake were approximately $1.9 million for 1993 and $2.6 million for
1994 when construction was completed. The Company anticipates that the
funds necessary to finance the capital expenditures of its subsidiaries
will be obtained through cash flows generated by operations of such
subsidiaries and other available sources of financing to the Company's
subsidiaries.
TRENDS
The Company's forest products operations are primarily conducted
by Pacific Lumber and 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 its future operating results or
financial position; however, these laws and regulations are periodically
modified. For example, in 1994 the California Board of Forestry adopted
certain regulations regarding compliance with long term sustained yield
objectives. These regulations require timber companies to project the
average annual growth they will have on
<PAGE>
their timberlands during the last decade of a 100-year planning period
("Projected Annual Growth"). During any rolling ten-year period, the
average annual harvest over such ten-year period may not exceed Projected
Annual Growth. The first ten-year period began in May 1994. Pacific
Lumber is required to submit, by October 1996, a plan setting forth, among
other things, its Projected Annual Growth. Pacific Lumber has not
completed its analysis of the projected productivity of its timberlands and
is therefore unable to predict the impact that these regulations will have
on its future timber harvesting practices; however, the final results of
this analysis could require Pacific Lumber to reduce (or permit it to
increase) its timber harvest in future years from the average annual
harvest that it has experienced in recent years. Pacific Lumber believes
that it would be able to mitigate the effect of any required reduction in
harvest level by acquisitions of additional timberlands and by increasing
the productivity of its timberlands. In addition, new laws and regulations
are frequently introduced concerning the California timber industry. From
time to time, bills are introduced in the California legislature and the
U.S. Congress which relate to the business of Pacific Lumber, including the
protection and acquisition of old growth and other timberlands, endangered
species, environmental protection and the restriction, regulation and
administration of timber harvesting practices. 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
any of these bills on the consolidated financial position or results of
operations of the Company. Furthermore, any bills which are passed are
subject to executive veto and court challenge. In addition to existing and
possible new or modified statutory enactments, regulatory requirements and
administrative actions, the California timber industry remains subject to
potential California or local ballot initiatives and evolving federal and
California case law which could affect timber harvesting practices. It is,
however, impossible to assess the effect of such matters on the future
operating results or consolidated financial position of the Company.
Various groups and individuals have filed objections with the CDF
regarding the CDF's actions and rulings with respect to certain of Pacific
Lumber's THPs, and the Company expects that such groups and individuals
will continue to file objections to Pacific Lumber's THPs. In addition,
lawsuits are pending which seek to prevent Pacific Lumber from implementing
certain of its approved THPs. See Item 3. "Legal Proceedings--Timber
Harvesting Litigation." 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 Pacific Lumber's THPs are likely to occur in the future. Although such
challenges have delayed or prevented Pacific Lumber 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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors of MAXXAM Group Inc.:
We have audited the accompanying consolidated balance sheets of
MAXXAM Group Inc. (a Delaware corporation and a wholly owned subsidiary of
MAXXAM Inc.) and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of operations, cash flows and stockholder's
equity (deficit) for each of the three years in the period ended December
31, 1994. These financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
MAXXAM Group Inc. and subsidiaries as of December 31, 1994 and 1993, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As explained in Notes 6 and 7 to the financial statements,
effective January 1, 1993, the Company changed its method of accounting for
income taxes and postretirement benefits other than pensions.
Our audits were made for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The schedule
listed in Item 14(a)(2) of this Form 10-K is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not
part of the basic consolidated financial statements. This schedule has
been subjected to the auditing procedures applied in the audits of the
basic consolidated financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth
therein in relation to the basic consolidated financial statements taken as
a whole.
ARTHUR ANDERSEN LLP
San Francisco, California
January 27, 1995
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1994 1993
(In thousands of dollars)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 48,575 $ 39,001
Marketable securities 19,514 17,775
Receivables:
Trade 23,170 15,910
Other 7,435 4,212
Inventories 70,098 73,413
Prepaid expenses and other current assets 3,717 3,189
----------- -----------
Total current assets 172,509 153,500
Timber and timberlands, net of depletion of $188,003 and
$171,007 at December 31, 1994 and 1993, respectively 350,871 365,511
Property, plant and equipment, net 103,183 102,780
Deferred financing costs, net 30,096 32,725
Deferred income taxes 61,498 58,371
Restricted cash 32,402 33,562
Other assets 6,122 9,572
----------- -----------
$ 756,681 $ 756,021
=========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 3,703 $ 2,871
Accrued interest 25,765 26,216
Accrued compensation and related benefits 10,622 7,919
Deferred income taxes 12,986 14,132
Other accrued liabilities 3,266 4,406
Long-term debt, current maturities 13,670 16,093
---------- -----------
Total current liabilities 70,012 71,637
Long-term debt, less current maturities 768,786 772,310
Other noncurrent liabilities 30,365 28,125
----------- -----------
Total liabilities 869,163 872,072
----------- -----------<PAGE>
Contingencies
Stockholder's deficit:
Common stock, $.08-1/3 par value; 1000 shares
authorized; 100 shares issued - -
Additional capital 81,287 81,287
Accumulated deficit (193,769) (197,338)
----------- -----------
Total stockholder's deficit (112,482) (116,051)
----------- -----------
$ 756,681 $ 756,021
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
(In thousands of dollars)
<S> <C> <C> <C>
Net sales:
Lumber and logs $ 227,430 $ 215,743 $ 201,176
Other 22,199 17,696 22,169
---------- ---------- ----------
249,629 233,439 223,345
---------- ---------- ----------
Operating expenses:
Cost of goods sold (exclusive of depletion
and depreciation) 129,598 134,563 113,769
Selling, general and administrative 16,250 20,108 17,136
Depletion and depreciation 25,946 25,811 29,932
---------- ---------- ----------
171,794 180,482 160,837
---------- ---------- ----------
Operating income 77,835 52,957 62,508
Other income (expense):
Investment, interest and other income 14,367 9,718 399
Interest expense (77,383) (80,339) (87,606)
---------- ---------- ----------
Income (loss) from continuing operations before
income taxes, extraordinary items and
cumulative effect of changes in accounting
principles 14,819 (17,664) (24,699)
Credit (provision) in lieu of income taxes 3,616 3,355 (1,276)
---------- ---------- ----------
Income (loss) from continuing operations before
extraordinary items and cumulative effect of
changes in accounting principles 18,435 (14,309) (25,975)
Income (loss) from net assets transferred to
MAXXAM, net of minority interests and related
income taxes - (512,970) 33,691
---------- ---------- ----------
Income (loss) before extraordinary items and
cumulative effect of changes in accounting
principles 18,435 (527,279) 7,716
Extraordinary items:
Loss on litigation settlement, net of related
credit in lieu of income taxes of
$6,312 (14,866) - -
Loss on early extinguishment of debt, net of
related credit in lieu of income taxes
of $8,856 - (17,189) -
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 income (loss) $ 3,569 $(531,900) $ 7,716
========== ========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
(In thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,569 $(531,900) $ 7,716
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depletion and depreciation 25,946 25,811 29,932
Amortization of deferred financing costs and
discounts on long-term debt 12,127 7,435 3,018
Net sales of marketable securities 5,321 12,389 23,355
Net losses (gains) on marketable securities (1,669) (6,414) 5,374
Incurrence of financing costs (213) (34,738) (505)
Loss (income) from net assets transferred to
MAXXAM, net - 512,970 (33,691)
Extraordinary loss on early extinguishment of
debt, net - 17,189 -
Cumulative effect of changes in accounting
principles, net - (12,568) -
Decrease (increase) in inventories, net of
depletion 3,634 (2,077) 7,872
Increase (decrease) in accounts payable 832 471 (3,418)
Decrease (increase) in receivables (7,660) 7,558 (7,576)
Increase in accrued and deferred income taxes (3,815) (5,123) -
Decrease in other liabilities (2,283) (185) -
Decrease in accrued interest (451) (7,284) (53)
Other (614) 1,060 (59)
---------- ---------- ----------
Net cash provided by (used for) operating
activities 34,724 (15,406) 31,965
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets 1,149 256 573
Capital expenditures (11,322) (11,120) (8,669)
Increase in net assets transferred to MAXXAM - (11,770) (24,264)
---------- ---------- ----------
Net cash used for investing activities (10,173) (22,634) (32,360)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash released 1,160 1,438 -
Redemptions, repurchase of and principal payments on
long-term debt (13,237) (716,551) (4,773)
Net borrowings (payments) under revolving credit
agreements (2,900) 2,900 -
Proceeds from issuance of long-term debt - 790,000 -
Restricted cash deposits - (35,000) -
Dividends paid - (20,000) (36)
---------- ---------- ----------
Net cash provided by (used for) financing
activities (14,977) 22,787 (4,809)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,574 (15,253) (5,204)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 39,001 54,254 59,458
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 48,575 $ 39,001 $ 54,254
========== ========== ==========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Net margin borrowings for marketable securities $ 5,628 $ 1,020
Timber and timberlands acquired subject to loan from
seller 910
Net assets transferred to MAXXAM 30,531
Dividend of notes receivable and marketable securities
to MAXXAM $ 14,964
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 65,707 $ 80,188 $ 84,641
Income taxes paid 1,170 46 966
Tax allocation payments to MAXXAM 397 1,722 1,079
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Retained
Stock Additional Earnings
($.08-1/3 Par) Capital (Deficit) Total
(In thousands of dollars)
<S> <C> <C> <C> <C>
Balance, January 1, 1992 $ - $ 81,376 $ 392,377 $ 473,753
Net income - - 7,716 7,716
Dividend - - (15,000) (15,000)
Loss from issuance of Kaiser Aluminum
Corporation common stock - (119) - (119)
--------------- ----------- ----------- -----------
Balance, December 31, 1992 - 81,257 385,093 466,350
Net loss - - (531,900) (531,900)
Dividend - - (20,000) (20,000)
Gain from issuance of Kaiser Aluminum
Corporation common stock - 30 - 30
Net assets transferred to MAXXAM - - (30,531) (30,531)
--------------- ----------- ----------- -----------
Balance, December 31, 1993 - 81,287 (197,338) (116,051)
Net income - - 3,569 3,569
--------------- ----------- ----------- -----------
Balance, December 31, 1994 $ - $ 81,287 $ (193,769) $ (112,482)
=============== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
MAXXAM Group Inc. ("MGI") and its subsidiaries, collectively referred to
herein as the "Company." The Company is a wholly owned subsidiary of
MAXXAM Inc. ("MAXXAM").
The Company conducts its business primarily through the
operations of its subsidiaries. Prior to the Forest Products Group
Formation (as defined below), the Company operated in three industries:
aluminum, through its majority owned subsidiary, Kaiser Aluminum
Corporation ("Kaiser"), a fully integrated aluminum producer; forest
products, through The Pacific Lumber Company ("Pacific Lumber") and Britt
Lumber Co., Inc. ("Britt"), each a wholly owned subsidiary; and real estate
management and development, through the Palmas del Mar development located
in Puerto Rico ("Palmas") which was owned by the Company's subsidiary,
MAXXAM Properties Inc. ("MPI"). On August 4, 1993, contemporaneously with
the consummation of the sale of the MGI Notes (as defined in Note 5), the
Company (i) transferred to MAXXAM 50 million common shares of Kaiser held
by a subsidiary of the Company, representing the Company's (and MAXXAM's)
entire interest in Kaiser's common stock, (ii) transferred to MAXXAM 60,075
shares of MAXXAM common stock held by a subsidiary of the Company, (iii)
transferred to MAXXAM certain notes receivable, long-term investments, and
other assets, each net of related liabilities, collectively having a
carrying value to the Company of approximately $1,100 and (iv) exchanged
with MAXXAM 2,132,950 Depositary Shares, acquired from Kaiser on June 30,
1993 for $15,000, such exchange being in satisfaction of a $15,000
promissory note evidencing a cash loan made by MAXXAM to the Company in
January 1993. On the same day, MAXXAM assumed approximately $17,500 of
certain liabilities of the Company that were unrelated to the Company's
forest products operations or were related to operations which have been
disposed of by the Company. Additionally, on September 28, 1993, the
Company transferred to MAXXAM its interest in Palmas. The foregoing
transactions are collectively referred to as the "Forest Products Group
Formation."
As a result of the Forest Products Group Formation, the Company
restated its Consolidated Financial Statements to present the net assets
transferred to MAXXAM pursuant to the Forest Products Group Formation
(including certain allocated costs from MAXXAM for general and
administrative expenses unrelated to the Company's forest products
operations). Such restatement has been made with respect to all periods
presented in a manner similar to that which would have been presented if
the Company had discontinued the operations relating to such net assets.
See Note 2.
As a result of the Forest Products Group Formation, the Company's
business is substantially limited to forest products operations which
consists of 100% of the outstanding common stock of Pacific Lumber and 100%
of the outstanding common stock of Britt. Pacific Lumber is engaged in all
principal aspects of the lumber industry, including the growing and
harvesting of redwood and Douglas-fir timber, the milling of logs into
lumber and the production of manufactured lumber products. Britt mills
logs to produce a variety of fencing and decking products.
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents consist of highly liquid money market
instruments with original maturities of three months or less.
Marketable Securities
On December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities ("SFAS 115"). In accordance with the provisions of
SFAS 115, marketable securities are carried at fair value beginning on
December 31, 1993. Prior to that date, marketable securities portfolios
were carried at the lower of cost or market at the balance sheet date. The
cost of the securities sold is determined using the first-in, first-out
method. Included in investment, interest and other income for each of the
three years ended December 31, 1994 were: 1994 - net unrealized holding
losses of $1,094 and net realized gains of $2,763; 1993 - net realized
gains of $3,510, the recovery of $2,063 of net unrealized losses and net
unrealized gains of $841; and 1992 - net realized losses of $5,003 and net
unrealized losses of $371. Net unrealized losses represent the amount
required to reduce the short-term marketable securities portfolios from
cost to market value prior to December 31, 1993. Subsequent to the
adoption of SFAS 115, purchases and sales of marketable securities are
presented as cash flows from operating activities in the Consolidated
Statement of Cash Flows.
Inventories
Inventories are stated at the lower of cost or market. Cost is
primarily determined using the last-in, first-out (LIFO) method.
Timber and Timberlands
Depletion is computed utilizing the unit-of-production method
based upon estimates of timber values and quantities.
Property, Plant and Equipment
Property, plant and equipment, including capitalized interest, is
stated at cost, net of accumulated depreciation. Depreciation is computed
utilizing the straight-line method at rates based upon the estimated useful
lives of the various classes of assets.
Deferred Financing Costs
Costs incurred to obtain financing are deferred and amortized
over the estimated term of the related borrowing.
Restricted Cash and Concentrations of Credit Risk
Restricted cash represents the amount initially deposited into an
account (the "Liquidity Account") held by the trustee under the indenture
governing the 7.95% Timber Collateralized Notes due 2015 (the "Timber
Notes") as described in Note 5. The Liquidity Account is not available,
except under certain limited circumstances, for working capital purposes;
however, it is available to pay the Rated Amortization (as defined in Note
5) and interest on the Timber Notes if and to the extent that cash flows
are insufficient to make such payments. The required Liquidity Account
balance will generally decline as principal payments are made on the Timber
Notes. Investment, interest and other income for the years ended December
31, 1994 and 1993 includes approximately
<PAGE>
$2,490 and $2,101, respectively, attributable to an investment rate
agreement (at 7.95% per annum) with the financial institution which holds
the Liquidity Account.
At December 31, 1994 and 1993, cash and cash equivalents includes
$19,439 and $20,280, respectively, (the "Payment Account") which is
reserved for debt service payments on the Timber Notes (see Note 5). The
Payment Account and the Liquidity Account are each held by a different
financial institution. In the event of nonperformance by such financial
institutions, the Company's exposure to credit loss is represented by the
amounts deposited plus any unpaid accrued interest thereon. The Company
mitigates its concentrations of credit risk with respect to these
restricted cash deposits by maintaining them at high credit quality
financial institutions and monitoring the credit ratings of these
institutions.
Stockholder's Equity (Deficit)
Adjustments to the Company's additional capital for the years
ended December 31, 1992 and 1993 resulted from transactions relating to
Kaiser's common stock prior to the Forest Products Group Formation.
Pursuant to the terms of an amended compensation plan, Kaiser issued 77,279
and 4,228 shares to certain members of its management in 1992 and 1993,
respectively. As a result of these transactions, the Company's equity in
Kaiser's net assets differed from the Company's historical cost. The
Company accounted for these differences as adjustments to additional
capital.
Investment, Interest and Other Income
In February 1994, Pacific Lumber 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 year ended
December 31, 1994.
Items Related to 1992 Earthquake
In 1993 and 1992, Pacific Lumber recorded reductions in cost of
sales of $1,200 and $3,300, respectively, from business interruption
insurance claims for reimbursement of higher operating costs and the
related loss of revenues resulting from the April 1992 earthquake. In
1992, Pacific Lumber recorded a $1,600 gain in investment, interest and
other income on a casualty insurance claim for the loss of certain
commercial property due to the earthquake. Other receivables at December
31, 1994 and 1993 included $1,684 and $1,235, respectively, related to
these and other earthquake related insurance claims.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and restricted
cash approximate fair value. The fair value of marketable securities is
determined based on quoted market prices. The estimated fair value of
long-term debt is determined based on the quoted market prices for the
Timber Notes, the 10-1/2% Senior Notes due 2003 (the "Pacific Lumber Senior
Notes"), the 11-1/4% Senior Secured Notes due 2003 (the "MGI Senior Notes")
and the 12-1/4% Senior Secured Discount Notes due 2003 (the "MGI Discount
Notes"), and on the current rates offered for borrowings similar to the
other debt. The Timber Notes, the Pacific Lumber Senior Notes, the MGI
Senior Notes and the MGI Discount Notes are thinly traded financial
instruments; accordingly, their market prices at any balance sheet date may
not be representative of the prices which would be derived from a more
active market.
<PAGE>
The estimated fair values of the Company's financial instruments,
along with the carrying amounts of the related assets (liabilities), are as
follows:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 48,575 $ 48,575 $ 39,001 $ 39,001
Marketable securities (held for trading purposes) 19,514 19,514 17,775 17,775
Restricted cash 32,402 32,402 33,562 33,562
Long-term debt (782,456) (725,031) (788,403) (817,400)
</TABLE>
Reclassifications
Certain reclassifications have been made to prior years'
financial statements to be consistent with the presentation in the current
year.
2. NET ASSETS TRANSFERRED TO MAXXAM
As a result of the Forest Products Group Formation (as described
in Note 1), the Company transferred all of its interest in Kaiser's common
stock, the assets and related liabilities of Palmas, and certain other net
assets that were unrelated to the Company's forest products operations, to
MAXXAM. The Company did not incur any gain or loss relating to the
transfer of such assets and liabilities to MAXXAM.
<PAGE>
The net income (loss) from net assets transferred to MAXXAM is as follows:
<TABLE>
<CAPTION>
Seven Months
Ended Year Ended
July 31, December 31,
1993 1992
<S> <C> <C>
Net sales:
Aluminum operations $ 1,016,966 $ 1,909,115
Real estate and other 19,654 27,464
------------ ------------
1,036,620 1,936,579
----------- ------------
Costs and expenses:
Aluminum operations 1,091,353 1,877,004
Real estate and other 28,132 33,298
------------ ------------
1,119,485 1,910,302
------------ ------------
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of changes in
accounting principles (82,865) 26,277
Credit for income taxes 31,050 10,755
Minority interests 3,641 (3,341)
------------ ------------
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles (48,174) 33,691
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) -
------------ ------------
Income (loss) from net assets transferred to MAXXAM $ (512,970) $ 33,691
============ ============
</TABLE>
<PAGE>
Net assets transferred to MAXXAM are as follows as of the date of transfer:<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Aluminum operations $ 780,791
Real estate and other 16,480
----------
797,271
----------
Current liabilities:
Aluminum operations 477,805
Real estate and other 28,853
----------
506,658
----------
Net current assets 290,613
Non-current assets: ----------
Aluminum operations 1,722,362
Real estate and other 56,422
----------
1,778,784
----------
Non-current liabilities:
Aluminum operations 1,790,946
Minority interests in aluminum operations 221,907
Real estate and other 26,013
----------
2,038,866
----------
Net assets transferred to MAXXAM $ 30,531
==========
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
Lumber $ 55,310 $ 52,354
Logs 14,788 21,059
---------- ----------
$ 70,098 $ 73,413
========== ==========
</TABLE>
During 1993 and 1992, Pacific Lumber's inventory quantities were
reduced. These reductions resulted in the liquidation of Pacific Lumber's
LIFO inventory quantities carried at prevailing costs from prior years
which were higher than the current cost of inventory in 1993 and lower than
current costs in 1992. The effects of these inventory liquidations
increased cost of goods sold by approximately $222 for the year ended
December 31, 1993 and decreased cost of goods sold by approximately $372
for the year ended December 31, 1992.
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
Estimated December 31,
Useful Lives 1994 1993
<S> <C> <C> <C>
Logging roads, land and improvements 15 years $ 7,545 $ 7,241
Buildings 33 years 28,209 22,234
Machinery and equipment 5 - 15 years 126,480 123,270
Construction in progress 30 125
----------- ------------
162,264 152,870
Less: accumulated depreciation (59,081) (50,090)
----------- ------------
$ 103,183 $ 102,780
=========== ============
/TABLE
<PAGE>
Depreciation expense for the years ended December 31, 1994, 1993
and 1992 was $9,269, $8,670 and $8,491, respectively.
5. LONG-TERM DEBT
Long-term debt consists of the following:<PAGE>
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
7.95% Timber Collateralized Notes due July 20, 2015 $ 363,811 $ 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 82,779 73,499
10-1/2% Senior Notes due March 1, 2003 235,000 235,000
Other 866 2,951
---------- ----------
782,456 788,403
Less: current maturities (13,670) (16,093)
---------- ----------
$ 768,786 $ 772,310
========== ==========
</TABLE>
On March 23, 1993, Pacific Lumber issued $235,000 of the Pacific
Lumber Senior Notes and its newly-formed wholly owned subsidiary, Scotia
Pacific Holding Company ("SPHC"), issued $385,000 of the Timber Notes.
Pacific Lumber and SPHC used the net proceeds from the sale of the Pacific
Lumber Senior Notes and the Timber Notes, together with Pacific Lumber's
cash and marketable securities, to (i) retire (a) $163,784 aggregate
principal amount of Pacific Lumber's 12% Series A Senior Notes due July 1,
1996 (the "Series A Notes"), (b) $299,725 aggregate principal amount of
Pacific Lumber's 12.2% Series B Senior Notes due July 1, 1996 (the "Series
B Notes") and (c) $41,750 aggregate principal amount of Pacific Lumber's
12-1/2% Senior Subordinated Debentures due July 1, 1998 (the "Debentures;"
the Series A Notes, the Series B Notes and the Debentures are referred to
collectively as the "Old Pacific Lumber Securities"); (ii) pay accrued
interest on the Old Pacific Lumber Securities through the date of
redemption thereof; (iii) pay the applicable redemption premiums on the Old
Pacific Lumber Securities; (iv) repay Pacific Lumber's $28,867 cogeneration
facility loan; (v) fund the initial deposit of $35,000 to the Liquidity
Account; and (vi) pay a $25,000 dividend to a subsidiary of the Company.
These transactions resulted in a pre-tax extraordinary loss of $16,368,
consisting primarily of the payment of premiums and the write-off of
unamortized deferred financing costs on the Old Pacific Lumber Securities.
<PAGE>
The indenture governing the Timber Notes (the "Timber Note
Indenture") prohibits SPHC from incurring any additional indebtedness for
borrowed money and limits the business activities of SPHC to the ownership
and operation of its timber and timberlands. The Timber Notes are senior
secured obligations of SPHC and are not obligations of, or guaranteed by,
Pacific Lumber or any other person. The Timber Notes are secured by a lien
on (i) SPHC's timber and timberlands (representing $192,445 of the
Company's consolidated balance at December 31, 1994), (ii) substantially
all of SPHC's property and equipment, (iii) SPHC's contract rights and
certain other assets and (iv) the funds deposited in the Payment Account
and the Liquidity Account.
The Timber Notes are structured to link, to the extent of cash
available, the deemed depletion of SPHC's timber (through the harvest and
sale of logs) to required amortization of the Timber Notes. The required
amount of amortization due on any Timber Note payment date is determined by
various mathematical formulas set forth in the Timber Note Indenture. The
minimum amount of principal which SPHC must pay (on a cumulative basis)
through any Timber Note payment date in order to avoid an Event of Default
(as defined in the Timber Note Indenture) is referred to as rated
amortization ("Rated Amortization"). If all payments of principal are made
in accordance with Rated Amortization, the payment date on which SPHC will
pay the final installment of principal is July 20, 2015. The amount of
principal which SPHC must pay through each Timber Note payment date in
order to avoid payment of prepayment or deficiency premiums is referred to
as scheduled amortization ("Scheduled Amortization"). If all payments of
principal are made in accordance with Scheduled Amortization, the payment
date on which SPHC will pay the final installment of principal is July 20,
2009.
Substantially all of the Company's consolidated assets are owned
by Pacific Lumber and a significant portion of Pacific Lumber's assets are
owned by SPHC. The Company expects that Pacific Lumber will provide a
major portion of the Company's future operating cash flow. Pacific Lumber
is dependent upon SPHC for a significant portion of its operating cash
flow. The holders of the Timber Notes have priority over the claims of
creditors of Pacific Lumber with respect to the assets and cash flow of
SPHC, and the holders of the Pacific Lumber Senior Notes have priority over
the claims and creditors of the Company with respect to the assets and cash
flows of Pacific Lumber. Under the terms of the Timber Note Indenture,
SPHC will not have available cash for distribution to Pacific Lumber unless
SPHC's cash flow from operations exceeds the amounts required by the Timber
Note Indenture to be reserved for the payment of current debt service
(including interest, principal and premiums) on the Timber Notes, capital
expenditures and certain other operating expenses.
Principal and interest on the Timber Notes is payable semi-
annually on January 20 and July 20. The Timber Notes are redeemable at the
option of SPHC, in whole but not in part, at any time. The redemption
price of the Timber Notes is equal to the sum of the principal amount,
accrued interest and a prepayment premium calculated based upon the yield
of like term Treasury securities plus 50 basis points.
Interest on the Pacific Lumber Senior Notes is payable semi-
annually on March 1 and September 1. The Pacific Lumber Senior Notes are
redeemable at the option of Pacific Lumber, in whole or in part, on or
after March 1, 1998 at a price of 103% of the principal amount plus accrued
interest. The redemption price is reduced annually until March 1, 2000,
after which time the Pacific Lumber Senior Notes are redeemable at par.
Pacific Lumber has a revolving credit agreement with a bank (the
"Revolving Credit Agreement") which expires on May 31, 1997. Borrowings
under the Revolving Credit Agreement are secured by Pacific Lumber's trade
receivables and inventories, with interest computed at the bank's reference
rate plus 1-1/4% or the bank's offshore rate plus 2-1/4%. The Revolving
Credit Agreement provides for borrowings of up to $30,000, of which
<PAGE>
$15,000 may be used for standby letters of credit. As of December 31,
1994, $19,742 of borrowings was available under the Revolving Credit
Agreement, of which $4,742 was available for letters of credit. No
borrowings were outstanding as of December 31, 1994, and letters of credit
outstanding amounted to $10,258.
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
December 31, 1994, under the most restrictive of these covenants,
approximately $20,800 of dividends could be paid by Pacific Lumber.
On August 4, 1993, the Company issued $100,000 aggregate
principal amount of the MGI Senior Notes and $126,720 aggregate principal
amount (approximately $70,000 net of original issue discount) of the MGI
Discount Notes, which, together with the MGI Senior Notes, are referred to
collectively as the "MGI Notes". The MGI Notes are secured by the
Company's pledge of 100% of the common stock of Pacific Lumber, Britt and
MPI, and by MAXXAM's pledge of 28 million shares of Kaiser's common stock
it received as a result of the Forest Products Group Formation. The
indenture governing the MGI Notes, among other things, restricts the
ability of the Company to incur additional indebtedness, engage in
transactions with affiliates, pay dividends and make investments. As of
December 31, 1994, under the most restrictive of these covenants,
approximately $4,900 of dividends could be paid by the Company. The MGI
Notes are senior indebtedness of the Company; however, they are effectively
subordinate to the liabilities of the Company's subsidiaries, which include
the Timber Notes and the Pacific Lumber Senior Notes. The MGI Discount
Notes are net of discount of $43,941 and $53,221 at December 31, 1994 and
1993, respectively.
The MGI Senior Notes pay interest semi-annually on February 1 and
August 1 of each year. The MGI Discount Notes will not pay any interest
until February 1, 1999, at which time semi-annual interest payments will
become due on each February 1 and August 1 thereafter.
The Company used a portion of the net proceeds from the sale of
the MGI Notes to retire the entire outstanding balance of its 12-3/4% Notes
at 101% of their principal amount, plus accrued interest through November
14, 1993. The Company used the remaining portion of the net proceeds from
the sale of the MGI Notes, together with a portion of its existing cash
resources, to pay a $20,000 dividend to MAXXAM. MAXXAM used such proceeds
to redeem, on August 20, 1993, $20,000 aggregate principal amount of its
14% Senior Subordinated Reset Notes due 2000 at 100% of their principal
amount plus accrued interest thereon.
The Company incurred a pre-tax extraordinary loss associated with
the early retirement of the 12-3/4% Notes of $9,677 consisting of net
interest cost of $3,763, the write-off of $3,472 of unamortized deferred
financing costs, a premium of $1,500 and the write-off of $942 of
unamortized original issue discount.
<PAGE>
Maturities
The following table of scheduled maturities of long-term debt
outstanding at December 31, 1994 reflects Scheduled Amortization with
respect to the Timber Notes:
<TABLE>
<CAPTION>
Years Ending December 31,
1995 1996 1997 1998 1999 Thereafter
<S> <C> <C> <C> <C> <C> <C>
7.95% Timber Collateralized
Notes $ 13,578 $ 14,103 $ 16,165 $ 19,335 $ 21,651 $ 278,979
11-1/4% Senior Secured Notes - - - - - 100,000
12-1/4% Senior Secured Discount
Notes - - - - - 126,720
10-1/2% Senior Notes - - - - - 235,000
Other 92 92 93 94 94 401
-------- -------- -------- -------- -------- ----------
$ 13,670 $ 14,195 $ 16,258 $ 19,429 $ 21,745 $ 741,100
======== ======== ======== ======== ======== ==========
</TABLE>
Restricted Net Assets of Subsidiaries
At December 31, 1994, certain debt instruments restricted the
ability of Pacific Lumber to transfer assets, make loans and advances and
pay dividends to the Company. The restricted net assets of Pacific Lumber
totaled approximately $10,000 at December 31, 1994.
6. CREDIT (PROVISION) IN LIEU OF INCOME TAXES
The Company and its subsidiaries are members of MAXXAM's
consolidated return group for federal income tax purposes. Prior to August
4, 1993, the Company and each of its subsidiaries computed their tax
liabilities or tax benefits on a separate company basis (except as
discussed in the following paragraph), in accordance with their respective
tax allocation agreements with MAXXAM.
Effective on March 23, 1993, MAXXAM, Pacific Lumber, SPHC and
Salmon Creek Corporation ("Salmon Creek") entered into a tax allocation
agreement that, among other things, amended the tax calculations with
respect to Pacific Lumber (the "Amended PL Tax Allocation Agreement").
Under the terms of the Amended PL Tax Allocation Agreement, Pacific Lumber
is liable to MAXXAM for the federal consolidated income tax liability of
Pacific Lumber, SPHC and certain other subsidiaries of Pacific Lumber (but
excluding Salmon Creek) (collectively, the "PL Subgroup") computed as if
the PL Subgroup was a separate affiliated group of corporations which was
never connected with MAXXAM. The Amended PL Tax Allocation Agreement
further provides that Salmon Creek is liable to MAXXAM for its federal
income tax liability computed on a separate company basis as if it was
never connected with MAXXAM. The remaining subsidiaries of MGI are each
liable to MAXXAM for their respective income tax liabilities computed on a
separate company basis as if they were never connected with MAXXAM,
pursuant to their respective tax allocation agreements.
MGI's tax allocation agreement with MAXXAM, as amended on August
4, 1993 (the "Amended Tax Allocation Agreement"), provides that the
Company's federal income tax liability is computed as if MGI files a
consolidated tax return with all of its subsidiaries except Salmon Creek,
and that such corporations were never connected with MAXXAM (the "MGI
Consolidated Tax Liability"). The federal income tax liability of MGI is
the difference between (i) the MGI Consolidated Tax Liability and (ii) the
sum of the separate tax liabilities for the Company's subsidiaries
(computed as discussed above), but excluding Salmon Creek. To the extent
that
<PAGE>
the MGI Consolidated Tax Liability is less than the aggregate amounts in
(ii), MAXXAM is obligated to pay the amount of such difference to MGI.
The credit (provision) in lieu of income taxes on income (loss)
from continuing operations before income taxes, extraordinary items and
cumulative effect of changes in accounting principles consists of the
following:
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Current:
Federal credit (provision) in lieu of income taxes $ - $ (988) $ (1,774)
State and local (55) (253) (424)
---------- ---------- ----------
(55) (1,241) (2,198)
---------- ---------- ----------
Deferred:
Federal credit (provision) in lieu of income taxes 2,366 4,825 922
State and local 1,305 (229) -
---------- ---------- ----------
3,671 4,596 922
---------- ---------- ----------
$ 3,616 $ 3,355 $ (1,276)
========== ========== ==========
</TABLE>
The 1994 deferred federal credit in lieu of income taxes of
$2,366 includes a credit relating to reserves the Company no longer
believes are necessary. The 1993 deferred federal credit in lieu of income
taxes of $4,825 includes $2,601 for the benefit of operating loss
carryforwards generated in 1993 and includes an $850 benefit for increasing
net deferred income tax assets (liabilities) as of the date of enactment
(August 10, 1993) of the Omnibus Budget Reconciliation Act of 1993 which
retroactively increased the federal statutory income tax rate from 34% to
35% for periods beginning on or after January 1, 1993.
A reconciliation between the credit (provision) in lieu of income
taxes and the amount computed by applying the federal statutory income tax
rate to income (loss) from continuing operations before income taxes,
extraordinary items and cumulative effect of changes in accounting
principles is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Income (loss) from continuing operations before income
taxes, extraordinary items and cumulative effect of
changes in accounting principles $ 14,819 $ (17,664) $ (24,699)
========== ========== ==========
Amount of federal income tax based upon the statutory rate $ (5,187) $ 6,182 $ 8,398
Revision of prior years' tax estimates and other changes in
valuation allowances 7,739 (3,468) -
Increase in net deferred income tax assets due to tax rate
change - 850 -
State and local taxes, net of federal tax benefit 812 (313) (280)
Financial reporting and tax basis differences - - 343
Losses and expenses for which no federal tax benefit was
recognized - - (9,744)
Other 252 104 7
---------- ---------- ----------
$ 3,616 $ 3,355 $ (1,276)
========== ========== ==========
</TABLE>
<PAGE>
As shown in the Consolidated Statement of Operations for the year
ended December 31, 1994, the Company recorded an extraordinary loss related
to the settlement of litigation in connection with the Company's
acquisition of Pacific Lumber (see Note 9). The Company reported the loss
net of related deferred income taxes of $6,312 which is less than the
federal and state statutory income tax rates due to expenses for which no
tax benefit was recognized.
As shown in the Consolidated Statement of Operations for the year
ended December 31, 1993, the Company reported an extraordinary loss related
to the early extinguishment of debt. The Company reported the loss net of
related deferred income taxes of $8,856 which approximated the federal
statutory income tax rate in effect on the dates the transactions occurred.
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). The adoption of SFAS 109 changed the Company's method of accounting
for income taxes to an asset and liability approach from the deferral
method prescribed by APB 11. The asset and liability approach requires the
recognition of deferred income tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Under this method, deferred
income tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates. The cumulative effect of the change
in accounting principle, as of January 1, 1993, increased the Company's
results of operations by $14,916. The implementation of SFAS 109 required
the Company to restate certain assets and liabilities to their pre-tax
amounts from their net-of-tax amounts originally recorded in connection
with the acquisitions of Pacific Lumber in 1986 and Britt in 1990. As a
result of restating these assets and liabilities, the loss from continuing
operations before income taxes, extraordinary item and cumulative effect of
changes in accounting principles for the year ended December 31, 1993 was
decreased by $377.
The components of the Company's net deferred income tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
Deferred income tax assets:
Loss and credit carryforwards $ 86,864 $ 92,408
Timber and timberlands 37,209 36,443
Other liabilities 10,460 4,616
Postretirement benefits other than pensions 2,145 1,734
Investments 406 4,729
Other 1,412 4,569
Valuation allowances (52,060) (57,676)
---------- ----------
Total deferred income tax assets, net 86,436 86,823
---------- ----------
Deferred income tax liabilities:
Inventories (17,934) (17,172)
Property, plant and equipment (16,563) (21,160)
Other (3,427) (4,252)
---------- ----------
Total deferred income tax liabilities (37,924) (42,584)
---------- ----------
Net deferred income tax assets $ 48,512 $ 44,239
========== ==========
</TABLE>
<PAGE>
The valuation allowances listed above relate primarily to loss
and credit carryforwards. As of December 31, 1994, approximately $37,209
of the net deferred income tax assets listed above relate to the excess of
the tax basis over financial statement basis with respect to timber and
timberlands. The Company believes that it is more likely than not that
this net deferred income tax asset will be realized, based primarily upon
the estimated value of its timber and timberlands which is well in excess
of its tax basis. Also included in net deferred income tax assets as of
December 31, 1994 is approximately $35,263 which relates to the benefit of
loss and credit carryforwards, net of valuation allowances. The Company
evaluated all appropriate factors to determine the proper valuation
allowances for loss and credit carryforwards. These factors included any
limitations concerning use of the carryforwards, the year the carryforwards
expire and the levels of taxable income necessary for utilization. The
Company has concluded that it will more likely than not generate sufficient
taxable income to realize the benefit attributable to the loss and credit
carryforwards for which valuation allowances were not provided.
Included in the net deferred income tax assets listed above are
$44,351 and $42,752 at December 31, 1994 and 1993, respectively, which are
recorded pursuant to the tax allocation agreements with MAXXAM.
The following table presents the estimated tax attributes for
federal income tax purposes for the Company and its subsidiaries as of
December 31, 1994, under the terms of the respective tax allocation
agreements. The utilization of certain of these attributes is subject to
limitations.
<TABLE>
<CAPTION>
Expiring
Through
<S> <C> <C>
Regular Tax Attribute Carryforwards:
Prior year net operating losses $ 231,714 2008
Net capital losses 8,765 1997
Alternative Minimum Tax Attribute Carryforwards:
Current year net operating loss $ 7,785 2009
Prior year net operating losses 185,776 2008
</TABLE>
7. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit plan which covers all employees
of Pacific Lumber. Under the plan, employees are eligible for benefits at
age 65 or earlier, if certain provisions are met. The benefits are
determined under a career average formula based on each year of service
with Pacific Lumber and the employee's compensation for that year. Pacific
Lumber's funding policy is to contribute annually an amount at least equal
to the minimum cash contribution required by The Employee Retirement Income
Security Act of 1974, as amended.
A summary of the components of net periodic pension cost is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 1,643 $ 1,600 $ 1,546
Interest cost on projected benefit obligation 1,263 918 749
Actual loss (gain) on plan assets 10 (2,128) (1,013)
Net amortization and deferral (859) 1,359 352
---------- ---------- ----------
Net periodic pension cost $ 2,057 $ 1,749 $ 1,634
========== ========== ==========
</TABLE>
The following table sets forth the funded status and amounts
recognized in the Consolidated Balance Sheet:<PAGE>
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation $ 11,809 $ 11,047
Non-vested benefit obligation 779 1,183
--------- ----------
Total accumulated benefit obligation $ 12,588 $ 12,230
========== ==========
Projected benefit obligation $ 15,047 $ 15,303
Plan assets at fair value, primarily equity and debt
securities (13,184) (12,216)
---------- ----------
Projected benefit obligation in excess of plan assets 1,863 3,087
Unrecognized net transition asset 29 35
Unrecognized net gain (loss) 1,475 (582)
Unrecognized prior service cost (50) (89)
---------- ----------
Accrued pension liability $ 3,317 $ 2,451
========== ==========
</TABLE>
The assumptions used in accounting for the defined benefit plan were as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Rate of increase in compensation levels 5.0% 5.0% 5.0%
Discount rate 8.5% 7.5% 8.0%
Expected long-term rate of return on assets 8.0% 8.0% 9.0%
</TABLE>
The Company has an unfunded defined benefit plan for certain
postretirement and other benefits which covers substantially all employees
of Pacific Lumber. Participants of the plan are eligible for certain
health care benefits upon termination of employment and retirement and
commencement of pension benefits. Participants make contributions for a
portion of the cost of their health care benefits.
The Company adopted Statement of Financial Accounting Standards
No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions ("SFAS 106") as of January 1, 1993. The costs of postretirement
benefits other than pensions are now accrued over the period the employees
provide services to the date of their full eligibility for such benefits.
Previously, such costs were expensed as actual claims were incurred. The
cumulative effect of the change in accounting principle for the adoption of
SFAS 106 was recorded as a charge to results of operations of $2,348, net
of related income taxes of $1,566. The deferred income tax benefit related
to the adoption of SFAS 106 was recorded at the federal and state statutory
rates in effect on the date SFAS 106 was adopted.
A summary of the components of net periodic postretirement
benefit cost is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
<S> <C> <C>
Service cost - benefits earned during the year $ 216 $ 153
Interest cost on accumulated postretirement benefit
obligation 294 315
Net amortization and deferral (7) -
------------ ------------
Net periodic postretirement benefit cost $ 503 $ 468
============ ============
</TABLE>
<PAGE>
The adoption of SFAS 106 increased the Company's loss from
continuing operations before extraordinary item and cumulative effect of
changes in accounting principles by $212 ($360 before tax) for the year
ended December 31, 1993.
The postretirement benefit liability recognized in the Company's
Consolidated Balance Sheet is as follows:
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
Retirees $ 860 $ 963
Actives eligible for benefits 656 696
Actives not eligible for benefits 2,355 2,549
---------- ----------
Accumulated postretirement benefit obligation 3,871 4,208
Unrecognized net gain 972 71
---------- ----------
Postretirement benefit liability $ 4,843 $ 4,279
========== ==========
</TABLE>
The annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 13.0% for 1995 and
is assumed to decrease gradually to 5.5% for 2008 and remain at that level
thereafter. Each one percentage point increase in the assumed health care
cost trend rate would increase the accumulated postretirement benefit
obligation as of December 31, 1994 by approximately $512 and the aggregate
of the service and interest cost components of net periodic postretirement
benefit cost by approximately $85.
The discount rates used in determining the accumulated
postretirement benefit obligation were 8.5% and 7.5% at December 31, 1994
and 1993, respectively.
Subsequent to December 31, 1993, Pacific Lumber's employees were
eligible to participate in a defined contribution savings plan sponsored by
MAXXAM. This plan is designed to enhance the existing retirement programs
of participating employees. Employees may elect to contribute up to 16% of
their compensation to the plan. For those participants who have elected to
make voluntary contributions to the plan, Pacific Lumber's contributions
consist of a matching contribution of up to 4% of the compensation of
participants for each calendar quarter. The cost to the Company of this
plan was $1,215 for the year ended December 31, 1994.
Pacific Lumber is self-insured for workers' compensation
benefits. Included in accrued compensation and related benefits and other
noncurrent liabilities are accruals for workers' compensation claims
amounting to $9,233 and $7,008 at December 31, 1994 and 1993, respectively.
Workers' compensation expenses amounted to $4,069, $3,776 and $3,288 for
the years ended December 31, 1994, 1993 and 1992, respectively.
8. RELATED PARTY TRANSACTIONS
MAXXAM provides the Company and certain of the Company's
subsidiaries with accounting and data processing services. In addition,
MAXXAM provides the Company with office space and various office personnel,
insurance, legal, operating, financial and certain other services.
MAXXAM's expenses incurred on behalf of the Company are reimbursed by the
Company through payments consisting of (i) an allocation of the lease
expense for the office space utilized by or on behalf of the Company and
(ii) a reimbursement of actual out-of-pocket expenses incurred by MAXXAM,
including, but not limited to, labor costs (including costs
<PAGE>
associated with phantom share and stock appreciation rights) of MAXXAM
personnel rendering services to the Company. Charges by MAXXAM for such
services included in continuing operations were $2,254, $3,347 and $3,735
for the years ended December 31, 1994, 1993 and 1992, respectively. The
Company believes that the services being rendered are on terms not less
favorable to the Company than those which would be obtainable from
unaffiliated third parties.
In 1994, in connection with the litigation settlement described
in Note 9, Pacific Lumber paid approximately $3,185 to a law firm in which
a director of Pacific Lumber is also a partner. In 1993, Pacific Lumber
paid approximately $1,931 in connection with the offering of the Pacific
Lumber Senior Notes and the Timber Notes to this same law firm.
9. LOSS ON LITIGATION SETTLEMENT AND CONTINGENCIES
During 1994, MAXXAM, Pacific Lumber and others agreed to a
settlement, subsequently approved by the Court, of 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
approximately $52,000 settlement, approximately $33,000 was paid by
insurance carriers of MAXXAM and Pacific Lumber, approximately $14,800 was
paid by Pacific Lumber and the balance was paid by other defendants and
through the assignment of certain claims. In 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 or financial position. 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.
<PAGE>
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.
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summary quarterly financial information for the years ended
December 31, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1994:
Net sales $ 56,713 $ 62,976 $ 60,699 $ 69,241
Operating income 13,206 22,644 19,362 22,623
Income before extraordinary item 964 3,146 8,263 6,062
Extraordinary item, net - (14,866) - -
Net income (loss) 964 (11,720) 8,263 6,062
1993:
Net sales $ 52,737 $ 58,007 $ 58,803 $ 63,892
Operating income 16,233 14,997 9,185 12,542
Loss from continuing operations before
extraordinary item and cumulative effect
of changes in accounting principles (2,141) (3,593) (5,420) (3,155)
Loss from net assets transferred to MAXXAM,
net (480,370) (20,900) (11,700) -
Extraordinary item, net (10,802) - (6,387) -
Cumulative effect of changes in accounting
principles, net 12,568 - - -
Net loss (480,745) (24,493) (23,507) (3,155)
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K<PAGE>
<TABLE>
<CAPTION>
(A) INDEX TO FINANCIAL STATEMENTS PAGE
1. FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):
<S> <C>
Report of Independent Public Accountants 22
Consolidated balance sheet at December 31, 1994 and 1993 23
Consolidated statement of operations for the years ended December 31, 1994,
1993 and 1992 24
Consolidated statement of cash flows for the years ended December 31, 1994,
1993 and 1992 25
Consolidated statement of stockholder's equity (deficit) for the years ended December 31,
1994, 1993 and 1992 26
Notes to consolidated financial statements 27
2. FINANCIAL STATEMENT SCHEDULES:
<S> <C>
Schedule III - Condensed financial information of Registrant at December 31, 1994
and 1993 and for the years ended December 31, 1994, 1993 and 1992 46
</TABLE>
The consolidated financial statements and notes thereto of
Kaiser Aluminum Corporation and The Pacific Lumber Company are
incorporated herein by reference and included as Exhibits 99.1 and
99.2 hereto, respectively.
All other schedules are inapplicable or the required
information is included in the consolidated financial statements
or the notes thereto.
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
Reference is made to the Index of Exhibits immediately preceding
the exhibits hereto (beginning on page 51), which index is incorporated
herein by reference.
<PAGE>
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET (UNCONSOLIDATED)
<TABLE>
<CAPTION>
December 31,
1994 1993
(In thousands of dollars)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,214 $ 92
Marketable securities 19,514 11,584
Other current assets 1,766 380
------------ ------------
Total current assets 45,494 12,056
Investments in and advances from subsidiaries 17,083 39,405
Deferred financing costs and other assets 5,593 6,238
Deferred income taxes 13,609 6,369
------------ ------------
$ 81,779 $ 64,068
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 178 $ 2,058
Accrued interest 4,656 4,562
------------ ------------
Total current liabilities 4,834 6,620
Long-term debt 182,779 173,499
Margin borrowings for marketable securities 6,648 -
------------ ------------
Total liabilities 194,261 180,119
------------ ------------
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 (193,769) (197,338)
------------ ------------
Total stockholder's deficit (112,482) (116,051)
------------ ------------
$ 81,779 $ 64,068
============ ============
<FN>
See notes to consolidated financial statements and accompanying notes.
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS (UNCONSOLIDATED)
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
(In thousands of dollars)
<S> <C> <C> <C>
Investment, interest and other income (expense) $ (2,159) $ (718) $ (2,607)
Interest expense (21,180) (20,917) (21,592)
General and administrative expenses (598) (720) (1,000)
Equity in earnings (losses) of subsidiaries 18,790 6,534 (776)
---------- ---------- ----------
Loss from continuing operations before income
taxes, extraordinary item and cumulative
effect of change in accounting principle (5,147) (15,821) (25,975)
Credit in lieu of income taxes 8,716 3,334 -
---------- ---------- ----------
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
change in accounting principle 3,569 (12,487) (25,975)
Income (loss) from net assets transferred to
MAXXAM, net of minority interests and related
income taxes - (512,970) 33,691
---------- ---------- ----------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle 3,569 (525,457) 7,716
Extraordinary item:
Loss on early extinguishment of debt, net of
related credit in lieu of income taxes
of $3,290 - (6,387) -
Cumulative effect of change in accounting
principle for income taxes - (56) -
---------- ---------- ----------
Net income (loss) $ 3,569 $(531,900) $ 7,716
========== ========== ==========
<FN>
See notes to consolidated financial statements and accompanying notes.
</TABLE>
<PAGE>
STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
(In thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,569 $(531,900) $ 7,716
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Amortization of deferred financing costs and
discounts on long-term debt 9,930 4,855 1,806
Equity in losses (earnings) of subsidiaries (18,790) (6,534) 776
Net sales (purchases) of marketable securities (1,808) (5,586) 42,725
Net losses (gains) on marketable securities (731) (2,551) 2,608
Loss (income) from net assets transferred to
MAXXAM, net - 512,970 (33,691)
Extraordinary loss on early extinguishment of
debt, net - 6,387 -
Cumulative effect of change in accounting
principle - 56 -
Incurrence of financing costs - (6,503) -
Decrease (increase) in receivables 90 (380) 11,117
Increase in accrued and deferred income taxes (8,518) (3,356) -
Increase (decrease) in accrued interest and other
liabilities (911) 3,272 31
Increase (decrease) in accounts payable (53) 53 (111)
Other 232 62 -
---------- ---------- ----------
Net cash provided by (used for) operating
activities (16,990) (29,155) 32,977
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net advances from subsidiaries 41,112 35,695 -
Increase in net assets transferred to MAXXAM - (11,770) (22,356)
---------- ---------- ----------
Net cash provided by (used for) investing
activities 41,112 23,925 (22,356)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 170,000 -
Redemptions of long-term debt - (155,263) -
Dividends paid - (20,000) (36)
---------- ---------- ----------
Net cash used for financing activities - (5,263) (36)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24,122 (10,493) 10,585
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 92 10,585 -
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 24,214 $ 92 $ 10,585
========== ========== ==========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Net margin borrowings for marketable securities $ 5,628 $ 1,020
Net assets transferred to MAXXAM 30,531
Dividend of notes receivable and marketable securities
to parent $ 14,964
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 11,156 $ 13,975 $ 19,839
Tax allocation payments to (refunds from) MAXXAM (198) 22 -
<FN>
See notes to consolidated financial statements and accompanying notes.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
As described in Note 1 to the Company's Consolidated Financial
Statements (contained in Item 8), the Forest Products Group Formation
required the Company to restate its historical financial statements with
respect to the net assets transferred to MAXXAM. Such restatement has been
made with respect to all periods presented in a manner similar to that
which would have been presented if the Company had discontinued the
operations relating to such net assets.
B. LONG-TERM DEBT
The Forest Products Group Formation was done contemporaneously
with the issuance of the MGI Notes and the retirement of the 12-3/4% Notes
as described in Note 5 to the Consolidated Financial Statements. The MGI
Notes are secured by the Company's pledge of 100% of the common stock of
Pacific Lumber, Britt and MPI and by MAXXAM's pledge of 28 million shares
of Kaiser's common stock it received as a result of the Forest Products
Group Formation.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
MAXXAM GROUP INC.
Date: March 24, 1995 By: PAUL N. SCHWARTZ
Paul N. Schwartz
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: March 24, 1995 By: GARY L. CLARK
Gary L. Clark
Vice President
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Date: March 24, 1995 By: CHARLES E. HURWITZ
Charles E. Hurwitz
Chairman of the Board, President and
Chief Executive Officer
Date: March 24, 1995 By: PAUL N. SCHWARTZ
Paul N. Schwartz
Vice President, Chief Financial Officer
and Director
Date: March 24, 1995 By: JOHN A. CAMPBELL
John A. Campbell
Vice President and Director
Date: March 24, 1995 By: JOHN T. LA DUC
John T. La Duc
Vice President and Director
Date: March 24, 1995 By: ANTHONY R. PIERNO
Anthony R. Pierno
Vice President, General Counsel
and Director
Date: March 24, 1995 By: WILLIAM S. RIEGEL
William S. Riegel
Vice President and Director
<PAGE>
MAXXAM GROUP INC.
INDEX OF EXHIBITS
Exhibit
Number Description
3.1 Certificate of Incorporation of MAXXAM Group Inc. (the
"Company" or "MGI") (incorporated herein by reference
to Exhibit 3.1E to the Company's definitive proxy
statement dated October 24, 1984)
3.2 Certificate of Amendment of Certificate of
Incorporation of the Company dated as of September 28,
1988 (incorporated herein by reference to Exhibit 3(b)
to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988)
3.3 Certificate of Amendment of Certificate of
Incorporation of the Company dated as of June 1, 1989
(incorporated herein by reference to Exhibit 3(c) to
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989)
3.4 By-laws of the Company (incorporated herein by
reference to Exhibit 3.2 to the Company's Current
Report on Form 8-K dated July 10, 1986)
4.1 Indenture between the Company and Shawmut Bank, N.A.,
Trustee, regarding the Company's 12-3/4 Senior Secured
Discount Notes due 2003 and 11-1/4% Senior Secured
Notes due 2003 (incorporated herein by reference to
Exhibit 4.1 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1993)
4.2 Indenture between The Pacific Lumber Company ("Pacific
Lumber") and The First National Bank of Boston, as
Trustee, regarding Pacific Lumber's 10-1/2% Senior
Notes due 2003 (incorporated herein by reference to
Exhibit 4.1 to the Annual Report on Form 10-K of
Pacific Lumber for the fiscal year ended December 31,
1993, File No. 1-9204)
4.3 Indenture between Scotia Pacific Holding Company
("SPHC") and The First National Bank of Boston, as
Trustee, regarding SPHC's 7.95% Timber Collateralized
Notes due 2015 (incorporated herein by reference to
Exhibit 4.1 to SPHC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993, File No.
55538; the "SPHC 1993 Form 10-K")
4.4 Revolving Credit Agreement dated as of June 23, 1993
between Pacific Lumber and Bank of America National
Trust and Savings Association (incorporated herein by
reference to Exhibit 4.19 to Amendment No. 6 to the
Company's Registration Statement on Form S-2,
Registration No. 33-64042; the "MGI Registration
Statement")
4.5 Letter Amendment to the Revolving Credit Agreement,
dated October 5, 1993 (incorporated herein by
reference to Exhibit 4.1 to Pacific Lumber's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1993, File No. 1-9204)
4.6 Second Amendment, dated as of May 26, 1994, to the
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)
Note: Pursuant to Regulation Section 229.601, Item 601
(b)(4)(iii) of Regulation S-K, upon request of the
Securities and Exchange Commission, the Company hereby
agrees to furnish a copy of any unfiled instrument
which defines the rights of holders of long-term debt
of the Company and its consolidated subsidiaries (and
for any of its unconsolidated subsidiaries for which
financial statements are required to be filed) wherein
the total amount of securities authorized thereunder
does not exceed 10 percent of the total consolidated
assets of the Company
10.1 Tax Allocation Agreement between the Company and
MAXXAM Inc. dated August 4, 1993 (incorporated herein
by reference to Exhibit 10.6 to the MGI Registration
Statement)
10.2 Tax Allocation Agreement dated as of May 21, 1988
among MAXXAM Inc., the Company, Pacific Lumber and the
corporations signatory thereto (incorporated herein by
reference to Exhibit 10.8 to Pacific Lumber's Annual
Report on Form 10-K for the fiscal year ended December
31, 1988, File No. 1-9204)
10.3 Tax Allocation Agreement among Pacific Lumber, SPHC,
Salmon Creek Corporation and MAXXAM Inc. dated March
23, 1993 (incorporated herein by reference to Exhibit
10.1 to Amendment No. 3 to the Form S-1 Registration
Statement of SPHC, Registration No. 33-55538)
10.4 Tax Allocation Agreement between MAXXAM Inc. and Britt
Lumber Co., Inc., dated as of July 3, 1990
(incorporated herein by reference to Exhibit 10.4 to
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
10.5 Agreement dated December 20, 1985 between Pacific
Lumber and General Electric Company (incorporated
herein by reference to Exhibit 10(m) to Pacific
Lumber's Registration Statement on Form S-1,
Registration No. 33-5549; the "1985 GE Agreement")
10.6 Amendment No. 1 to Agreement between Pacific Lumber
and General Electric Company dated July 29, 1986
relating to the 1985 GE Agreement (incorporated herein
by reference to Exhibit 10.4 to Pacific Lumber's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1988, File No. 1-9204)
10.7 Power Purchase Agreement dated January 17, 1986
between Pacific Lumber and Pacific Gas and Electric
Company (incorporated herein by reference to Exhibit
10(n) to Pacific Lumber's Registration Statement on
Form S-1, Registration No. 33-5549)
10.8 Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment among SPHC,
The First National Bank of Boston, as Trustee, and The
First National Bank of Boston, as the Collateral Agent
(incorporated herein by reference to Exhibit 4.2 to
the SPHC 1993 Form 10-K)
10.9 Master Purchase Agreement between Pacific Lumber and
SPHC (incorporated herein by reference to Exhibit 10.1
to the SPHC 1993 Form 10-K)
10.10 Services Agreement between Pacific Lumber and SPHC
(incorporated herein by reference to Exhibit 10.2 to
the SPHC 1993 Form 10-K)
10.11 Additional Services Agreement between Pacific Lumber
and SPHC (incorporated herein by reference to Exhibit
10.3 to the SPHC 1993 Form 10-K)
10.12 Reciprocal Rights Agreement among Pacific Lumber, SPHC
and Salmon Creek Corporation (incorporated herein by
reference to Exhibit 10.4 to the SPHC 1993 Form 10-K)
10.13 Environmental Indemnification Agreement between
Pacific Lumber and SPHC (incorporated herein by
reference to Exhibit 10.5 to the SPHC 1993 Form 10-K)
10.14 Purchase and Services Agreement between Pacific Lumber
and Britt Lumber Co., Inc. (incorporated herein by
reference to Exhibit 10.17 to Amendment No. 2 to the
Form S-2 Registration Statement of Pacific Lumber;
Registration Statement No. 33-56332)
10.15 Put and Call Agreement dated November 16, 1987 between
Charles E. Hurwitz and MPI (incorporated herein by
reference to Exhibit C to Schedule 13D dated November
24, 1987, filed by the Company with respect to MAXXAM
Inc.'s common stock; the "Put and Call Agreement")
10.16 Amendment to Put and Call Agreement, dated May 18,
1988 (incorporated herein by reference to Exhibit D to
the Final Amendment to Schedule 13D dated May 20,
1988, filed by the Company relating to MAXXAM Inc.'s
common stock)
10.17 Amendment to Put and Call Agreement, dated as of
February 17, 1989 (incorporated herein by reference to
Exhibit 10.35 to MAXXAM Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1988, File
No. 1-3924)
10.18 Unconditional Guarantee of Payment and Performance
dated June 17, 1991, by the Company and MAXXAM Inc. to
and for the benefit of General Electric Capital
Corporation ("GECC") (incorporated herein by reference
to Exhibit 10(ee) to Amendment No. 4 to MGI's
Registration Statement on Form S-4 on Form S-2,
Registration No. 33-42300)
10.19 First Renewal, Extension and Modification Agreement,
dated as of June 17, 1992 among GECC, MXM Mortgage
Corp. and the Company (incorporated herein by
reference to Exhibit 4.3 to MAXXAM Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September
30, 1993, File No. 1-3924)
10.20 Loan Increase, Extension and Modification Agreement,
dated as of December 30, 1992, among GECC, MXM
Mortgage Corp. and MAXXAM Inc.(incorporated herein by
reference to Exhibit 4.23 to MAXXAM Inc.'s Annual
Report on Form 10-K for the fiscal year ended December
31, 1992, File No. 1-3924)
10.21 Consent and Assumption Agreement, dated as of December
10, 1993, among GECC, MXM Mortgage Corp., MXM Mortgage
L.P., the Company and MAXXAM Inc. (incorporated herein
by reference to MAXXAM Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1993, File
No. 1-3924)
10.22 Release and Termination of Unconditional Guarantee of
Payment and Performance, dated as of December 30,
1993, executed by GECC (incorporated herein by
reference to MAXXAM Inc.'s Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, File No.
1-3924)
10.23 Investment Management Agreement, dated as of December
1, 1991, by and among the Company, MAXXAM Inc. and
certain related corporations (incorporated herein by
reference to Exhibit 10.23 to Amendment No. 5 to the
MGI Registration)
10.24 Undertaking, dated August 4, 1993, executed by MAXXAM
in favor of the Company
*27 Financial Data Schedule
*99.1 The consolidated financial statements and notes
thereto of Kaiser Aluminum Corporation for the fiscal
year ended December 31, 1994
*99.2 The consolidated financial statements and notes
thereto of The Pacific Lumber Company for the fiscal
year ended December 31, 1994
* Included with this filing.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Company's consolidated balance sheet and consolidated
statement of operations and is qualified in its entirety by
reference to such consolidated financial statements together with
the related footnotes thereto.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<CASH> 48,575
<SECURITIES> 19,514
<RECEIVABLES> 23,170
<ALLOWANCES> 0
<INVENTORY> 70,098
<CURRENT-ASSETS> 172,509
<PP&E> 162,264
<DEPRECIATION> 59,081
<TOTAL-ASSETS> 756,681
<CURRENT-LIABILITIES> 70,012
<BONDS> 782,456
<COMMON> 0
0
0
<OTHER-SE> (112,482)
<TOTAL-LIABILITY-AND-EQUITY> 756,681
<SALES> 249,629
<TOTAL-REVENUES> 249,629
<CGS> 129,598
<TOTAL-COSTS> 129,598
<OTHER-EXPENSES> 42,196
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,383
<INCOME-PRETAX> 14,819
<INCOME-TAX> (3,616)
<INCOME-CONTINUING> 18,435
<DISCONTINUED> 0
<EXTRAORDINARY> (14,866)
<CHANGES> 0
<NET-INCOME> 3,569
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Kaiser Aluminum
Corporation:
We have audited the accompanying consolidated balance sheets of Kaiser
Aluminum Corporation (a Delaware corporation) and subsidiaries as
of December 31, 1994 and 1993, and the related statements
of consolidated income and cash flows for each of the three years in
the period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Kaiser
Aluminum Corporation and subsidiaries as of December 31, 1994 and
1993, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As explained in Note 1 of the Notes to Consolidated Financial
Statements, effective January 1, 1993, the Company changed its methods
of accounting for postretirement benefits other than pensions,
postemployment benefits, and income taxes.
ARTHUR ANDERSEN LLP
Houston, Texas
February 17, 1995
28
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
-------------------
(In millions of dollars, except share amounts) 1994 1993
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 17.6 $ 14.7
Receivables:
Trade, less allowance for doubtful receivables of $4.2 in 1994 and $2.9 in 1993 150.7 156.1
Other 48.5 78.6
Inventories 468.0 426.9
Prepaid expenses and other current assets 158.0 60.7
-------- --------
Total current assets 842.8 737.0
Investments in and advances to unconsolidated affiliates 169.7 183.2
Property, plant, and equipment - net 1,133.2 1,163.7
Deferred income taxes 271.2 210.8
Other assets 281.2 233.2
-------- --------
Total $2,698.1 $2,527.9
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 152.1 $ 126.3
Accrued interest 32.6 23.6
Accrued salaries, wages, and related expenses 77.7 56.1
Accrued postretirement medical benefit obligation - current portion 47.0 47.6
Other accrued liabilities 176.9 133.2
Payable to affiliates 85.3 62.4
Short-term borrowings .5
Long-term debt - current portion 11.5 8.7
-------- --------
Total current liabilities 583.1 458.4
Long-term liabilities 495.5 501.8
Accrued postretirement medical benefit obligation 734.9 713.1
Long-term debt 751.1 720.2
Minority interests 116.2 105.0
Stockholders' equity:
Preferred stock, par value $.05, authorized 20,000,000 shares;
Series A Convertible, stated value $.10, issued and outstanding,
1,938,295 in 1994 and 1993 .2 .2
PRIDES Convertible, par value $.05, issued and outstanding,
8,855,550 and nil in 1994 and 1993 .4
Common stock, par value $.01, authorized 100,000,000 shares;
issued and outstanding, 58,205,083 and 58,095,599 shares in 1994 and 1993 .6 .6
Additional capital 527.8 425.9
Accumulated deficit (502.6) (375.7)
Additional minimum pension liability (9.1) (21.6)
-------- --------
Total stockholders' equity 17.3 29.4
-------- --------
Total $2,698.1 $2,527.9
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
29
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
<TABLE>
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
<CAPTION>
Year Ended December 31,
------------------------------
(In millions of dollars, except share amounts) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,781.5 $1,719.1 $1,909.1
-------- -------- --------
Costs and expenses:
Cost of products sold 1,625.5 1,587.7 1,619.3
Depreciation 95.4 97.1 80.3
Selling, administrative, research and development, and general 116.8 121.9 119.6
Restructuring of operations 35.8
-------- -------- --------
Total costs and expenses 1,837.7 1,842.5 1,819.2
-------- -------- --------
Operating income (loss) (56.2) (123.4) 89.9
Other income (expense):
Interest and other income - net (7.3) (.9) 20.9
Interest expense (88.6) (84.2) (78.7)
-------- -------- --------
Income (loss) before income taxes, minority interests, extraordinary loss,
and cumulative effect of changes in accounting principles (152.1) (208.5) 32.1
Credit (provision) for income taxes 53.8 86.9 (5.3)
Minority interests (3.1) (1.5) .1
-------- -------- --------
Income (loss) before extraordinary loss and cumulative effect of changes
in accounting principles (101.4) (123.1) 26.9
Extraordinary loss on early extinguishment of debt, net of tax benefit
of $2.9 and $11.2 for 1994 and 1993, respectively (5.4) (21.8)
Cumulative effect of changes in accounting principles, net of tax benefit
of $237.7 (507.3)
-------- -------- --------
Net income (loss) (106.8) (652.2) 26.9
Dividends on preferred stock (20.1) (6.3)
-------- -------- --------
Net income (loss) attributable to common shareholders $ (126.9) $ (658.5) $ 26.9
======== ======== ========
Per common and common equivalent share:
Income (loss) before extraordinary loss and cumulative effect of
changes in accounting principles $ (2.09) $ (2.25) $ .47
Extraordinary loss (.09) (.38)
Cumulative effect of changes in accounting principles (8.84)
-------- -------- --------
Net income (loss) $ (2.18) $ (11.47) $ .47
======== ======== ========
Weighted average common and common equivalent shares outstanding (000) 58,139 57,423 57,250
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
30
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
<TABLE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
<CAPTION>
Year Ended December 31,
-------------------------
(In millions of dollars) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(106.8) $(652.2) $ 26.9
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation 95.4 97.1 80.3
Amortization of deferred financing costs and discount on long-term debt 6.2 11.2 11.5
Non-cash postretirement medical benefit expenses 13.9 19.2
Restructuring of operations 35.8
Minority interests 3.1 1.5 (.1)
Extraordinary loss on early extinguishment of debt - net 5.4 21.8
Cumulative effect of changes in accounting principles - net 507.3
(Decrease) increase in accrued and deferred income taxes (68.8) (96.4) 3.5
Equity in losses of unconsolidated affiliates 1.9 3.3 1.9
Recognition of previously deferred income from a forward alumina sale (.6) (25.7)
Increase (decrease) in accrued interest 9.3 19.2 (.3)
Incurrence of financing costs (19.2) (12.7) (5.5)
Decrease (increase) in receivables 36.4 (6.1) (57.8)
(Increase) decrease in inventories (41.1) 13.0 58.7
(Increase) decrease in prepaid expenses and other current assets (49.7) 7.4 7.6
Increase (decrease) in accounts payable 25.8 (10.3) (5.2)
Increase (decrease) in payable to affiliates and accrued liabilities 36.9 57.7 (88.7)
Other 10.0 8.0 19.2
------- ------- -------
Net cash (used for) provided by operating activities (41.3) 24.2 26.3
------- ------- -------
Cash flows from investing activities:
Net proceeds from disposition of property and investments 4.1 13.1 26.1
Capital expenditures (70.0) (67.7) (114.4)
------- ------- -------
Net cash used for investing activities (65.9) (54.6) (88.3)
------- ------- -------
Cash flows from financing activities:
Repayments of long-term debt, including revolving credit (345.1) (1,134.5) (221.4)
Borrowings of long-term debt, including revolving credit 378.9 1,068.1 303.8
Borrowings from MAXXAM Group Inc. (see supplemental disclosure below) 15.0 2.5
Tender premiums and other costs of early extinguishment of debt (27.1)
Net short-term debt repayments (.5) (4.3) (1.5)
Dividends paid (14.8) (6.3) (11.4)
Capital stock issued 100.1 119.3 .6
Redemption of minority interests' preference stock (8.5) (4.2) (7.3)
------- ------- -------
Net cash provided by financing activities 110.1 26.0 65.3
------- ------- -------
Net increase (decrease) in cash and cash equivalents during the year 2.9 (4.4) 3.3
Cash and cash equivalents at beginning of year 14.7 19.1 15.8
------- ------- -------
Cash and cash equivalents at end of year $ 17.6 $ 14.7 $ 19.1
======= ======= =======
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 73.1 $ 53.7 $ 68.1
Income taxes paid 16.0 13.5 1.8
Tax allocation payments to (from) MAXXAM Inc. (3.9) 28.0
Supplemental disclosure of non-cash financing activities:
Exchange of the borrowings from MAXXAM Group Inc. for capital stock $ 15.0
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
31
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share amounts)
1. Summary of Significant Accounting Policies
----------------------------------------------
Principles of Consolidation
The consolidated financial statements include the statements of Kaiser
Aluminum Corporation ("Kaiser" or the "Company") and its majority-
owned subsidiaries. Investments in 50%-or-less-owned entities are
accounted for primarily by the equity method. Intercompany balances
and transactions are eliminated. The Company is a subsidiary of MAXXAM
Inc. ("MAXXAM") and conducts its operations through its wholly owned
subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). Certain
reclassifications of prior-year information were made to conform to
the current presentation.
Changes in Accounting Principles
The Company adopted Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ("SFAS 106"), and Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits"
("SFAS 112"), as of January 1, 1993. The costs of postretirement
benefits other than pensions and postemployment benefits are now
accrued over the period employees provide services to the date of
their full eligibility for such benefits. Previously, such costs were
expensed as actual claims were incurred. The cumulative effect of the
changes in accounting principles for the adoption of SFAS 106 and SFAS
112 were recorded as charges to results of operations of $497.7 and
$7.3, net of related income taxes of $234.2 and $3.5, respectively.
These deferred income tax benefits were recorded at the federal
statutory rate in effect on the date the accounting standards were
adopted, before giving effect to certain valuation allowances. The new
accounting standards had no effect on the Company's cash outlays for
postretirement or postemployment benefits, nor did these one-time
charges affect the Company's compliance with its existing debt
covenants. The Company reserves the right, subject to applicable
collective bargaining agreements and applicable legal requirements, to
amend or terminate these benefits.
The Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"), as of January 1, 1993.
The adoption of SFAS 109 changes the Company's method of accounting
for income taxes to an asset and liability approach from the deferral
method prescribed by Accounting Principles Board Opinion No. 11,
"Accounting for Income Taxes" ("APB 11"). The asset and liability
approach requires the recognition of deferred income tax assets and
liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax
returns. Under this method, deferred income tax assets and liabilities
are determined based on the temporary differences between the
financial statement and tax bases of assets and liabilities using
enacted tax rates. The cumulative effect of the change in accounting
principle reduced the Company's results of operations by $2.3. The
adoption of SFAS 109 required the Company to restate certain assets
and liabilities to their pre-tax amounts from their net-of-tax amounts
originally recorded in connection with the acquisition by MAXXAM in
October 1988. As a result of restating the assets and liabilities, the
loss before income taxes, minority interests, extraordinary loss, and
cumulative effect of changes in accounting principles for the year
ended December 31, 1993, was increased by $9.3.
Cash and Cash Equivalents
The Company considers only those short-term, highly liquid investments
with original maturities of 90 days or less to be cash equivalents.
Inventories
Substantially all product inventories are stated at last-in, first-out
("LIFO") cost, not in excess of market value. Replacement cost is not
in excess of LIFO cost. Other inventories, principally operating
supplies and repair and maintenance parts, are stated at the lower of
average cost or market. Inventory costs consist of material, labor,
and manufacturing overhead, including depreciation. Inventories
consist of the following:
32
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
<TABLE>
<CAPTION>
December 31,
---------------
1994 1993
------ ------
<S> <C> <C>
Finished fabricated products $ 49.4 $ 83.7
Primary aluminum and work in process 203.1 141.4
Bauxite and alumina 102.3 94.0
Operating supplies and repair and maintenance parts 113.2 107.8
------ ------
$468.0 $426.9
====== ======
</TABLE>
Depreciation
Depreciation is computed principally by the straight-line method at
rates based on the estimated useful lives of the various classes of
assets. The principal estimated useful lives by class of assets are:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
<S> <C>
Land improvements 8 to 25 years
Buildings 15 to 45 years
Machinery and equipment 10 to 22 years
</TABLE>
Other Income
Other income in 1994 and 1993 includes $10.3 and $10.8 of pre-tax
charges related principally to establishing additional litigation and
environmental reserves in the fourth quarters, respectively. Other
income in 1992 includes $14.0 of pre-tax income for non-recurring
adjustments to previously recorded liabilities and reserves in the
fourth quarter.
Deferred Financing Costs
Costs incurred to obtain debt financing are deferred and amortized
over the estimated term of the related borrowing. Amortization of
deferred financing costs of $6.0, $11.2, and $10.9 for the years ended
December 31, 1994, 1993, and 1992, respectively, are included in
interest expense.
Foreign Currency
The Company uses the United States dollar as the functional currency
for its foreign operations.
Derivative Financial Instruments
Gains and losses arising from the use of derivative financial
instruments are reflected in the Company's operating results
concurrently with the consummation of the underlying hedged
transactions. Deferred gains or losses as of December 31, 1994, are
included in Prepaid expenses and other current assets and Other
accrued liabilities. The Company does not hold or issue derivative
financial instruments for trading purposes (see Note 10).
Fair Value of Financial Instruments
The following table presents the estimated fair value of the Company's
financial instruments, together with the carrying amounts of the
related assets or liabilities. Unless otherwise noted, the carrying
amount of all financial instruments is a reasonable estimate of fair
value.
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
------------------ --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Debt $762.6 $747.6 $728.9 $734.1
Foreign currency contracts 3.5
</TABLE>
33
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Debt - The quoted market prices were used for the Senior Notes and
12-3/4% Notes (see Note 5). The fair value of all other debt is based
on discounting the future cash flows using the current rate for debt
of similar maturities and terms.
Foreign Currency Contracts - The fair value generally reflects the
estimated amounts that the Company would receive to enter into
similar contracts at the reporting date, thereby taking into account
unrealized gains or losses on open contracts (see Note 10).
Net Income (Loss) per Common and Common Equivalent Share
Net income (loss) per common and common equivalent share is computed
based on the weighted average number of common and common equivalent
shares outstanding during each period. For the year ended December 31,
1994, common stock equivalents of 19,382,950 attributable to the
Series A Shares, 8,855,550 shares attributable to the PRIDES, and
1,122,380 attributable to nonqualified stock options and for the year
ended December 31, 1993, common stock equivalents of 19,382,950
attributable to the Series A Shares and 664,400 attributable to
nonqualified stock options were excluded from the calculation of
weighted average shares because they were antidilutive (see Notes 7
and 8). Dividends declared on the Series A Shares and the PRIDES
($20.1 and $6.3 for the years ended December 31, 1994 and 1993) are
added to net loss for the purpose of calculating loss per common and
common equivalent share.
2. Restructuring of Operations
-------------------------------
In 1993, KACC implemented a restructuring plan primarily for its flat-
rolled products operation at its Trentwood plant in response to
overcapacity in the aluminum rolling industry, flat demand in the U.S.
can stock markets, and declining demand for aluminum products sold to
customers in the commercial aerospace industry, all of which had
resulted in declining prices in Trentwood's key markets. As of
December 31, 1994, the costs related to the 1993 pre-tax charge for
this restructuring of $35.8 have been substantially incurred.
3. Investments In and Advances To Unconsolidated Affiliates
------------------------------------------------------------
Summary combined financial information is provided below for
unconsolidated aluminum investments, most of which supply and process
raw materials. The investees are Queensland Alumina Limited ("QAL")
(28.3% owned), Anglesey Aluminium Limited ("Anglesey") (49.0% owned),
and Kaiser Jamaica Bauxite Company (49.0% owned). The equity in
earnings (losses) before income taxes of such operations is treated as
a reduction (increase) in cost of products sold. At December 31, 1994
and 1993, KACC's net receivables from these affiliates were not
material.
<TABLE>
Summary of Combined Operations
<CAPTION>
Year Ended December 31,
---------------------------
1994 1993 1992
-------------------------------------------------------------------
<C> <C> <C>
Net sales $ 489.8 $ 510.3 $ 586.6
Costs and expenses (494.8) (527.2) (586.7)
Provision (credit) for income taxes (6.3) 1.9 6.9
------- ------- -------
Net income (loss) $ (11.3) $ (15.0) $ 6.8
======= ======= =======
Company's equity in losses $ (1.9) $ (3.3) $ (1.9)
======= ======= =======
</TABLE>
34
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Summary of Combined Financial Position
<TABLE>
<CAPTION>
December 31,
---------------
1994 1993
----------------------------------------------------------------------
<S> <C> <C>
Current assets $342.3 $312.3
Property, plant, and equipment - net 349.4 371.1
Other assets 42.4 46.3
------ ------
Total assets $734.1 $729.7
====== ======
Current liabilities $122.4 $130.4
Long-term debt 307.6 290.0
Other liabilities 31.0 17.8
Stockholders' equity 273.1 291.5
------ ------
Total liabilities and stockholders' equity $734.1 $729.7
====== ======
</TABLE>
The Company's equity in losses differs from the summary net income
(loss) due to various percentage ownerships in the entities and equity
method accounting adjustments.
At December 31, 1994, KACC's investment in its unconsolidated
affiliates exceeded its equity in their net assets by approximately
$67.9. The Company is amortizing this amount over a 12-year period,
which results in an annual amortization charge of approximately $11.6.
The Company and its affiliates have interrelated operations. KACC
provides some of its affiliates with services such as financing,
management, and engineering. Significant activities with affiliates
include the acquisition and processing of bauxite, alumina, and
primary aluminum. Purchases from these affiliates were $219.7, $206.6,
and $219.4 in the years ended December 31, 1994, 1993, and 1992,
respectively. No dividends were received from investees in the three
years ended December 31, 1994.
4. Property, Plant, and Equipment
----------------------------------
The major classes of property, plant, and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1994 1993
------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 153.5 $ 135.1
Buildings 196.8 194.8
Machinery and equipment 1,285.0 1,223.0
Construction in progress 45.0 64.9
-------- --------
1,680.3 1,617.8
Accumulated depreciation 547.1 454.1
-------- --------
Property, plant, and equipment - net $1,133.2 $1,163.7
======== ========
</TABLE>
35
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
5. Long-Term Debt
------------------
Long-term debt and its maturity schedule are as follows:
<TABLE>
<CAPTION>
December 31,
2000 -------------
and 1994 1993
1995 1996 1997 1998 1999 After Total Total
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 Credit Agreement (10% at December 31, 1994) $6.7 $ 6.7
1989 Credit Agreement (6.59% at December 31, 1993) $188.0
9-7/8% Senior Notes, net $223.6 223.6
Pollution Control and Solid Waste Disposal
Facilities Obligations (6.00%-7.75%) $ 1.2 $1.2 $1.3 $1.4 .2 32.8 38.1 39.2
Alpart CARIFA Loan (fixed and variable rates) 60.0 60.0 60.0
Alpart Term Loan (8.95%) 6.2 6.3 6.2 18.7 25.0
12-3/4% Senior Subordinated Notes 400.0 400.0 400.0
Other borrowings (fixed and variable rates) 4.1 1.5 1.7 7.4 .4 .4 15.5 16.7
----- ---- ---- ---- ---- ------ ------ ------
Total $11.5 $9.0 $9.2 $8.8 $7.3 $716.8 762.6 728.9
Less current portion ===== ==== ==== ==== ==== ====== 11.5 8.7
------ ------
Long-term debt $751.1 $720.2
====== ======
</TABLE>
1994 Credit Agreement
On February 17, 1994, the Company and KACC entered into a credit
agreement with BankAmerica Business Credit, Inc. (as agent for itself
and other lenders), Bank of America National Trust and Savings
Association, and certain other lenders (as amended, the "1994 Credit
Agreement"). The 1994 Credit Agreement consists of a $275.0 five-year
secured, revolving line of credit, scheduled to mature in 1999, and
replaced the credit agreement entered into in December 1989 by the
Company and KACC with a syndicate of commercial banks and other
financial institutions (as amended, the "1989 Credit Agreement"). KACC
is able to borrow under the facility by means of revolving credit
advances and letters of credit (up to $125.0) in an aggregate amount
equal to the lesser of $275.0 or a borrowing base relating to eligible
accounts receivable plus eligible inventory. The Company recorded a
pre-tax extraordinary loss of $8.3 ($5.4 after taxes) in the first
quarter of 1994, consisting primarily of the write-off of unamortized
deferred financing costs related to the 1989 Credit Agreement. As of
December 31, 1994, $202.5 (of which $59.3 could have been used for
letters of credit) was available to KACC under the 1994 Credit
Agreement. The 1994 Credit Agreement is unconditionally guaranteed by
the Company and by certain significant subsidiaries of KACC. Loans
under the 1994 Credit Agreement bear interest at a rate per annum, at
KACC's election, equal to a Reference Rate (as defined) plus 1-1/2% or
LIBO Rate (Reserve Adjusted) (as defined) plus 3-1/4%. After June 30,
1995, the interest rate margins applicable to borrowings under the
1994 Credit Agreement may be reduced by up to 1-1/2% (non-
cumulatively), based on a financial test, determined quarterly.
The 1994 Credit Agreement requires KACC to maintain certain financial
covenants and places restrictions on the Company's and KACC's ability
to, among other things, incur debt and liens, make investments, pay
dividends, undertake transactions with affiliates, make capital
expenditures, and enter into unrelated lines of business. Neither the
Company nor KACC currently is permitted to pay dividends on its common
stock. The 1994 Credit Agreement is secured by, among other things,
(i) mortgages on KACC's major domestic plants (excluding the Gramercy
plant); (ii) subject to certain exceptions, liens on the accounts
receivable, inventory, equipment, domestic patents and trademarks, and
substantially all other personal property of KACC and certain of its
subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser;
and (iv) pledges of all of the stock of a number of KACC's wholly
owned domestic subsidiaries, pledges of a portion of the stock of
certain foreign subsidiaries, and pledges of a portion of the stock of
certain partially owned foreign affiliates.
36
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Senior Notes
Concurrent with the offering by the Company of its 8.255% PRIDES,
Convertible Preferred Stock (the "PRIDES") (see Note 8), KACC issued
$225.0 of its 9-7/8% Senior Notes due 2002 (the "Senior Notes"). The
net proceeds of the offering of the Senior Notes were used to reduce
outstanding borrowings under the revolving credit facility of the 1989
Credit Agreement immediately prior to the effectiveness of the 1994
Credit Agreement and for working capital and general corporate
purposes.
Senior Subordinated Notes
On February 1, 1993, KACC issued $400.0 of 12-3/4% Senior Subordinated
Notes due 2003 (the "12-3/4% Notes"). The net proceeds from the sale
of the 12-3/4% Notes were used to retire the 14-1/4% Senior
Subordinated Notes due 1995 (the "14-1/4% Notes"), to prepay $18.0 of
the term loan, and to reduce outstanding borrowings under the
revolving credit facility of the 1989 Credit Agreement. These
transactions resulted in a pre-tax extraordinary loss of $33.0 in the
first quarter of 1993, consisting primarily of the write-off of
unamortized discount and deferred financing costs related to the
14-1/4% Notes and the payment of premiums on the 14-1/4% Notes.
The obligations of KACC with respect to the Senior Notes and the
12-3/4% Notes are guaranteed, jointly and severally, by certain
subsidiaries of KACC. The indentures governing the Senior Notes and
the 12-3/4% Notes restrict, among other things, KACC's ability, and
the 1994 Credit Agreement restricts, among other things, Kaiser's and
KACC's ability, to incur debt, undertake transactions with affiliates,
and pay dividends.
Gramercy Revenue Bonds
In December 1992, KACC entered into an installment sale agreement (the
"Sale Agreement") with the Parish of St. James, Louisiana (the
"Louisiana Parish"), pursuant to which the Louisiana Parish issued
$20.0 aggregate principal amount of its 7-3/4% Bonds due August 1,
2022 (the "Bonds") to finance the construction of certain solid waste
disposal facilities at KACC's Gramercy plant. The proceeds from the
sale of the Bonds were deposited into a construction fund and may be
withdrawn, from time to time, pursuant to the terms of the Sale
Agreement and the Bond indenture. At December 31, 1994, $6.4 remained
in the construction fund. The Sale Agreement requires KACC to make
payments to the Louisiana Parish in installments due on the dates and
in the amounts required to permit the Louisiana Parish to satisfy all
of its payment obligations under the Bonds.
Alpart CARIFA Loan
In December 1991, Alpart entered into a loan agreement with the
Caribbean Basin Projects Financing Authority ("CARIFA") under which
CARIFA loaned Alpart the proceeds from the issuance of CARIFA's
industrial revenue bonds. The terms of the loan parallel the bonds'
repayment terms. The $38.0 aggregate principal amount of Series A
bonds matures on June 1, 2008. The Series A bonds bear interest at a
floating rate of 87% of the applicable LIBID Rate (LIBOR less 1/8 of
1%) on $37.5 of the principal amount (5.2% at December 31, 1994) with
the remaining $.5 bearing interest at a fixed rate of 6.35%. The $22.0
aggregate principal amount of Series B bonds matures on June 1, 2007,
and bears interest at a fixed rate of 8.25%.
Proceeds from the sale of the bonds were used by Alpart to refinance
interim loans from the partners in Alpart, to pay eligible project
costs for the expansion and modernization of its alumina refinery and
related port and bauxite mining facilities, and to pay certain costs
of issuance. Under the terms of the loan agreement, Alpart must remain
a qualified recipient for Caribbean Basin Initiative funds as defined
in applicable laws. Alpart has agreed to indemnify bondholders of
CARIFA for certain tax payments that could result from events, as
defined, that adversely affect the tax treatment of the interest
income on the bonds. Alpart's obligations under the loan agreement are
secured by a $64.2 letter of credit guaranteed by the partners in
Alpart (of which $22.5 is guaranteed by the Company's minority partner
in Alpart).
37
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Capitalized Interest
Interest capitalized in 1994, 1993, and 1992 was $2.7, $3.4, and $4.4,
respectively.
Restricted Net Assets of Subsidiary
Certain debt instruments restrict the ability of KACC to transfer
assets, make loans and advances, and pay dividends to the Company. The
assets of KACC, which are substantially all of the Company's assets,
are restricted.
6. Income Taxes
----------------
Income (loss) before income taxes, minority interests, extraordinary
loss, and cumulative effect of changes in accounting principles by
geographic area is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1994 1993 1992
-------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $(168.4) $(232.0) $ (77.6)
Foreign 16.3 23.5 109.7
------- ------- -------
Total $(152.1) $(208.5) $ 32.1
======= ======= =======
</TABLE>
Income taxes are classified as either domestic or foreign, based on
whether payment is made or due to the United States or a foreign
country. Certain income classified as foreign is also subject to
domestic income taxes.
The credit (provision) for income taxes on income (loss) before income
taxes, minority interests, extraordinary loss, and cumulative effect
of changes in accounting principles consists of:
<TABLE>
<CAPTION>
Federal Foreign State Total
---------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 Current $(18.0) $(.1) $(18.1)
Deferred $71.2 .6 .1 71.9
----- ------ ---- ------
Total $71.2 $(17.4) $ 53.8
===== ====== ==== ======
1993 Current $12.6 $ (7.9) $(.1) $ 4.6
Deferred 68.5 12.0 1.8 82.3
----- ------ ---- ------
Total $81.1 $ 4.1 $1.7 $ 86.9
===== ====== ==== ======
1992 Current $(9.7) $(11.4) $(.1) $(21.2)
Deferred 13.1 3.3 (.5) 15.9
----- ------ ---- ------
Total $ 3.4 $ (8.1) $(.6) $ (5.3)
===== ====== ==== ======
</TABLE>
The 1994 federal deferred credit for income taxes of $71.2 includes
$29.3 for the benefit of operating loss carryforwards generated in
1994. The 1993 federal deferred credit for income taxes of $68.5
includes $29.2 for the benefit of operating loss carryforwards
generated in 1993 and a $3.4 benefit for increasing net deferred
income tax assets (liabilities) as of the date of enactment (August
10, 1993) of the Omnibus Budget Reconciliation Act of 1993, which
retroactively increased the federal statutory income tax rate from 34%
to 35% for periods beginning on or after January 1, 1993.
A reconciliation between the credit (provision) for income taxes and
the amount computed by applying the federal statutory income tax rate
to income (loss) before income taxes, minority interests,
extraordinary loss, and cumulative effect of changes in accounting
principles is as follows:
38
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1994 1993 1992
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount of federal income tax based on the statutory rate $53.2 $73.0 $(10.9)
Percentage depletion 5.6 6.4 6.3
Increase in net deferred income tax assets due to tax rate change 1.8 3.4
Revision of prior years' tax estimates and other changes in valuation allowances .2 3.9 2.9
Foreign taxes, net of federal tax benefit (5.3) (2.6) (.4)
Financial reporting/tax basis differences (3.0)
Other (1.7) 2.8 (.2)
----- ----- ------
Credit (provision) for income taxes $53.8 $86.9 $ (5.3)
===== ===== ======
</TABLE>
As shown in the Statements of Consolidated Income (Loss) for the years
ended December 31, 1994 and 1993, the Company reported extraordinary
losses related to the early extinguishment of debt. The Company
reported the 1994 extraordinary loss net of related deferred federal
income taxes of $2.9 and reported the 1993 extraordinary loss net of
related current federal income taxes of $11.2, which approximated the
federal statutory rate in effect on the dates the transactions
occurred.
The Company adopted SFAS 109 as of January 1, 1993, as discussed in
Note 1. The components of the Company's net deferred income tax assets
are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1994 1993
----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Postretirement benefits other than pensions $ 293.7 $ 285.4
Loss and credit carryforwards 187.6 142.6
Other liabilities 109.6 105.2
Pensions 51.0 60.6
Foreign and state deferred income tax liabilities 28.1 33.0
Property, plant, and equipment 23.1 23.1
Other 3.5 10.5
Valuation allowances (133.9) (133.5)
------- -------
Total deferred income tax assets - net 562.7 526.9
======= =======
Deferred income tax liabilities:
Property, plant, and equipment (203.2) (224.4)
Investments in and advances to unconsolidated affiliates (63.8) (60.6)
Inventories (8.3) (14.8)
Other (6.4) (20.3)
------- -------
Total deferred income tax liabilities (281.7) (320.1)
------- -------
Net deferred income tax assets $ 281.0 $ 206.8
======= =======
</TABLE>
The valuation allowances listed above relate primarily to loss and
credit carryforwards and postretirement benefits other than pensions.
As of December 31, 1994, approximately $125.1 of the net deferred
income tax assets listed above relate to the benefit of loss and
credit carryforwards, net of valuation allowances. The Company
evaluated all appropriate factors to determine the proper valuation
allowances for these carryforwards, including any limitations
concerning their use and the year the carryforwards expire, as well as
the levels of taxable income necessary for utilization. For example,
full valuation allowances were provided for certain credit
carryforwards that expire in the near term. With regard to future
levels of income, the Company believes, based on the cyclical nature
of its business, its history of prior operating earnings, and its
39
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
expectations for future years, that it will more likely than not
generate sufficient taxable income to realize the benefit attributable
to the loss and credit carryforwards for which valuation allowances
were not provided. The remaining portion of the Company's net deferred
income tax assets at December 31, 1994, is approximately $155.9. A
principal component of this amount is the tax benefit associated with
the accrual for postretirement benefits other than pensions. The
future tax deductions with respect to the turnaround of this accrual
will occur over a 30- to 40-year period. If such deductions create or
increase a net operating loss in any one year, the Company has the
ability to carry forward such loss for 15 taxable years. For these
reasons, the Company believes a long-term view of profitability is
appropriate and has concluded that this net deferred income tax asset
will more likely than not be realized despite the operating losses
incurred in recent years.
Certain of the deferred income tax assets and liabilities listed above
are included on the Consolidated Balance Sheet in the captions
entitled Receivables, Prepaid expenses and other current assets, Other
accrued liabilities, and Long-term liabilities.
The Company and its subsidiaries were included in the consolidated
federal income tax returns of MAXXAM for the period from October 28,
1988, through June 30, 1993. As a consequence of the issuance of the
Depositary Shares on June 30, 1993, as discussed in Note 8, the
Company and its subsidiaries are no longer included in the
consolidated federal income tax returns of MAXXAM. The Company and its
subsidiaries have become members of a new consolidated return group of
which the Company is the common parent corporation (the "New Kaiser
Tax Group"). The New Kaiser Tax Group files consolidated federal
income tax returns for taxable periods beginning on or after July 1,
1993.
The tax allocation agreement between the Company and MAXXAM (the
"Company Tax Allocation Agreement") and the tax allocation agreement
between KACC and MAXXAM (the "KACC Tax Allocation Agreement")
(collectively, the "Tax Allocation Agreements"), terminated pursuant
to their terms, effective for taxable periods beginning after June 30,
1993. Any unused federal income tax attribute carryforwards under the
terms of the Tax Allocation Agreements were eliminated and are not
available to offset federal income tax liabilities for taxable periods
beginning on or after July 1, 1993. Upon the filing of MAXXAM's 1993
consolidated federal income tax return, the tax attribute
carryforwards of the MAXXAM consolidated return group as of
December 31, 1993, were apportioned in part to the New Kaiser Tax
Group, based on the provisions of the relevant consolidated return
regulations. The benefit of such tax attribute carryforwards
apportioned to the New Kaiser Tax Group approximated the benefit of
tax attribute carryforwards eliminated under the Tax Allocation
Agreements. To the extent the New Kaiser Tax Group generates unused
tax losses or tax credits for periods beginning on or after July 1,
1993, such amounts will not be available to obtain refunds of amounts
paid by the Company or KACC to MAXXAM for periods ending on or before
June 30, 1993, pursuant to the Tax Allocation Agreements.
KACC and MAXXAM entered into the KACC Tax Allocation Agreement, which
became effective as of October 28, 1988. Under the terms of the KACC
Tax Allocation Agreement, MAXXAM computed the federal income tax
liability for KACC and its subsidiaries (collectively, the "Subgroup")
as if the Subgroup were a separate affiliated group of corporations
which was never connected with MAXXAM. During 1991, the Company and
MAXXAM entered into the Company Tax Allocation Agreement, which became
effective as of January 1, 1991. Under the terms of the Company Tax
Allocation Agreement, MAXXAM computed a tentative federal income tax
liability for the Company as if it and its subsidiaries, including
KACC and its subsidiaries, were a separate affiliated group of
corporations which was never connected with MAXXAM. The federal income
tax liability of the Company was the difference between the tentative
federal income tax liability and the liability computed under the KACC
Tax Allocation Agreement.
The provisions of the Tax Allocation Agreements will continue to
govern for periods ended prior to July 1, 1993. Therefore, payments or
refunds may still be required by or payable to the Company or KACC
under the terms of their respective tax allocation agreements for
these periods due to the final resolution of audits, amended returns,
and related matters. However, the 1994 Credit Agreement prohibits the
payment by KACC to MAXXAM of any amounts due under the KACC Tax
40
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Allocation Agreement, except for certain payments that are required as
a result of audits and only to the extent of any amounts paid after
February 17, 1994, by MAXXAM to KACC under the KACC Tax Allocation
Agreement.
The following table presents the Company's tax attributes for federal
income tax purposes as of December 31, 1994. The utilization of
certain of these tax attributes is subject to limitations:
<TABLE>
<CAPTION>
Expiring
Through
---------------------------------------------------------------------------
<S> <C> <C>
Regular tax attribute carryforwards:
Current year net operating loss $ 83.7 2009
Prior year net operating losses 135.4 2008
General business tax credits 37.4 2006
Foreign tax credits 42.2 1999
Alternative minimum tax credits 15.3 Indefinite
Alternative minimum tax attribute carryforwards:
Current year net operating loss $ 64.3 2009
Prior year net operating losses 84.4 2008
Foreign tax credits 33.8 1999
</TABLE>
7. Employee Benefit and Incentive Plans
----------------------------------------
Retirement Plans
Retirement plans are non-contributory for salaried and hourly
employees and generally provide for benefits based on a formula which
considers length of service and earnings during years of service. The
Company's funding policies meet or exceed all regulatory requirements.
The funded status of the employee pension benefit plans and the
corresponding amounts that are included in the Company's Consolidated
Balance Sheets are as follows:
<TABLE>
<CAPTION>
Plans with Accumulated
Benefits Exceeding Assets<F1>
December 31,
1994 1993
-----------------------------------------------------------------------------------------------------------------------
<S>
Accumulated benefit obligation: <C> <C>
Vested employees $(663.9) $(705.0)
Nonvested employees (41.1) (40.1)
------- -------
Accumulated benefit obligation (705.0) (745.1)
Additional amounts related to projected salary increases (30.0) (45.5)
------- -------
Projected benefit obligation (735.0) (790.6)
Plan assets (principally common stocks and fixed income obligations) at fair value 524.6 569.8
------- -------
Plan assets less than projected benefit obligation (210.4) (220.8)
Unrecognized net losses 42.5 75.7
Unrecognized net obligations .8 1.6
Unrecognized prior-service cost 30.9 16.9
Adjustment required to recognize minimum liability (42.9) (47.7)
------- -------
Accrued pension obligation included in the
Consolidated Balance Sheets (principally in long-term liabilities) $(179.1) $(174.3)
======= =======
<FN>
<F1>
Includes plans with assets exceeding accumulated benefits by
approximately $.3 and $.1 in 1994 and 1993, respectively.
</FN>
</TABLE>
41
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
As required by Statement of Financial Accounting Standards No. 87,
Employers' Accounting for Pensions, the Company recorded an after-tax
credit (charge) to equity of $12.5 and $(14.9) at December 31, 1994
and 1993, respectively, for the reduction (excess) of the minimum
liability over the unrecognized net obligation and prior-service cost.
These amounts were recorded net of the related income tax (provision)
credit of $(7.3) and $8.7 as of December 31, 1994 and 1993,
respectively, which approximated the federal and state statutory
rates.
The components of net periodic pension cost are:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1994 1993 1992
------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 11.2 $ 10.8 $ 11.0
Interest cost on projected benefit obligation 57.3 59.2 58.8
Return on assets:
Actual gain (.8) (70.3) (26.3)
Deferred gain (loss) (53.0) 15.9 (31.2)
Net amortization and deferral 4.1 2.3 2.1
------ ------ ------
Net periodic pension cost $ 18.8 $ 17.9 $ 14.4
====== ====== ======
</TABLE>
Assumptions used to value obligations at year-end, and to determine
the net periodic pension cost in the subsequent year are:
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 8.50% 7.50% 8.25%
Expected long-term rate of return on assets 9.50% 10.00% 10.00%
Rate of increase in compensation levels 5.00% 5.00% 5.00%
</TABLE>
Postretirement Benefits Other Than Pensions
Kaiser adopted SFAS 106 to account for postretirement benefits other
than pensions effective January 1, 1993 (see Note 1). The Company and
its subsidiaries provide postretirement health care and life insurance
benefits to eligible retired employees and their dependents.
Substantially all employees may become eligible for those benefits if
they reach retirement age while still working for the Company or its
subsidiaries. These benefits are provided through contracts with
various insurance carriers. The Company has not funded the liability
for these benefits.
The Company's accrued postretirement benefit obligation is composed of
the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1994 1993
----------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(566.2) $(629.3)
Active employees eligible for postretirement benefits (30.2) (35.1)
Active employees not eligible for postretirement benefits (98.7) (128.3)
------- -------
Accumulated postretirement benefit obligation (695.1) (792.7)
Unrecognized net (gains) losses (55.0) 67.0
Unrecognized prior-service costs (31.8) (35.0)
------- -------
Accrued postretirement benefit obligation $(781.9) $(760.7)
======= =======
</TABLE>
42
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
The components of net periodic postretirement benefit cost are:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------
1994 1993
------------------------------------------------------------------
<S> <C> <C>
Service cost $ 8.2 $ 7.1
Interest cost 56.9 58.5
Amortization of prior service cost (3.2)
----- -----
Net periodic postretirement benefit cost $61.9 $65.6
===== =====
</TABLE>
The 1995 annual assumed rates of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) are 9.5% and
8.0% for retirees under 65 and over 65, respectively, and are assumed
to decrease gradually to 5.5% in 2007 and remain at that level
thereafter. The health care cost trend rate has a significant effect
on the amounts reported. A one percentage point increase in the
assumed health care cost trend rate would increase the accumulated
postretirement benefit obligation as of December 31, 1994, by
approximately $79.8 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1994 by
approximately $9.5. The weighted average discount rate used to
determine the accumulated postretirement benefit obligation at
December 31, 1994 and 1993, was 8.5% and 7.5%, respectively.
Postemployment Benefits
Kaiser adopted the new accounting standard on postemployment benefits
effective January 1, 1993 (see Note 1). The Company provides certain
benefits to former or inactive employees after employment but before
retirement.
Incentive Plans
Effective January 1, 1989, the Company and KACC adopted an unfunded
Long-Term Incentive Plan (the "LTIP") for certain key employees of the
Company, KACC, and their consolidated subsidiaries. All compensation
vested as of December 31, 1992, under the LTIP, as amended in 1991 and
1992, has been paid to the participants in cash or common stock of the
Company as of December 31, 1993. Under the LTIP, as amended, 764,092
restricted shares were distributed to six Company executives during
1993 for benefits generally earned but not vested as of December 31,
1992. These shares generally will vest at the rate of 25% per year.
The Company will record the related expense of $6.5 over the four-year
period ending December 31, 1996. In 1993, the Company adopted the
Kaiser 1993 Omnibus Stock Incentive Plan. A total of 2,500,000 shares
of Kaiser common stock were reserved for awards or for payment of
rights granted under the Plan, of which 504,044 shares were available
to be awarded at December 31, 1994. Under the Kaiser 1993 Omnibus
Stock Incentive Plan, 102,564 restricted shares were distributed to
two Company executives during 1994, which will vest at the rate of 25%
per year. The Company will record the related expense of $1.0 over the
four-year period ending December 31, 1998.
In 1993 and 1994, the Compensation Committee of the Board of Directors
approved the award of "nonqualified stock options" to members of
management other than those participating in the LTIP. These options
generally will vest at the rate of 20-25% per year. Information
relating to nonqualified stock options is shown below:
<TABLE>
<CAPTION>
1994 1993
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at beginning of year 664,400
Granted 494,800 664,400
Exercised (at $7.25 per share) (6,920)
Expired or forfeited (29,900)
--------- -------
Outstanding at end of year (prices ranging from $7.25 to $12.75 per share) 1,122,380 664,400
========= =======
Exercisable at end of year 119,980
=========
</TABLE>
43
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Effective January 1, 1990, KACC adopted an unfunded Middle Management
Long-Term Incentive Plan. KACC also has a supplemental savings and
retirement plan for salaried employees, under which the participants
contribute a percentage of their base salaries.
The Company's expense for the above plans was $6.1, $5.3, and $6.6 for
the years ended December 31, 1994, 1993, and 1992, respectively.
8. Stockholders' Equity and Minority Interests
-----------------------------------------------
Changes in stockholders' equity and minority interests were:
<TABLE>
<CAPTION>
Minority Interests Stockholders' Equity
------------------ ------------------------------------------------
Retained
Earnings Additional
Redeemable (Accu- Minimum
Preference Preferred Common Additional mulated Pension
Stock Other Stock Stock Capital Deficit) Liability
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1992 $34.8 $74.1 $ .6 $287.9 $ 267.3
Net income 26.9
Redeemable preference stock:
Accretion 5.1
Stock redemption (7.1)
Dividends on common stock (11.4)
Conversions (2,405 preference shares into cash) (.2)
Common stock issued .6
Minority interest in majority-owned subsidiaries (1.8)
Additional minimum pension liability $(6.7)
----- ----- ----- ------ ------- -----
BALANCE, DECEMBER 31, 1992 32.8 72.1 .6 288.5 282.8 (6.7)
Net loss (652.2)
Redeemable preference stock:
Accretion 4.8
Stock redemption (4.0)
Conversions (1,967 preference shares into cash) (.2)
Common stock issued 3.3
Preferred stock issued $ .2 134.1
Dividends on preferred stock (6.3)
Minority interest in majority-owned subsidiaries (.5)
Additional minimum pension liability (14.9)
----- ----- ----- ----- ------ ------- ------
BALANCE, DECEMBER 31, 1993 33.6 71.4 .2 .6 425.9 (375.7) (21.6)
Net loss (106.8)
Redeemable preference stock:
Accretion 4.0
Stock redemption (8.5)
Common stock issued 2.2
Preferred stock issued .4 99.7
Dividends on preferred stock (20.1)
Minority interest in majority-owned subsidiaries 15.7
Reduction of minimum pension liability 12.5
----- ----- ----- ----- ------ ------ ------
BALANCE, DECEMBER 31, 1994 $29.1 $87.1 $ .6 $ .6 $527.8 $(502.6) $ (9.1)
===== ===== ===== ===== ====== ======= ======
</TABLE>
44
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Redeemable Preference Stock
In March 1985, KACC entered into a three-year agreement with the
United Steelworkers of America (USWA) whereby shares of a new series
of "Cumulative (1985 Series A) Preference Stock" would be issued to an
employee stock ownership plan in exchange for certain elements of
wages and benefits. Concurrently, a similar plan was established for
certain nonbargaining employees which provided for the issuance of
"Cumulative (1985 Series B) Preference Stock." Series A Stock and
Series B Stock ("Series A and B Stock") each have a par value of $1
per share and a liquidation and redemption value of $50 per share plus
accrued dividends, if any.
For financial reporting purposes, Series A and B Stock were recorded
at fair market value when issued, based on independent appraisals,
with a corresponding charge to compensation cost. Carrying values have
been increased each year to recognize accretion of redemption values
and, in certain years, there have been other increases for reasons
described below. Changes in Series A and B Stock are shown below.
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------------------
<S> <C> <C> <C>
Shares:
Beginning of year 1,081,548 1,163,221 1,305,550
Redeemed (169,381) (81,673) (142,329)
--------- --------- ---------
End of year 912,167 1,081,548 1,163,221
========= ========= =========
</TABLE>
No additional Series A or B Stock will be issued based on compensation
earned in 1992 or subsequent years. While held by the plan trustee,
Series B Stock is entitled to cumulative annual dividends, when and as
declared by the Board of Directors, payable in stock or in cash at the
option of KACC on or after March 1, 1991, in respect to years
commencing January 1, 1990, based on a formula tied to KACC's income
before tax from aluminum operations. When distributed to plan
participants (generally upon separation from KACC), the Series A and B
Stocks are entitled to an annual cash dividend of $5 per share,
payable quarterly, when and as declared by the Board of Directors.
Redemption fund agreements require KACC to make annual payments by
March 31 each year based on a formula tied to consolidated net income
until the redemption funds are sufficient to redeem all Series A and B
Stock. On an annual basis, the minimum payment is $4.3 and the maximum
payment is $7.3. In March 1993 and 1994, KACC contributed $4.3 for
each of the years 1992 and 1993, and will contribute $4.3 in March
1995 for 1994.
Under the USWA labor contract effective November 1, 1990, KACC was
obligated to offer to purchase up to 80 shares of Series A Stock from
each active participant in 1991 at a price equal to its redemption
value of $50 per share. KACC also agreed to offer to purchase up to an
additional 40 shares from each participant in 1994. The employees
could elect to receive their shares, accept cash, or place the
proceeds into KACC's 401(k) savings plan. Under separate action, KACC
also offered to purchase 80 shares of Series B Stock from active
participants in 1991 and 40 shares in 1994. Under the provisions of
these contracts, in February 1994, KACC purchased $4.6 and $.8 of the
Series A and B Stock, respectively.
Under the USWA labor contract effective November 1, 1994, KACC is
obligated to offer to purchase up to 40 shares of Series A Stock from
each active participant in 1995 at a price equal to its redemption
value of $50 per share. KACC also agreed to offer to purchase up to an
additional 80 shares from each participant in 1998. In addition, if a
profitability test is satisfied for either 1995 or 1996, KACC will
offer to purchase from each active participant an additional 20 shares
of such preference stock held in the stock ownership plan for the
benefit of substantially the same employees in either 1996 or 1997.
The employees could elect to receive their shares, accept cash, or
place the proceeds into KACC's 401(k) savings plan. KACC will provide
comparable purchases of Series B Stock from active participants.
45
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
The Series A and B Stock is distributed in the event of death,
retirement, or in other specified circumstances. KACC also may redeem
such stock at $50 per share plus accrued dividends, if any. At the
option of the plan participant, the trustee shall redeem stock
distributed from the plans at redemption value to the extent funds are
available in the redemption fund. Under the Tax Reform Act of 1986, at
the option of the plan participant, KACC must purchase distributed
shares earned after December 31, 1985, at redemption value on a five-
year installment basis, with interest at market rates. The obligation
of KACC to make such installment payments must be secured.
The Series A and B Stock is entitled to the same voting rights as KACC
common stock and to certain additional voting rights under certain
circumstances, including the right to elect, along with other KACC
preference stockholders, two directors whenever accrued dividends have
not been paid on two annual dividend payment dates or when accrued
dividends in an amount equivalent to six full quarterly dividends are
in arrears. The Series A and B Stock restricts the ability of KACC to
redeem or pay dividends on common stock if KACC is in default on any
dividends payable on the Series A and B Stock.
Preference Stock
KACC Cumulative Convertible Preference Stock, $100 par value ("$100
Preference Stock"), restricts acquisition of junior stock and payment
of dividends. At December 31, 1994, such provisions were less
restrictive as to the payment of cash dividends than the 1994 Credit
Agreement provisions. KACC has the option to redeem the $100
Preference Stocks at par value plus accrued dividends. KACC does not
intend to issue any additional shares of the $100 Preference Stocks.
The 4-1/8% and 4-3/4% (1957 Series, 1959 Series, and 1966 Series) $100
Preference Stock can be exchanged for per share cash amounts of
$69.30, $77.84, $78.38, and $76.46, respectively. KACC records the
$100 Preference Stock at their exchange amounts for financial
statement presentation and the Company includes such amounts in
minority interests. The outstanding shares of KACC preference stock
were:
<TABLE>
<CAPTION>
December 31,
--------------
1994 1993
----------------------------------------------------------------
<S> <C> <C>
4-1/8% 3,657 3,921
4-3/4% (1957 Series) 2,605 2,623
4-3/4% (1959 Series) 13,534 13,605
4-3/4% (1966 Series) 3,640 3,890
</TABLE>
Preferred Stock
Series A Convertible - On June 30, 1993, Kaiser issued 17,250,000 of
its $.65 Depositary Shares (the "Depositary Shares"), each
representing one-tenth of a share of Series A Mandatory Conversion
Premium Dividend Preferred Stock (the "Series A Shares"). In
connection with the issuance of the Depositary Shares, MAXXAM Group
Inc. ("MGI"), a wholly owned subsidiary of MAXXAM, exchanged a $15.0
promissory note of KACC (the "MAXXAM Note") for an additional
2,132,950 Depositary Shares. On August 4, 1993, MGI transferred the
2,132,950 Depositary Shares to MAXXAM in exchange for satisfaction of
a $15.0 promissory note evidencing a cash loan made to MGI by MAXXAM
in January 1993. MAXXAM sold 1,239,400 of the Depositary Shares
during 1994.
The net cash proceeds from the sale of Depositary Shares were
approximately $119.3. Kaiser used $37.8 of such net proceeds to make a
non-interest-bearing loan to KACC evidenced by an intercompany note,
which matures on June 29, 1996, and is payable in quarterly
installments. The intercompany note is designed to provide sufficient
funds to Kaiser to enable it to make dividend payments on the Series A
Shares until June 30, 1996, the date on which the outstanding Series A
Shares are mandatorily converted into shares of the Company's common
stock. Kaiser used $81.5 of such net proceeds and the MAXXAM Note to
make a capital contribution to KACC. KACC used $13.7 of the funds it
received from Kaiser to prepay the remaining balance of the term loan
46
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
under the 1989 Credit Agreement and $105.6 of such funds to reduce
outstanding borrowings under the revolving credit facility of the 1989
Credit Agreement.
The owners of Depositary Shares are entitled to receive (when, as, and
if the Board of Directors declares dividends on the Series A Shares)
cumulative preferential cash dividends from the date of issue,
accruing at the rate of $.65 per annum for each of the Depositary
Shares, payable quarterly in arrears on the last day of each March,
June, September, and December, commencing September 30, 1993. Holders
of Depositary Shares (based on the voting rights of the Series A
Shares) have one vote for each Depositary Share held of record, except
as required by law, and are entitled to vote with the holders of
common stock on all matters submitted to a vote of common
stockholders.
On June 30, 1996, each of the outstanding Depositary Shares
automatically will convert (upon the automatic conversion of the
Series A Shares) into one share of common stock, plus the right to
receive an amount in cash equal to the accrued and unpaid dividends
payable with respect to such Depositary Share. Automatic conversion of
the outstanding Depositary Shares (and the Series A Shares) will occur
upon certain mergers or consolidations of the Company (as defined). At
any time or from time to time prior to June 30, 1996, the Company may
call the outstanding Depositary Shares (by calling the Series A
Shares) for redemption, in whole or in part, at a call price per
Depositary Share initially equal to $12.46, declining by $.0018 on
each day following the date of issue to $10.624 on April 30, 1996, and
equal to $10.51 thereafter, payable in shares of common stock having
an aggregate Current Market Price (as defined) equal to the applicable
call price, plus an amount in cash equal to all accrued and unpaid
dividends payable with respect to such Depositary Share.
PRIDES Convertible - In the first quarter of 1994, the Company
consummated the public offering of 8,855,550 shares of the PRIDES. The
net proceeds from the sale of the shares of PRIDES were approximately
$100.1. The Company used such net proceeds to make non-interest-
bearing loans to KACC in the aggregate principal amount of $33.2 (the
aggregate dividends scheduled to accrue on the shares of PRIDES from
the issuance date until December 31, 1997, the date on which the
outstanding PRIDES will be mandatorily converted into shares of the
Company's common stock), evidenced by intercompany notes, and used the
balance of such net proceeds to make capital contributions to KACC in
the aggregate amount of $66.9.
Holders of shares of PRIDES are entitled to receive (when, as, and if
the Board of Directors declares dividends on the PRIDES) cumulative
preferential cash dividends at a rate per annum of 8.255% of the per
share offering price (equivalent to $.97 per annum for each share of
PRIDES), from the date of initial issuance, payable quarterly in
arrears on the last day of March, June, September, and December of
each year. Holders of shares of PRIDES have a 4/5 vote for each share
held of record and, except as required by law, are entitled to vote
together with the holders of common stock and together with the
holders of any other classes or series of stock (including the Series
A Shares) who are entitled to vote in such manner on all matters
submitted to a vote of common stockholders.
On December 31, 1997, unless either previously redeemed or converted
at the option of the holder, each of the outstanding shares of PRIDES
will mandatorily convert into one share of the Company's common stock,
subject to adjustment in certain events, and the right to receive an
amount in cash equal to all accrued and unpaid dividends thereon
(other than previously declared dividends payable to a holder of
record on a prior date).
Shares of PRIDES are not redeemable prior to December 31, 1996. At any
time and from time to time on or after December 31, 1996, the Company
may redeem any or all of the outstanding shares of PRIDES. Upon any
such redemption, each holder will receive, in exchange for each share
of PRIDES, the number of shares of common stock equal to (A) the sum
of $11.9925, declining after December 31, 1996, to $11.75 until
December 31, 1997, plus, in the event the Company does not elect to
pay cash dividends to the redemption date, all accrued and unpaid
dividends thereon divided by (B) the Current Market Price (as defined)
47
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
on the applicable date of determination, but in no event less than
.8333 of a share of common stock, subject to adjustment in certain
events. At any time prior to December 31, 1997, unless previously
redeemed, each share of PRIDES is convertible at the option of the
holder thereof into .8333 of a share of common stock (equivalent to a
conversion price of $14.10 per share of common stock), subject to
adjustment in certain events. The number of shares of common stock a
holder will receive upon redemption, and the value of the shares
received upon conversion, will vary depending on the market price of
the common stock from time to time.
Dividends on Common Stock
The Company paid cash dividends on common stock of $2.9 in each
quarter of 1992. As required under the 1989 Credit Agreement, on
December 15, 1992, KACC issued a Pay-in-Kind Note (the "PIK Note") to
MGI in the principal amount of $2.5, representing the entire amount of
the dividend received by MGI in respect of the shares of the Company's
common stock which it owned. The PIK Note bears interest, compounded
semiannually, at a rate equal to 12% per annum, and is due and
payable, together with accrued interest thereon, on June 30, 1995.
The indentures governing the Senior Notes and the 12-3/4% Notes
restrict, among other things, KACC's ability, and the 1994 Credit
Agreement restricts, among other things, Kaiser's and KACC's ability,
to incur debt, undertake transactions with affiliates, and pay
dividends. Under the most restrictive of these covenants, neither the
Company nor KACC currently is permitted to pay dividends on its common
stock.
At December 31, 1994, 28,000,000 shares of the Company's common stock
owned by MAXXAM were pledged as security for debt issued by MGI,
consisting of $100.0 aggregate principal amount of 11-1/4% Senior
Secured Notes due 2003 and $126.7 aggregate principal amount of
12-1/4% Senior Secured Discount Notes due 2003.
9. Commitments and Contingencies
---------------------------------
Commitments
KACC has financial commitments, including purchase agreements, tolling
arrangements, forward foreign exchange and forward sales contracts
(see Note 10), letters of credit, and guarantees. Such purchase
agreements and tolling arrangements include long-term agreements for
the purchase and tolling of bauxite into alumina in Australia by QAL.
These obligations expire in 2008. Under the agreements, KACC is
unconditionally obligated to pay its proportional share of debt,
operating costs, and certain other costs of QAL. The aggregate minimum
amount of required future principal payments at December 31, 1994, is
$78.7, due in 1997. The KACC share of payments, including operating
costs and certain other expenses under the agreement, was $85.6,
$86.7, and $99.2 for the years ended December 31, 1994, 1993, and
1992, respectively. KACC also has agreements to supply alumina to and
to purchase aluminum from Anglesey.
Minimum rental commitments under operating leases at December 31,
1994, are as follows: years ending December 31, 1995 - $22.1; 1996 -
$21.5; 1997 - $21.0; 1998 - $24.1; 1999 - $30.4; thereafter - $213.9.
The future minimum rentals receivable under noncancelable subleases
was $73.2 at December 31, 1994.
Rental expenses were $26.8, $29.0, and $26.2 for the years ended
December 31, 1994, 1993, and 1992, respectively.
Environmental Contingencies
The Company and KACC are subject to a wide variety of environmental
laws and regulations and to fines or penalties assessed for alleged
breaches of the environmental laws and to claims and litigation based
upon such laws. KACC currently is subject to a number of lawsuits
under the Comprehensive Environmental Response, Compensation and
48
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Liability Act of 1980, as amended by the Superfund Amendments
Reauthorization Act of 1986 ("CERCLA"), and, along with certain other
entities, has been named as a potentially responsible party for
remedial costs at certain third-party sites listed on the National
Priorities List under CERCLA.
Based on the Company's evaluation of these and other environmental
matters, the Company has established environmental accruals primarily
related to potential solid waste disposal and soil and groundwater
remediation matters. The following table presents the changes in such
accruals, which are primarily included in Long-term liabilities, for
the years ended December 31, 1994, 1993, and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $40.9 $46.4 $51.5
Additional amounts 2.8 1.7 4.5
Less expenditures (3.6) (7.2) (9.6)
----- ----- -----
Balance at end of period $40.1 $40.9 $46.4
===== ===== =====
</TABLE>
These environmental accruals represent the Company's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology, and the
Company's assessment of the likely remediation action to be taken. The
Company expects that these remediation actions will be taken over the
next several years and estimates that annual expenditures to be
charged to these environmental accruals will be approximately $3.0 to
$11.0 for the years 1995 through 1999 and an aggregate of
approximately $11.0 thereafter.
As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are
established, or alternative technologies are developed, changes in
these and other factors may result in actual costs exceeding the
current environmental accruals. The Company believes that it is
reasonably possible that costs associated with these environmental
matters may exceed current accruals by amounts that could range, in
the aggregate, up to approximately $20.0. While uncertainties are
inherent in the final outcome of these environmental matters, and it
is presently impossible to determine the actual costs that ultimately
may be incurred, management currently believes that the resolution of
such uncertainties should not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Asbestos Contingencies
KACC is a defendant in a number of lawsuits in which the plaintiffs
allege that certain of their injuries were caused by exposure to
asbestos during, and as a result of, their employment or association
with KACC or exposure to products containing asbestos produced or sold
by KACC. The lawsuits generally relate to products KACC has not
manufactured for at least 15 years. At December 31, 1994, the number
of such lawsuits pending was approximately 25,200 with approximately
14,300 received and 12,500 settled or dismissed in 1994.
Based on prior experience, KACC estimates that annual future cash
payments in connection with such litigation will be approximately
$11.0 to $14.0 for the years 1995 through 1999, and an aggregate of
approximately $95.0 thereafter through 2007. Based on past experience
and reasonably anticipated future activity, the Company has
established an accrual for estimated asbestos-related costs for claims
filed and estimated to be filed and settled through 2007. The Company
does not presently believe there is a reasonable basis for estimating
such costs beyond 2007 and, accordingly, no accrual has been recorded
for such costs which may be incurred. This accrual was calculated
based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, the
current state of case law related to asbestos claims, the advice of
counsel, and the anticipated effects of inflation and discounting at
49
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
an estimated risk-free rate (8% at December 31, 1994). Accordingly, an
asbestos-related cost accrual of $102.0 is included primarily in
Long-term liabilities at December 31, 1994. The aggregate amount of
the undiscounted liability at December 31, 1994 is $158.1, before
considerations for insurance recoveries.
The Company believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs. While
claims for recovery from some of KACC's insurance carriers are
currently subject to pending litigation and other carriers have raised
certain defenses, the Company believes, based on prior insurance-
related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of counsel, that substantial
recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $86.4, determined on the
same basis as the asbestos-related cost accrual, is recorded primarily
in Other assets at December 31, 1994.
While uncertainties are inherent in the final outcome of these
asbestos matters and it is presently impossible to determine the
actual costs that ultimately may be incurred and the insurance
recoveries that will be received, management currently believes that,
based on the factors discussed in the preceding paragraphs, the
resolution of the asbestos-related uncertainties and the incurrence of
asbestos-related costs net of related insurance recoveries should not
have a material adverse effect on the Company's consolidated financial
position or results of operations.
Other Contingencies
The Company or KACC is involved in various other claims, lawsuits, and
other proceedings relating to a wide variety of matters. While
uncertainties are inherent in the final outcome of such matters, and
it is presently impossible to determine the actual costs that
ultimately may be incurred, management currently believes that the
resolution of such uncertainties and the incurrence of such costs
should not have a material adverse effect on the Company's
consolidated financial position or results of operations.
10. Derivative Financial Instruments and Related Hedging Programs
------------------------------------------------------------------
KACC enters into a number of financial instruments with
off-balance-sheet risk in the normal course of business that are
designed to reduce its exposure to fluctuations in foreign exchange
rates, alumina, primary aluminum, and fabricated aluminum products
prices, and the cost of purchased commodities.
KACC has significant expenditures which are denominated in foreign
currencies related to long-term purchase commitments with its
affiliates in Australia and the United Kingdom, which expose KACC to
certain exchange rate risks. In order to mitigate its exposure, KACC
periodically enters into forward foreign exchange and currency option
contracts in Australian dollars and Pounds Sterling to hedge these
commitments. The forward foreign currency exchange contracts are
agreements to purchase or sell a foreign currency, for a price
specified at the contract date, with delivery and settlement in the
future. At December 31, 1994, KACC had net forward foreign exchange
contracts totaling approximately $74.4 for the purchase of 102.0
Australian dollars through December 31, 1996.
To mitigate its exposure to declines in the market prices of alumina,
primary aluminum, and fabricated aluminum products, while retaining
the ability to participate in favorable pricing environments that may
materialize, KACC has developed strategies which include forward sales
of primary aluminum at fixed prices and the purchase or sale of
options for primary aluminum. Under the principal components of KACC's
price risk management strategy, which can be modified at any time, (i)
varying quantities of KACC's anticipated production are sold forward
at fixed prices; (ii) call options are purchased to allow KACC to
participate in certain higher market prices, should they materialize,
for a portion of KACC's primary aluminum and alumina sold forward;
(iii) option contracts are entered into to establish a price range
50
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
KACC will receive for a portion of its primary aluminum and alumina;
and (iv) put options are purchased to establish minimum prices KACC
will receive for a portion of its primary aluminum and alumina. In
this regard, in respect of its 1995 anticipated production, as of
December 31, 1994, KACC had sold forward 170,950 metric tons of
primary aluminum at fixed prices, purchased call options in respect of
69,000 metric tons of primary aluminum, purchased put options to
establish a minimum price for 193,500 metric tons of primary aluminum,
and entered into option contracts that established a price range for
90,000 metric tons of primary aluminum. KACC will not receive the
benefit of market price increases to the extent (i) the quantity of
production sold forward is greater than the tonnage covered by the
purchased call options; (ii) market prices exceed the prices at which
primary aluminum is sold forward, but are less than the strike price
of the purchased call options, on the tonnage covered by the options;
or (iii) market prices exceed the maximum of the price range on the
tonnage covered by the option contracts entered to establish a price
range.
In addition, KACC enters into forward fixed price arrangements with
certain customers which provide for the delivery of a specific
quantity of fabricated aluminum products over a specified future
period of time. In order to establish the cost of primary aluminum for
a portion of such sales, KACC may enter into forward and option
contracts. In this regard, at December 31, 1994, KACC had purchased
4,500 metric tons of primary aluminum under forward purchase contracts
at fixed prices that expire at various times through June 1995.
KACC has also entered into a natural gas pricing contract to fix
future prices of a portion (20,000 million BTUs per day) of a plant's
natural gas supply through March 1995.
At December 31, 1994, the net unrealized gain on KACC's position in
forward foreign exchange was $3.5 and the net unrealized loss on
aluminum forward sales and option contracts and the natural gas
pricing contract was $80.4, based on a price of $1,955 per metric ton
of aluminum and $1.59 per million BTUs of natural gas.
The Company has established margin accounts with its counterparties
related to aluminum forward sales and option contracts. The Company is
entitled to receive advances from counterparties related to unrealized
gains and, in turn, is required to make margin deposits with
counterparties to cover unrealized losses related to these contracts.
At December 31, 1994, the Company had $50.5 on deposit with various
counterparties in respect of such unrealized losses. This amount is
recorded in Prepaid expenses and other current assets.
KACC is exposed to credit risk in the event of non-performance by
other parties to these currency and commodity contracts, but KACC does
not anticipate non-performance by any of these counterparties, given
their credit worthiness. When appropriate, KACC arranges master
netting agreements.
51
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
11. Segment and Geographical Area Information
Sales and transfers among geographic areas are made on a basis
intended to reflect the market value of products.
The aggregate foreign currency gain included in determining net income
was $.8, $4.9, and $12.0 for the years ended December 31, 1994, 1993,
and 1992, respectively.
Sales of more than 10% of total revenue to a single customer were
$58.2, $40.7, and $135.3 of bauxite and alumina and $147.7, $145.7,
and $144.9 of aluminum processing for the years ended December 31,
1994, 1993, and 1992.
Export sales were less than 10% of total revenue during the years
ended December 31, 1994, 1993, and 1992, respectively.
Geographical area information relative to operations is summarized as
follows:
<TABLE>
<CAPTION>
Year Ended Other
December 31, Domestic Caribbean Africa Foreign Eliminations Total
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers 1994 $1,263.2 $169.9 $180.0 $168.4 $1,781.5
1993 1,177.8 155.4 207.5 178.4 1,719.1
1992 1,285.0 170.1 263.5 190.5 1,909.1
Sales and transfers among 1994 $ 98.7 $139.4 $(238.1)
geographic areas 1993 88.2 79.6 (167.8)
1992 90.1 86.5 (176.6)
Equity in income (losses) of 1994 $ .2 $ (2.1) $ (1.9)
unconsolidated affiliates 1993 (3.3) (3.3)
1992 (1.9) (1.9)
Operating income (loss) 1994 $ (128.8) $ 9.9 $ 18.3 $ 44.4 $ (56.2)
1993 (145.9) (11.8) 21.9 12.4 (123.4)
1992 (36.9) 26.5 65.4 34.9 89.9
Investment in and advances to 1994 $ 1.2 $ 28.8 $139.7 $ 169.7
unconsolidated affiliates 1993 1.0 30.5 151.7 183.2
Identifiable assets 1994 $1,933.8 $364.8 $200.0 $199.5 $2,698.1
1993 1,758.0 360.4 223.0 186.5 2,527.9
</TABLE>
52
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Financial information by industry segment at December 31, 1994 and
1993, and for the years ended December 31, 1994, 1993, and 1992, is as
follows:
<TABLE>
<CAPTION>
Year Ended Bauxite & Aluminum
December 31, Alumina Processing Corporate Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers 1994 $432.5 $1,349.0 $1,781.5
1993 423.4 1,295.7 1,719.1
1992 466.5 1,442.6 1,909.1
Intersegment sales 1994 $146.8 $ 146.8
1993 129.4 129.4
1992 179.9 179.9
Equity in earnings (losses) of 1994 $ (4.7) $ 2.6 $ .2 $ (1.9)
unconsolidated affiliates 1993 (2.5) (.8) (3.3)
1992 1.8 (3.7) (1.9)
Operating income (loss) 1994 $ 19.8 $ (8.4) $(67.6) $ (56.2)
1993 (4.5) (46.3) (72.6) (123.4)
1992 62.6 104.9 (77.6) 89.9
Effect of changes in accounting principles
on operating income (loss)
SFAS 106 1993 $ (2.0) $ (16.1) $ (1.1) $ (19.2)
SFAS 109 1993 (7.7) (7.8) .3 (15.2)
Depreciation 1994 $ 33.5 $ 59.1 $ 2.8 $ 95.4
1993 35.3 59.9 1.9 97.1
1992 29.8 49.0 1.5 80.3
Capital expenditures 1994 $ 28.9 $ 39.9 $ 1.2 $ 70.0
1993 35.3 31.2 1.2 67.7
1992 50.8 39.4 24.2 114.4
Investment in and advances to 1994 $136.6 $ 31.9 $ 1.2 $ 169.7
unconsolidated affiliates 1993 151.5 30.7 1.0 183.2
Identifiable assets 1994 $749.6 $1,242.3 $706.2 $2,698.1
1993 734.0 1,214.9 579.0 2,527.9
</TABLE>
53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
The Pacific Lumber Company:
We have audited the accompanying consolidated balance sheets of
The Pacific Lumber Company (a Delaware corporation) and subsidiaries as of
December 31, 1994 and 1993, and the related consolidated statements of
operations, cash flows and stockholder's equity for each of the three years
in the period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
The Pacific Lumber Company and subsidiaries as of December 31, 1994 and
1993, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
As explained in Notes 5 and 6 to the financial statements,
effective January 1, 1993, the Company changed its method of accounting for
income taxes and postretirement benefits other than pensions.
ARTHUR ANDERSEN LLP
San Francisco, California
January 27, 1995
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1994 1993
(In thousands of dollars)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,330 $ 38,760
Marketable securities - 5,635
Receivables:
Trade 23,258 14,750
Other 4,035 3,801
Inventories 68,168 66,241
Prepaid expenses and other current assets 3,660 2,939
------------ ------------
Total current assets 123,451 132,126
Timber and timberlands, net of depletion of
$188,003 and $171,007 at December 31, 1994
and 1993, respectively 350,871 365,511
Property, plant and equipment, net 96,960 96,541
Deferred financing costs, net 24,516 26,500
Deferred income taxes 50,142 52,066
Restricted cash 32,402 33,562
Other assets 5,925 6,630
------------ ------------
$ 684,267 $ 712,936
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 3,309 $ 2,360
Accrued compensation and related benefits 10,285 7,782
Accrued interest 21,109 21,627
Deferred income taxes 12,986 14,132
Other accrued liabilities 2,105 1,377
Long-term debt, current maturities 13,670 13,191
------------ ------------
Total current liabilities 63,464 60,469
Long-term debt, less current maturities 586,007 598,811
Other noncurrent liabilities 23,517 27,925
------------ ------------
Total liabilities 672,988 687,205
------------ ------------
Contingencies
Stockholder's equity:
Common stock, $.01 par value, 100 shares
authorized and issued - -
Additional capital 157,520 157,520
Accumulated deficit (146,241) (131,789)
------------ ------------
Total stockholder's equity 11,279 25,731
------------ ------------
$ 684,267 $ 712,936
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
(In thousands of dollars)
<S> <C> <C> <C>
Net sales:
Lumber and logs $ 205,504 $ 193,227 $ 182,545
Other 21,875 17,407 21,746
---------- ---------- ----------
227,379 210,634 204,291
---------- ---------- ----------
Operating expenses:
Cost of goods sold (exclusive of depletion and
depreciation) 116,316 115,175 98,454
Selling, general and administrative 15,190 18,869 15,695
Depletion and depreciation 25,485 25,374 30,038
---------- ---------- ----------
156,991 159,418 144,187
---------- ---------- ----------
Operating income 70,388 51,216 60,104
Other income (expense):
Investment, interest and other income 12,022 3,884 3,404
Interest expense (56,067) (59,145) (65,632)
---------- ---------- ----------
Income (loss) before income taxes, extraordinary items and
cumulative effect of changes in accounting principles 26,343 (4,045) (2,124)
Credit (provision) in lieu of income taxes (1,429) 1,683 -
---------- ---------- ----------
Income (loss) before extraordinary items and cumulative
effect of changes in accounting principles 24,914 (2,362) (2,124)
Extraordinary items:
Loss on litigation settlement, net of related credit in
lieu of income taxes of $6,312 (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 - 4,973 -
---------- ---------- ----------
Net income (loss) $ 10,048 $ (10,539) $ (2,124)
========== ========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
(In thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 10,048 $ (10,539) $ (2,124)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depletion and depreciation 25,485 25,374 30,038
Net sales (purchases) of marketable
securities 6,619 6,025 (5,419)
Amortization of deferred financing
costs 2,197 2,580 1,212
Net gains on marketable securities (984) (1,310) (840)
Net loss (gain) on asset dispositions (830) 134 (153)
Incurrence of financing costs (213) (28,235) (505)
Extraordinary loss on early
extinguishment of debt, net - 10,802 -
Cumulative effect of changes in
accounting principles, net - (2,625) -
Decrease (increase) in accrued and
deferred income taxes 1,627 (1,697) -
Increase (decrease) in accounts payable 949 53 (3,588)
Decrease (increase) in receivables (8,742) 9,991 (15,019)
Increase (decrease) in other
liabilities (2,027) (394) 1,408
Decrease (increase) in inventories, net
of depletion (1,608) 987 9,968
Decrease (increase) in prepaid expenses
and other current assets (721) 237 647
Decrease in accrued interest (518) (9,398) -
Other 706 (74) (524)
---------- ---------- ----------
Net cash provided by operating
activities 31,988 1,911 15,101
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets 1,119 229 573
Capital expenditures (10,962) (10,472) (8,257)
---------- ---------- ----------
Net cash used for investing
activities (9,843) (10,243) (7,684)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash released 1,160 1,438 -
Dividends paid (24,500) (25,000) -
Redemptions, repurchase of and principal
payments on long-term debt (13,235) (557,883) (4,654)
Proceeds from issuance of long-term debt - 620,000 -
Restricted cash deposits - (35,000) -
---------- ---------- ----------
Net cash provided by (used for)
financing activities (36,575) 3,555 (4,654)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (14,430) (4,777) 2,763
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 38,760 43,537 40,774
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 24,330 $ 38,760 $ 43,537
========== ========== ==========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Timber and timberlands acquired subject to
loans from seller $ 910
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 54,388 $ 65,963 $ 64,420
Income taxes paid 1,170 14 927
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common
Stock Additional Accumulated
($.01 Par) Capital Deficit Total
(In thousands of dollars)
<S> <C> <C> <C> <C>
Balance, January 1, 1992 $ - $ 157,520 $ (94,126) $ 63,394
Net loss - - (2,124) (2,124)
------------ ---------- ------------ ----------
Balance, December 31, 1992 - 157,520 (96,250) 61,270
Net loss - - (10,539) (10,539)
Dividends - - (25,000) (25,000)
------------ ---------- ------------ ----------
Balance, December 31, 1993 - 157,520 (131,789) 25,731
Net income - - 10,048 10,048
Dividends - - (24,500) (24,500)
------------ ---------- ------------ ----------
Balance, December 31, 1994 $ - $ 157,520 $ (146,241) $ 11,279
============ ========== ============ ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The
Pacific Lumber Company and its wholly owned subsidiaries, collectively
referred to herein as the "Company." The Company is an indirect wholly
owned subsidiary of MAXXAM Group Inc. ("MGI"). MGI is a wholly owned
subsidiary of MAXXAM Inc. ("MAXXAM").
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents consist of highly liquid money market
instruments with original maturities of three months or less.
Marketable Securities
On December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities ("SFAS 115"). In accordance with the provisions of
SFAS 115, marketable securities are carried at fair value beginning on
December 31, 1993. Prior to that date, marketable securities portfolios
were carried at the lower of cost or market at the balance sheet date. The
cost of the securities sold is determined using the first-in, first-out
method. Included in investment, interest and other income for each of the
three years ended December 31, 1994 were: 1994 - a decrease in net
unrealized holding gains of $264 and net realized gains of $1,248; 1993 -
net realized gains of $1,046 and net unrealized gains of $264; and 1992 -
net realized gains of $717 and the recovery of $123 of net unrealized
losses. Net unrealized losses represent the amount required to reduce the
short-term marketable securities portfolios from cost to market value prior
to December 31, 1993. Subsequent to the adoption of SFAS 115, purchases
and sales of marketable securities are presented as cash flows from
operating activities in the Consolidated Statement of Cash Flows.
Inventories
Inventories are stated at the lower of cost or market value.
Cost is determined using the last-in, first-out (LIFO) method.
Timber and Timberlands
Depletion is computed utilizing the unit-of-production method
based upon estimates of timber values and quantities.
Property, Plant and Equipment
Property, plant and equipment, including capitalized interest, is
stated at cost, net of accumulated depreciation. Depreciation is computed
utilizing the straight-line method at rates based upon the estimated useful
lives of the various classes of assets.
Deferred Financing Costs
Costs incurred to obtain financing are deferred and amortized
over the term of the related borrowing.
<PAGE>
Restricted Cash and Concentrations of Credit Risk
Restricted cash represents the amount initially deposited into an
account (the "Liquidity Account") held by the trustee under the indenture
governing the 7.95% Timber Collateralized Notes due 2015 (the "Timber
Notes") as described in Note 4. The Liquidity Account is not available,
except under certain limited circumstances, for working capital purposes;
however, it is available to pay the Rated Amortization (as defined in Note
4) and interest on the Timber Notes if and to the extent that cash flows
are insufficient to make such payments. The required Liquidity Account
balance will generally decline as principal payments are made on the Timber
Notes. Investment, interest and other income for the years ended December
31, 1994 and 1993 includes approximately $2,490 and $2,101, respectively,
attributable to an investment rate agreement (at 7.95% per annum) with the
financial institution which holds the Liquidity Account.
At December 31, 1994 and 1993, cash and cash equivalents includes
$19,439 and $20,280, respectively, (the "Payment Account") which is
reserved for debt service payments on the Timber Notes (see Note 4). The
Payment Account and the Liquidity Account are each held by a different
financial institution. In the event of nonperformance by such financial
institutions, the Company's exposure to credit loss is represented by the
amounts deposited plus any unpaid accrued interest thereon. The Company
mitigates its concentrations of credit risk with respect to these
restricted cash deposits by maintaining them at high credit quality
financial institutions and monitoring the credit ratings of these
institutions.
Investment, Interest and Other Income
In February 1994, 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 year ended
December 31, 1994.
Items Related to 1992 Earthquake
In 1993 and 1992, the Company recorded reductions in cost of
sales of $1,200 and $3,300, respectively, from business interruption
insurance claims for reimbursement of higher operating costs and the
related loss of revenues resulting from the April 1992 earthquake. In
1992, the Company recorded a $1,600 gain in investment, interest and other
income on a casualty insurance claim for the loss of certain commercial
property due to the earthquake. Other receivables at December 31, 1994 and
1993 included $1,684 and $1,235, respectively, related to these and other
earthquake related insurance claims.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and restricted
cash approximate fair value. The fair value of marketable securities is
determined based on quoted market prices. The estimated fair value of
long-term debt is determined based on the quoted market prices for the
Timber Notes and the 10-1/2% Senior Notes due 2003 (the "Senior Notes"),
and on the current rates offered for borrowings similar to the other debt.
The Timber Notes and the Senior Notes are thinly traded financial
instruments; accordingly, their market prices at any balance sheet date may
not be representative of the prices which would be derived from a more
active market.
<PAGE>
The estimated fair values of the Company's financial instruments,
along with the carrying amounts of the related assets (liabilities), are as
follows:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 24,330 $ 24,330 $ 38,760 $ 38,760
Marketable securities (held for trading purposes) - - 5,635 5,635
Restricted cash 32,402 32,402 33,562 33,562
Long-term debt (599,677) (558,801) (612,002) (637,700)
</TABLE>
Reclassifications
Certain reclassifications have been made to prior years'
financial statements to be consistent with the presentation in the current
year.
2. INVENTORIES
Inventories consist of the following:<PAGE>
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
Lumber $ 53,393 $ 50,906
Logs 14,775 15,335
---------- ----------
$ 68,168 $ 66,241
========== ==========
</TABLE>
During 1993 and 1992, inventory quantities were reduced. These
reductions resulted in the liquidation of LIFO inventory quantities carried
at prevailing costs from prior years which were higher than the current
cost of inventory in 1993 and lower than current costs in 1992. The
effects of these inventory liquidations increased cost of goods sold by
approximately $222 for the year ended December 31, 1993 and decreased cost
of goods sold by approximately $372 for the year ended December 31, 1992.
3. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows:<PAGE>
<TABLE>
<CAPTION>
Estimated December 31,
Useful Lives 1994 1993
<S> <C> <C>
Machinery and equipment 5 - 15 years $ 119,280 $ 116,455
Buildings 33 years 27,666 21,932
Logging roads 15 years 7,102 6,857
---------- ----------
154,048 145,244
Less: accumulated depreciation (57,088) (48,703)
---------- ----------
$ 96,960 $ 96,541
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1994, 1993
and 1992 was $8,808, $8,233 and $8,189, respectively.
<PAGE>
4. LONG-TERM DEBT
Long-term debt consists of the following:<PAGE>
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
7.95% Timber Collateralized Notes due July 20, 2015 $ 363,811 $ 376,953
10-1/2% Senior Notes due March 1, 2003 235,000 235,000
Other 866 49
---------- ----------
599,677 612,002
Less: current maturities (13,670) (13,191)
---------- ----------
$ 586,007 $ 598,811
========== ==========
/TABLE
<PAGE>
On March 23, 1993, the Company issued $235,000 of the Senior
Notes and its newly-formed wholly owned subsidiary, Scotia Pacific Holding
Company ("SPHC"), issued $385,000 of the Timber Notes. The Company and
SPHC used the net proceeds from the sale of the Senior Notes and the Timber
Notes, together with the Company's cash and marketable securities, to (i)
retire (a) $163,784 aggregate principal amount of the Company's 12% Series
A Senior Notes due July 1, 1996 (the "Series A Notes"), (b) $299,725
aggregate principal amount of the Company's 12.2% Series B Senior Notes due
July 1, 1996 (the "Series B Notes") and (c) $41,750 aggregate principal
amount of the Company's 12-1/2% Senior Subordinated Debentures due July 1,
1998 (the "Debentures;" the Series A Notes, the Series B Notes and the
Debentures are referred to collectively as the "Old Pacific Lumber
Securities"); (ii) pay accrued interest on the Old Pacific Lumber
Securities through the date of redemption thereof; (iii) pay the applicable
redemption premiums on the Old Pacific Lumber Securities; (iv) repay the
Company's $28,867 cogeneration facility loan; (v) fund the initial deposit
of $35,000 to the Liquidity Account; and (vi) pay a $25,000 dividend to a
subsidiary of MGI. These transactions resulted in a pre-tax extraordinary
loss of $16,368, consisting primarily of the payment of premiums and the
write-off of unamortized deferred financing costs on the Old Pacific Lumber
Securities.
The indenture governing the Timber Notes (the "Timber Note
Indenture") prohibits SPHC from incurring any additional indebtedness for
borrowed money and limits the business activities of SPHC to the ownership
and operation of its timber and timberlands. The Timber Notes are senior
secured obligations of SPHC and are not obligations of, or guaranteed by,
the Company or any other person. The Timber Notes are secured by a lien on
(i) SPHC's timber and timberlands (representing $192,445 of the Company's
consolidated balance at December 31, 1994), (ii) substantially all of
SPHC's property and equipment, (iii) SPHC's contract rights and certain
other assets and (iv) the funds deposited in the Payment Account and the
Liquidity Account.
The Timber Notes are structured to link, to the extent of cash
available, the deemed depletion of SPHC's timber (through the harvest and
sale of logs) to required amortization of the Timber Notes. The required
amount of amortization due on any Timber Note payment date is determined by
various mathematical formulas set forth in the Timber Note Indenture. The
minimum amount of principal which SPHC must pay (on a cumulative basis)
through any Timber Note payment date in order to avoid an Event of Default
(as defined in the Timber Note Indenture) is referred to as rated
amortization ("Rated Amortization"). If all payments of principal are made
in accordance with Rated Amortization, the payment date on which SPHC will
pay the final installment of principal is July 20, 2015. The amount of
principal which SPHC must pay through each Timber Note payment date in
order to avoid payment of prepayment or deficiency premiums is referred to
as scheduled amortization ("Scheduled Amortization"). If all payments of
principal are made in accordance with Scheduled Amortization, the payment
date on which SPHC will pay the final installment of principal is July 20,
2009. Scheduled
<PAGE>
Amortization on the Timber Notes is as follows: years ending December 31,
1995 - $13,578; 1996 - $14,103; 1997 - $16,165; 1998 - $19,335; 1999 -
$21,651; thereafter - $278,979.
Principal and interest on the Timber Notes is payable semi-
annually on January 20 and July 20. The Timber Notes are redeemable at the
option of SPHC, in whole but not in part, at any time. The redemption
price of the Timber Notes is equal to the sum of the principal amount,
accrued interest and a prepayment premium calculated based upon the yield
of like term Treasury securities plus 50 basis points.
Interest on the Senior Notes is payable semi-annually on March 1
and September 1. The Senior Notes are redeemable at the option of the
Company, in whole or in part, on or after March 1, 1998 at a price of 103%
of the principal amount plus accrued interest. The redemption price is
reduced annually until March 1, 2000, after which time the Senior Notes are
redeemable at par.
The Company has a revolving credit agreement with a bank (the
"Revolving Credit Agreement") which expires on May 31, 1997. Borrowings
under the Revolving Credit Agreement are secured by the Company's trade
receivables and inventories, with interest computed at the bank's reference
rate plus 1-1/4% or the bank's offshore rate plus 2-1/4%. The Revolving
Credit Agreement provides for borrowings of up to $30,000, of which $15,000
may be used for standby letters of credit. As of December 31, 1994,
$19,742 of borrowings was available under the Revolving Credit Agreement,
of which $4,742 was available for letters of credit. No borrowings were
outstanding as of December 31, 1994, and letters of credit outstanding
amounted to $10,258.
The indentures governing the Senior Notes and the Timber Notes
and the Company's Revolving Credit Agreement contain various covenants
which, among other things, limit the payment of dividends and restrict
transactions between the Company and its affiliates. As of December 31,
1994, under the most restrictive of these covenants, approximately $20,800
of dividends could be paid by the Company.
Scheduled maturities of long-term debt outstanding at December
31, 1994 are as follows: years ending December 31, 1995 - $13,670; 1996 -
$14,195; 1997 - $16,258; 1998 - $19,429; 1999 - $21,745; thereafter -
$514,380.
5. CREDIT (PROVISION) IN LIEU OF INCOME TAXES
The Company and its subsidiaries are members of MAXXAM's
consolidated return group for federal income tax purposes. The Company's
tax allocation agreement with MAXXAM, as amended on March 23, 1993 (the
"Amended Tax Allocation Agreement"), provides that The Pacific Lumber
Company, excluding its wholly owned subsidiaries ("Pacific Lumber"), is
liable to MAXXAM for the federal consolidated income tax liability of
Pacific Lumber, SPHC and certain other subsidiaries of Pacific Lumber (but
excluding Salmon Creek Corporation) (collectively, the "PL Subgroup")
computed as if the PL Subgroup was a separate affiliated group of
corporations which was never affiliated with MAXXAM. The Amended Tax
Allocation Agreement further provides that Salmon Creek Corporation is
liable to MAXXAM for its federal income tax liability computed as if Salmon
Creek Corporation was a separate corporation which was never affiliated
with MAXXAM. Under the tax allocation agreement with MAXXAM, prior to the
effective date of its amendment on March 23, 1993, Pacific Lumber recorded
tax liabilities or benefits computed as if it filed separate tax returns.
<PAGE>
The credit (provision) in lieu of income taxes on income (loss)
before income taxes, extraordinary items and cumulative effect of changes
in accounting principles for the two years ended December 31, 1994 consists
of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
<S> <C> <C>
Current:
Federal credit (provision) in lieu of income
taxes $ - $ -
State and local (50) -
----------- ------------
(50) -
----------- ------------
Deferred:
Federal credit (provision) in lieu of income
taxes (1,748) 1,913
State and local 369 (230)
----------- ------------
(1,379) 1,683
----------- ------------
$ (1,429) $ 1,683
=========== ============
</TABLE>
Pursuant to the principles of Accounting Principles Board Opinion
No. 11, Accounting for Income Taxes ("APB 11"), the Company did not record
a credit in lieu of income taxes for 1992 due to the uncertainty of
realizing the benefit of the 1992 net operating loss in future periods.
The 1994 deferred federal provision in lieu of income taxes of
$1,748 includes a credit relating to reserves the Company no longer
believes are necessary. The 1993 deferred federal credit in lieu of income
taxes of $1,913 includes an $850 benefit for increasing net deferred income
tax assets (liabilities) as of the date of enactment (August 10, 1993) of
the Omnibus Budget Reconciliation Act of 1993 which retroactively increased
the federal statutory income tax rate from 34% to 35% for periods beginning
on or after January 1, 1993.
A reconciliation between the credit (provision) in lieu of income
taxes and the amount computed by applying the federal statutory income tax
rate to income (loss) before income taxes, extraordinary items and
cumulative effect of changes in accounting principles is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Income (loss) before income taxes, extraordinary items
and cumulative effect of changes in accounting
principles $ 26,343 $ (4,045) $ (2,124)
========== ========== ==========
Amount of federal income tax based upon the statutory
rate $ (9,220) $ 1,416 $ 722
Revision of prior years' tax estimates and other changes
in valuation allowances 7,148 (566) -
State and local taxes, net of federal tax benefit 207 (150) -
Increase in net deferred income tax assets due to tax
rate change - 850 -
Losses and expenses for which no federal tax benefit was
recognized - - (722)
Other 436 133 -
---------- ---------- ----------
$ (1,429) $ 1,683 $ -
========== ========== ==========
</TABLE>
<PAGE>
As shown in the Consolidated Statement of Operations for the year
ended December 31, 1994, the Company recorded an extraordinary loss related
to the settlement of litigation in connection with MGI's acquisition of the
Company (see Note 8). The Company reported the loss net of related
deferred income taxes of $6,312 which is less than the federal and state
statutory income tax rates due to expenses for which no tax benefit was
recognized.
As shown in the Consolidated Statement of Operations for the year
ended December 31, 1993, the Company reported an extraordinary loss related
to the early extinguishment of debt. The Company reported the loss net of
related deferred income taxes of $5,566 which approximated the federal
statutory income tax rate in effect on the date the transaction occurred.
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). The adoption of SFAS 109 changed the Company's method of accounting
for income taxes to an asset and liability approach from the deferral
method prescribed by APB 11. The asset and liability approach requires the
recognition of deferred income tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Under this method, deferred
income tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates. The cumulative effect of the change
in accounting principle, as of January 1, 1993, increased the Company's
results of operations by $4,973. The implementation of SFAS 109 required
the Company to restate certain assets and liabilities to their pre-tax
amounts from their net-of-tax amounts originally recorded in connection
with the acquisition of the Company in 1986. As a result of restating
these assets and liabilities, the loss before income taxes, extraordinary
item and cumulative effect of changes in accounting principles for the year
ended December 31, 1993 was decreased by $875.
The components of the Company's net deferred income tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
Deferred income tax assets:
Timber and timberlands $ 37,209 $ 36,443
Loss and credit carryforwards 29,301 35,013
Other liabilities 4,840 4,627
Postretirement benefits other than pensions 2,145 1,734
Other 892 3,019
Valuation allowances (2,664) (5,613)
---------- ----------
Total deferred income tax assets, net 71,723 75,223
---------- ----------
Deferred income tax liabilities:
Inventories (16,339) (17,172)
Property, plant and equipment (14,848) (19,101)
Other (3,380) (1,016)
---------- ----------
Total deferred income tax liabilities (34,567) (37,289)
---------- ----------
Net deferred income tax assets $ 37,156 $ 37,934
========== ==========
</TABLE>
A principal component of the net deferred income tax assets
listed above relates to the excess of the tax basis over financial
statement basis with respect to timber and timberlands. The Company
believes that it is more likely than not that this net deferred income tax
asset will be realized, based primarily upon the estimated value of its
timber and timberlands which is well in excess of its tax basis. The
valuation allowances listed above relate primarily to loss and credit
carryforwards. The Company evaluated all appropriate factors to determine
the proper valuation allowances for loss and credit carryforwards. These
factors included any limitations concerning use of the carryforwards, the
year the carryforwards expire and the levels of taxable income necessary
for utilization. The Company has concluded that it will more likely than
not generate sufficient taxable income to realize the benefit attributable
to the loss and credit carryforwards for which valuation allowances were
not provided.
Included in the net deferred income tax assets listed above are
$33,540 and $36,056 at December 31, 1994 and 1993, respectively, which are
recorded pursuant to the tax allocation agreements with MAXXAM.
The following table presents the Company's estimated tax
attributes, for federal income tax purposes, under the terms of the Amended
Tax Allocation Agreement at December 31, 1994.
<TABLE>
<CAPTION>
Expiring
Through
<S> <C> <C>
Regular Tax Attribute Carryforwards:
Prior year net operating losses $ 72,012 2008
Net capital losses 3,997 1997
Alternative Minimum Tax Attribute Carryforwards:
Current year net operating loss $ 3,853 2009
Prior year net operating losses 30,679 2008
</TABLE>
6. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit plan which covers all employees
of the Company. Under the plan, employees are eligible for benefits at age
65 or earlier, if certain provisions are met. The benefits are determined
under a career average formula based on each year of service with the
Company and the employee's compensation for that year. The Company's
funding policy is to contribute annually an amount at least equal to the
minimum cash contribution required by The Employee Retirement Income
Security Act of 1974, as amended.
A summary of the components of net periodic pension cost is as follows:<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 1,643 $ 1,600 $ 1,546
Interest cost on projected benefit obligation 1,263 918 749
Actual loss (gain) on plan assets 10 (2,128) (1,013)
Net amortization and deferral (859) 1,359 352
---------- ---------- ----------
Net periodic pension cost $ 2,057 $ 1,749 $ 1,634
========== ========== ==========
</TABLE>
<PAGE>
The following table sets forth the funded status and amounts
recognized in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation $ 11,809 $ 11,047
Non-vested benefit obligation 779 1,183
---------- ----------
Total accumulated benefit obligation $ 12,588 $ 12,230
========== ==========
Projected benefit obligation $ 15,047 $ 15,303
Plan assets at fair value, primarily equity and debt
securities (13,184) (12,216)
---------- ----------
Projected benefit obligation in excess of plan assets 1,863 3,087
Unrecognized net transition asset 29 35
Unrecognized net gain (loss) 1,475 (582)
Unrecognized prior service cost (50) (89)
---------- ----------
Accrued pension liability $ 3,317 $ 2,451
========== ==========
/TABLE
<PAGE>
The assumptions used in accounting for the defined benefit plan were as
follows:<PAGE>
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Rate of increase in compensation levels 5.0% 5.0% 5.0%
Discount rate 8.5% 7.5% 8.0%
Expected long-term rate of return on assets 8.0% 8.0% 9.0%
</TABLE>
The Company has an unfunded defined benefit plan for certain
postretirement and other benefits which covers substantially all employees
of the Company. Participants of the plan are eligible for certain health
care benefits upon termination of employment and retirement and
commencement of pension benefits. Participants make contributions for a
portion of the cost of their health care benefits.
The Company adopted Statement of Financial Accounting Standards
No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions ("SFAS 106") as of January 1, 1993. The costs of postretirement
benefits other than pensions are now accrued over the period the employees
provide services to the date of their full eligibility for such benefits.
Previously, such costs were expensed as actual claims were incurred. The
cumulative effect of the change in accounting principle for the adoption of
SFAS 106 was recorded as a charge to results of operations of $2,348, net
of related income taxes of $1,566. The deferred income tax benefit related
to the adoption of SFAS 106 was recorded at the federal and state statutory
rates in effect on the date SFAS 106 was adopted.
A summary of the components of net periodic postretirement
benefit cost is as follows:<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
<S> <C> <C>
Service cost - benefits earned during the year $ 216 $ 153
Interest cost on accumulated postretirement benefit
obligation 294 315
Net amortization and deferral (7) -
------------ ------------
Net periodic postretirement benefit cost $ 503 $ 468
============ ============
</TABLE>
<PAGE>
The adoption of SFAS 106 increased the Company's loss before
extraordinary item and cumulative effect of changes in accounting
principles by $212 ($360 before tax) for the year ended December 31, 1993.
The postretirement benefit liability recognized in the Company's
Consolidated Balance Sheet is as follows:<PAGE>
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
Retirees $ 860 $ 963
Actives eligible for benefits 656 696
Actives not eligible for benefits 2,355 2,549
---------- ----------
Accumulated postretirement benefit obligation 3,871 4,208
Unrecognized net gain 972 71
---------- ----------
Postretirement benefit liability $ 4,843 $ 4,279
========== ==========
</TABLE>
The annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 13.0% for 1995 and
is assumed to decrease gradually to 5.5% for 2008 and remain at that level
thereafter. Each one percentage point increase in the assumed health care
cost trend rate would increase the accumulated postretirement benefit
obligation as of December 31, 1994 by approximately $512 and the aggregate
of the service and interest cost components of net periodic postretirement
benefit cost by approximately $85.
The discount rates used in determining the accumulated
postretirement benefit obligation were 8.5% and 7.5% at December 31, 1994
and 1993, respectively.
Subsequent to December 31, 1993, the Company's employees were
eligible to participate in a defined contribution savings plan sponsored by
MAXXAM. This plan is designed to enhance the existing retirement programs
of participating employees. Employees may elect to contribute up to 16% of
their compensation to the plan. For those participants who have elected to
make voluntary contributions to the plan, the Company's contributions
consist of a matching contribution of up to 4% of the compensation of
participants for each calendar quarter. The cost to the Company of this
plan was $1,215 for the year ended December 31, 1994.
The Company is self-insured for workers' compensation benefits.
Included in accrued compensation and related benefits and other noncurrent
liabilities are accruals for workers' compensation claims amounting to
$9,233 and $7,008 at December 31, 1994 and 1993, respectively. Workers'
compensation expenses amounted to $3,698, $3,317 and $2,944 for the years
ended December 31, 1994, 1993 and 1992, respectively.
7. RELATED PARTY TRANSACTIONS
MAXXAM provides the Company with personnel, insurance, legal,
accounting, financial, and certain other services. MAXXAM is compensated
by the Company through the payment of a fee representing the reimbursement
of actual out-of-pocket expenses incurred by MAXXAM, including, but not
limited to, labor costs of personnel of MAXXAM rendering services to the
Company. Charges by MAXXAM for such services were $1,744, $2,598 and
$2,735 for the years ended December 31, 1994, 1993 and 1992, respectively.
Net sales for the years ended December 31, 1994, 1993 and 1992
include revenues of $10,326, $9,198 and $6,942, respectively, from Britt
Lumber Co., Inc., an indirect wholly owned subsidiary of MGI. The Company
<PAGE>
recognized operating income of $5,571, $1,972 and $1,335 on these revenues
for the years ended December 31, 1994, 1993 and 1992, respectively. At
December 31, 1994 and 1993, receivables include $1,283 and $178,
respectively, related to these affiliate sales.
On August 4, 1993, all of the Company's issued and outstanding
common stock was pledged as collateral for MGI's $100.0 million 11-1/4%
Senior Secured Notes due 2003 and $126.7 million 12-1/4% Senior Secured
Discount Notes due 2003 (collectively, the "MGI Notes"). MGI conducts its
operations primarily through subsidiary companies. The Company represents
the substantial portion of MGI's assets and operations. The indenture
governing the MGI Notes requires the Company's board of directors to
declare and pay dividends on the Company's common stock to the maximum
extent permitted by any consensual restriction or encumbrance on the
Company's ability to declare and pay dividends, unless the Board determines
in good faith that such declaration and payment would be detrimental to the
capital or other operating needs of the Company.
In 1994, in connection with the litigation settlement described
in Note 8, the Company paid approximately $3,185 to a law firm in which a
director of the Company is also a partner. In 1993, the Company paid
approximately $1,931 in connection with the offering of the Senior Notes
and the Timber Notes to this same law firm.
8. LOSS ON LITIGATION SETTLEMENT AND CONTINGENCIES
During 1994, MAXXAM, the Company and others agreed to a
settlement, subsequently approved by the Court, of class and related
individual claims brought by former stockholders of the Company against
MAXXAM, MGI, the Company, former directors of the Company and others
concerning MGI's acquisition of the Company. Of the approximately $52,000
settlement, approximately $33,000 was paid by insurance carriers of MAXXAM
and the Company, approximately $14,800 was paid by the Company and the
balance was paid by other defendants and through the assignment of certain
claims. In 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 or financial position. 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 the Company'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.
9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summary quarterly financial information for the years ended
December 31, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1994:
Net sales $ 50,816 $ 55,120 $ 55,001 $ 66,442
Operating income 12,148 19,527 17,092 21,621
Income before extraordinary item 3,381 4,380 9,555 7,598
Extraordinary item, net - (14,866) - -
Net income (loss) 3,381 (10,486) 9,555 7,598
1993:
Net sales $ 45,569 $ 51,621 $ 55,819 $ 57,625
Operating income 13,560 13,309 11,427 12,920
Loss before extraordinary item and cumulative effect of
changes in accounting principles (1,275) (62) (576) (449)
Extraordinary item, net (10,802) - - -
Cumulative effect of changes in accounting principles,
net 2,625 - - -
Net loss (9,452) (62) (576) (449)
</TABLE>
