UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 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
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Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
None.
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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, 1996: 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.
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 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 over 125 years, engages in several 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 192,000 acres of
commercial timberlands. These timberlands are located in Humboldt County
along the northern California coast which has very favorable soil and
climate conditions. 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
greatly facilitate Pacific Lumber's operations and 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 "Scotia Pacific Timberlands"),
a special purpose Delaware corporation and wholly owned subsidiary of
Pacific Lumber ("Scotia Pacific"). Pacific Lumber has the exclusive right
to harvest (the "Pacific Lumber Harvest Rights") approximately 8,000 non-
contiguous acres of the Scotia Pacific Timberlands consisting substantially
of virgin old growth redwood and virgin old growth Douglas-fir timber
located on numerous small parcels throughout the Scotia Pacific
Timberlands. Substantially all of Scotia Pacific's assets, including the
Scotia Pacific Timberlands and the GIS (defined below), are pledged as
security for Scotia Pacific's 7.95% Timber Collateralized Notes due 2015
(the "Timber Notes"). Pacific Lumber harvests and purchases from Scotia
Pacific all of the logs harvested from the Scotia Pacific Timberlands. See
"--Relationships With Scotia Pacific and Britt" for a description of this
and other relationships among Pacific Lumber, Scotia Pacific 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 partially harvested in the past.
Pacific Lumber has engaged in extensive efforts to
supplement the natural regeneration of timber and increase the amount of
timber on its timberlands. Pacific Lumber is required to comply
with California forestry regulations regarding reforestation, which
generally require that an area be reforested to specified standards
within an established period of time. Pacific Lumber also actively engages
in efforts to establish timberlands from open areas such as pasture land.
During 1995, Pacific Lumber planted approximately 676,000 redwood and
Douglas-fir seedlings. Regeneration of redwood timber generally is
accomplished through the natural growth of new 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 regeneration by
planting redwood seedlings. Douglas-fir timber grown on Pacific Lumber's
timberlands is regenerated almost entirely by planting 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 developed by
registered professional foresters and must be filed with, and approved by,
the California Department of Forestry ("CDF") prior to the harvesting of
timber. Each THP is designed to comply with applicable environmental laws
and regulations. The CDF's evaluation of proposed THPs incorporates review
and analysis of such THPs 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. See "--Regulatory and Environmental Factors" for information
regarding proposed critical habitat designation, sustained yield
regulations and related matters. 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 and conducting field
studies, Pacific Lumber's foresters are able to develop detailed THPs
addressing the various regulatory requirements. 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 employs a variety of well-accepted methods of
selecting trees for harvest. These methods, which are designed to achieve
optimal regeneration, are referred to as "silvicultural systems" in the
forestry profession. Silvicultural systems range from very light thinnings
aimed at enhancing the growth rate of retained trees to clear cutting which
results in the harvest of all trees in an area and replacement with a new
forest stand. In between are a number of varying levels of partial
harvests which can be employed. Pacific Lumber's foresters select the
appropriate silvicultural system for any given site based upon the specific
conditions of that site. Pacific Lumber customarily employs silvicultural
systems that involve thinnings followed by a variety of partial cuttings to
achieve a high degree of natural regeneration. Partial harvesting allows
the remaining trees to obtain more light, nutrients and water, thereby
promoting faster growth rates. Pacific Lumber uses a variety of factors,
including the size and density of the remaining trees, to determine when to
again submit a THP with respect to a given area. Clear cutting is only
used under specific circumstances where it is advisable due to specific
site conditions (such as undesirable tree species composition for natural
regeneration, topographic difficulties which preclude partial cuttings or
the need to create more diverse wildlife habitats within watersheds as
recommended by Pacific Lumber's wildlife biologists). Due to the magnitude
of its timberlands and conservative application of silvicultural systems
that retain substantial numbers of trees on areas that are harvested,
Pacific Lumber has historically conducted harvesting operations on
approximately 5% of its timberlands in any given year.
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 268 million
board feet, with approximately 290, 286, and 228 million board feet
produced in 1995, 1994 and 1993, respectively. The Fortuna sawmill, built
by Pacific Lumber in 1972, produces primarily common grade lumber. During
1995, the Fortuna mill produced approximately 94 million board feet of
lumber. The Carlotta sawmill was acquired in 1986 and produces both common
and upper grade redwood lumber. During 1995, the Carlotta mill produced
approximately 67 million board feet of lumber. Sawmill "A," located in
Scotia, was remodeled in 1983 and processes Douglas-fir logs while Sawmill
"B," also located in Scotia, primarily processes large diameter redwood
logs. During 1995, Sawmills "A" and "B" produced 79 and 51 million board
feet of lumber, 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 of some grades of common grade lumber by assembling knot-free pieces
of narrower and shorter lumber into wider or longer pieces in its
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 where
several of its manufacturing facilities are located. Pacific Lumber sells
surplus power to Pacific Gas and Electric Company. In 1995, the sale of
surplus power accounted for approximately 1% of Pacific Lumber's total
revenues.
PRODUCTS
The following table sets forth the distribution of Pacific
Lumber's lumber production (on a net board foot basis) and revenues by
product line:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Year Ended December 31, 1994
------------------------------------ ------------------------------------
% of Total % of Total
Lumber % of Total Lumber % of Total
Production Lumber % of Total Production Lumber % of Total
Volume Revenues Revenues Volume Revenues Revenues
Product ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Upper grade redwood
lumber 17% 38% 31% 17% 41% 33%
Common grade redwood
lumber 54% 40% 32% 58% 36% 30%
---------- ----------- ---------- ---------- ---------- ----------
Total redwood
lumber 71% 78% 63% 75% 77% 63%
---------- ----------- ---------- ---------- ---------- ----------
Upper grade Douglas-
fir lumber 3% 5% 4% 3% 7% 5%
Common grade
Douglas-fir
lumber 23% 14% 11% 20% 13% 10%
---------- ----------- ---------- ---------- ---------- ----------
Total Douglas-
fir lumber 26% 19% 15% 23% 20% 15%
---------- ----------- ---------- ---------- ---------- ----------
Other grades of
lumber 3% 3% 4% 2% 3% 4%
---------- ----------- ---------- ---------- ---------- ----------
Total lumber 100% 100% 82% 100% 100% 82%
========== =========== ========== ========= ========== ==========
Logs 7% 9%
========== ==========
Hardwood chips 4% 4%
Softwood chips 5% 4%
---------- ----------
Total wood
chips 9% 8%
========== ==========<PAGE>
</TABLE>
Lumber
Pacific Lumber primarily produces and markets lumber. In 1995,
Pacific Lumber sold approximately 277 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.
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. The overall supply of upper grade
lumber has been diminishing due to increasing environmental and
regulatory restrictions and other factors. While Pacific Lumber's
competitive position with respect to upper grade lumber has been
improving due to the quality of its timberlands, Pacific Lumber's
supply of upper grade lumber has decreased in some premium product
categories. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations." 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.
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. 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.
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. See "-
- -Relationships With Scotia Pacific and Britt" 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.
Wood Chips
Pacific Lumber uses a whole-log chipper to produce wood chips
from hardwood trees which would otherwise be left as waste. These chips
are sold to third parties primarily for the production of facsimile and
other specialty papers. 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.
BACKLOG AND SEASONALITY
Pacific Lumber's backlog of sales orders at December 31, 1995 and
1994 was approximately $11.5 million and $11.9 million, respectively, the
substantial portion of which was delivered in the first quarter of the next
fiscal year. Pacific Lumber has historically experienced lower first
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 63% of these sales in
1995. Common grades of Douglas-fir lumber are sold primarily in
California. In 1995, 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 revenues in 1995. 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 products. 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,
product availability 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, 1996, Pacific Lumber had approximately 1,600
employees, none of whom are covered by a collective bargaining agreement.
RELATIONSHIPS WITH SCOTIA PACIFIC AND BRITT
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 Scotia Pacific consummated its offering of $385 million of
Timber Notes. Upon the closing of such offerings, Pacific Lumber, Scotia
Pacific and Britt entered into a variety of agreements. Pacific Lumber and
Scotia Pacific 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 Scotia Pacific
Timberlands containing timber of Scotia Pacific ("Scotia Pacific Timber")
not performed by Scotia Pacific's own employees. Such services include the
furnishing of all equipment, personnel and expertise not within Scotia
Pacific's possession and reasonably necessary for the operation and
maintenance of the Scotia Pacific Timberlands containing Scotia Pacific
Timber. In particular, Pacific Lumber is required to regenerate Scotia
Pacific Timber, prevent and control loss of Scotia Pacific Timber by fires,
maintain a system of roads throughout the Scotia Pacific Timberlands, take
measures to control the spread of disease and insect infestation affecting
Scotia Pacific Timber and comply with environmental laws and regulations,
including measures with respect to waterways, habitat, hatcheries and
endangered species. Pacific Lumber is also required (to the extent
necessary) to assist Scotia Pacific personnel in updating the GIS and to
prepare and file, on Scotia Pacific'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, Scotia Pacific 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 approximately $115,100 per month in 1995 and is
expected to be approximately $112,100 per month in 1996. Pursuant to the
Additional Services Agreement, Scotia Pacific 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 Scotia Pacific a fee for
such services equal to the actual cost of providing such services, as
determined in accordance with generally accepted accounting principles.
Pacific Lumber and Scotia Pacific also entered into a Master
Purchase Agreement (the "Master Purchase Agreement"). The Master Purchase
Agreement governs all purchases of logs by Pacific Lumber from Scotia
Pacific. Each purchase of logs by Pacific Lumber from Scotia Pacific is
made pursuant to a separate log purchase agreement (which incorporates the
terms of the Master Purchase Agreement) for the Scotia Pacific 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 ("SBE") 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
Scotia Pacific pursuant to the Master Purchase Agreement, Pacific Lumber is
responsible, at its own expense, for harvesting and removing the standing
Scotia Pacific Timber covered by approved THPs and, thus, the purchase
price thereof 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 Scotia Pacific's
revenues are derived from the sale of logs to Pacific Lumber under the
Master Purchase Agreement.
Pacific Lumber, Scotia Pacific and Salmon Creek Corporation
("Salmon Creek," a wholly owned subsidiary of Pacific Lumber) 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 Scotia Pacific pursuant to
which Pacific Lumber agreed to indemnify Scotia Pacific 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 Scotia Pacific 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 11 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 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 Scotia Pacific and Britt"
for a description of Britt's log purchases from Pacific Lumber.
Marketing
In 1995, Britt sold approximately 78 million board feet of lumber
products to approximately 100 different customers. Over one-half of its
lumber sales were in northern California. The remainder of its 1995 sales
were in southern California and ten other western states. The largest and
top five of such customers accounted for approximately 33% and 72%,
respectively, of such 1995 sales. Britt markets its products to a variety
of customers, including distribution centers, industrial remanufacturers,
wholesalers and retailers and is expanding its market eastward.
Britt's backlog of sales orders at December 31, 1995 and 1994 was
approximately $3.2 million and $3.6 million, respectively, the substantial
portion of which was delivered in the first quarter of the next fiscal
year.
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 periodically. Britt's
(single shift) mill capacity, assuming 40 production hours per week, is
estimated at 35.5 million board feet of fencing products per year. As of
March 1, 1996, Britt employed approximately 110 people, none of whom are
covered by a collective bargaining agreement.
Competition
Management estimates that Britt accounted for approximately one-
third of the redwood fence market in 1995 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 federal laws
and regulations dealing with timber harvesting, endangered species and
critical habitat, 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 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. The
Company does not expect that compliance with such existing laws and
regulations will have a material adverse effect on its future liquidity,
consolidated operating results or financial position; however, these laws
and regulations are modified from time to time and there can be no
assurance that certain pending or future legislation, governmental
regulations or judicial or administrative decisions would not materially
adversely affect the Company (see below).
In 1994, the BOF 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
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 March 1992, the marbled murrelet was approved for listing as
endangered under the CESA. In October 1992, the United States Fish and
Wildlife Service ("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. Pacific Lumber has incorporated, and
will continue to incorporate as required, mitigation measures into its THPs
to protect and maintain habitat for the marbled murrelet on its
timberlands. The BOF requires Pacific Lumber to conduct pre-harvest
marbled murrelet surveys to provide certain site specific mitigations in
connection with THPs covering virgin old growth timber and unusually dense
stands of residual old growth timber. Such surveys can only be conducted
during a portion of the murrelet's nesting and breeding season, which
extends from April through mid-September. 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 to date
(based upon current survey protocols) have indicated that Pacific Lumber
has approximately 6,000 acres of occupied marbled murrelet habitat. A
substantial portion of this land contains virgin and residual old growth
timber and the bulk of it falls within the areas proposed to be designated
as critical habitat for the marbled murrelet (see below). Pacific Lumber
is unable to predict when or if it will be able to harvest this acreage.
In January 1994, the USFWS proposed designation of critical
habitat for the marbled murrelet under the ESA (which proposed designation
did not include any of Pacific Lumber's timberlands). In July 1995, in a
case entitled Marbled Murrelet v. Babbitt (Case No. C-91-522R), a U.S.
District Court in Seattle ordered the USFWS to make its final designation
of critical habitat for the marbled murrelet by January 29, 1996 and to
issue its proposed final designation of critical habitat by August 1, 1995.
On August 10, 1995, the USFWS published its proposed final designation of
critical habitat for the marbled murrelet (the "Proposed Designation"),
seeking to designate over four million acres as critical habitat for the
marbled murrelet, including approximately 33,000 acres of Pacific Lumber's
timberlands. The Proposed Designation was subject to a 60-day comment
period and Pacific Lumber filed comments vigorously opposing the Proposed
Designation. In February 1996, the Court extended until May 15, 1996 the
deadline for final designation of critical habitat for the marbled
murrelet. The USFWS has not yet published its final designation of
critical habitat for the marbled murrelet. Pacific Lumber is unable to
predict when or if it would be able to harvest on any acreage finally
designated as critical habitat. Furthermore, it is impossible to determine
the future adverse impact of such designation on Pacific Lumber's
liquidity, consolidated financial position or results of operations until
such time as the Proposed Designation is finalized and related regulatory
and legal issues are fully resolved. However, if Pacific Lumber is unable
to harvest, or is severely limited in harvesting, on timberlands designated
as marbled murrelet critical habitat, such restrictions could have a
material adverse effect on its liquidity, consolidated financial condition
and results of operations. If Pacific Lumber is unable to harvest or is
severely limited in harvesting, it intends to seek full compensation from
the appropriate governmental agencies on the grounds that such restrictions
constitute a taking.
Pacific Lumber's wildlife biologists are conducting research
concerning the marbled murrelet on its timberlands and are currently
developing a habitat conservation plan for the marbled murrelet (the
"Murrelet HCP"). The Murrelet HCP, which is designed to mitigate the
impact of the Proposed Designation, has been submitted to the USFWS.
Pacific Lumber is working with the USFWS and other government agencies on
the Murrelet HCP. It is uncertain when the Murrelet HCP review process
will be completed or what the outcome will be of the review process or its
effect upon Pacific Lumber's liquidity, consolidated financial position or
results of operations.
There also continue to be other regulatory actions and lawsuits
seeking to have various other species listed as threatened or endangered
under the ESA and/or the CESA and to designate critical habitat for such
species. It is uncertain what effect any such other listings and/or
designations of critical habitat would have on liquidity, Pacific Lumber's
consolidated financial position or results of operations.
Various groups and individuals have filed objections with the CDF
and the BOF regarding the CDF's and the BOF's actions and rulings with
respect to certain of Pacific Lumber's THPs, and Pacific Lumber 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 and other harvesting operations. These challenges have severely
restricted Pacific Lumber's ability to harvest virgin old growth timber on
its property (and to a lesser extent, its residual old growth timber). To
date, challenges with respect to Pacific Lumber's THPs relating to young
growth and residual old growth timber have been limited; however, no
assurance can be given as to the extent of such challenges in the future.
Pacific Lumber believes that environmentally focused challenges to its THPs
are likely to occur in the future, particularly with respect to virgin and
residual old growth timber. 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 liquidity, 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 liquidity,
consolidated results of operations or financial position of the Company.
See also Item 3. "Legal Proceedings--Timber Harvesting Litigation" for a
description of the pending Marbled Murrelet action.
In June 1990, 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"). The Owl Plan was
recently updated through 1999 and the USFWS agreed that operations
consistent with the Owl Plan would not result in the take of any owls. By
incorporating the Owl Plan into each THP filed with the CDF, Pacific Lumber
is able to expedite the approval time 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. The plaintiffs in the Marbled Murrelet action have requested
injunctive relief with respect to the Owl Plan. See Item 3. "Legal
Proceedings--Timber Harvesting Litigation."
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, including the protection and acquisition
of old growth and other timberlands, endangered species, environmental
protection, air and water quality, and the restriction, regulation and
administration of timber harvesting practices. For example, a bill has
been introduced in the California legislature which would, among other
things, initiate negotiations by the California Resources Agency for the
public acquisition of approximately 4,700 acres of Pacific Lumber's
timberlands, 3,000 acres of which is a contiguous block of virgin old
growth redwood forest often referred to as the "Headwaters Forest." In
addition, the U.S. Congressman from the congressional district in which
Pacific Lumber is located has introduced a bill which would, among other
things, authorize public acquisition of the Headwaters Forest and up to
1,700 contiguous acres. The bill would authorize the Secretary of the
Interior to exchange government-owned timberlands and other property for
the appraised fair market value of the Headwaters Forest and any contiguous
acreage to be acquired. 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 future
liquidity, consolidated financial position or operating results 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
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
liquidity, consolidated financial position or operating results 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
In September 1989, seven past and present employees of Pacific
Lumber brought an action against the Company, Pacific Lumber, MAXXAM and
certain current and former directors and officers of the Company, Pacific
Lumber and MAXXAM, in the United States District Court, Northern District
of California, entitled Kayes, et al. v. Pacific Lumber Company, et al.
(No. C89-3500) (the "Kayes action"). 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
Company, Pacific Lumber and MAXXAM defendants breached their fiduciary
duties under the Employee Retirement Income Security Act of 1974 ("ERISA")
to participants and beneficiaries of the Retirement Plan by purchasing the
group annuity contract from Executive Life and selecting Executive Life 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) (the "Miller action") on April 26, 1993. The Miller action was
dismissed on May 14, 1993. On October 22, 1994, the President signed the
Pension Annuitants' Protection Act of 1994, 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 April
10, 1995, the U.S. Ninth Circuit Court of Appeals reversed the dismissal of
the Miller action. On August 7, 1995, the defendants requested the U.S.
Supreme Court to review the case by filing a petition for writ of
certiorari. The U.S. Supreme Court denied defendants' petition for writ of
certiorari.
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
the Company, Pacific Lumber, MAXXAM 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.
On December 8, 1995, the parties in the Kayes/Miller action and
DOL civil action reached an agreement in principle to settle these matters.
The proposed settlement is subject to execution of a definitive agreement
and other contingencies. A status conference is scheduled for April 12,
1996 in the Kayes/Miller action and the DOL civil action. A special
committee of the Board of Directors of MAXXAM has been appointed to review
the proposed settlement and a related derivative action.
Management is of the opinion that the outcome of the foregoing
litigation and proposed settlement should not have a material adverse
effect on the Company's liquidity, consolidated financial position or
results of operations.
TIMBER HARVESTING LITIGATION
Various actions, similar to each other, have been filed against
the Company, Pacific Lumber and its subsidiaries, MAXXAM, 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 and its subsidiaries from
harvesting certain of their THPs and conducting certain other timber
operations.
The Sierra Club and EPIC v. The California Department of
Forestry, Scotia Pacific Holding Co., et al. (No. 95 DR 0072) action (the
"Sierra Club action") in the Superior Court of Humboldt County, filed on
March 10, 1995 by the Sierra Club and the Environmental Protection
Information Center ("EPIC"), relates to exemptions for forest health which
Pacific Lumber and its subsidiaries had previously filed covering their
entire 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
exemptions. In May 1995, the Court denied plaintiffs' request for a
preliminary injunction and dismissed the case on its merits. On May 19,
1995, plaintiffs appealed the Court's decision and requested an emergency
stay of harvesting. On June 6, 1995, the Court of Appeal denied the
plaintiffs' request for a stay of timber harvesting operations; however,
plaintiffs continued their appeal of the trial court's decision. In July
1995, the USFWS and the California Department of Fish and Game (the "CDFG")
inspected Pacific Lumber's property and determined that certain areas
(which Pacific Lumber estimates to be approximately 6,000 acres) are
suitable marbled murrelet habitat and have prohibited harvesting on these
timberlands from April 1 through September 15 (the marbled murrelet
breeding and nesting season). These agencies have also imposed certain
other restrictions to assure that there is no adverse impact on the marbled
murrelet.
On September 1, 1995, Pacific Lumber and its subsidiaries
notified the CDF that they intended to commence operations under the forest
health exemptions shortly after September 15, 1995, the end of the marbled
murrelet breeding season. In connection with the Sierra Club action, on
February 23, 1996, the Court of Appeal affirmed the trial court's decision
in favor of Pacific Lumber, finding that harvesting of dead, dying or
diseased trees is exempt from the environmental review requirements of CEQA
and the Forest Practice Act. It is uncertain if plaintiffs will seek
review of this decision from the California Supreme Court. Pacific Lumber
is still prohibited from harvesting under certain portions of the
exemptions as a result of the Marbled Murrelet action described below.
On September 15, 1995, EPIC filed another lawsuit with respect to
the forest health exemptions; that case is entitled Marbled Murrelet, et
al. v. Bruce Babbitt, et al. (No. C-95-3261) (the "Marbled Murrelet
action") and was filed in the U.S. District Court for the Northern District
of California. As amended, the complaint alleges, among other things,
violations of the ESA, the National Environmental Protection Act ("NEPA")
and the Administrative Procedures Act ("APA"). Plaintiffs claim, among
other things, that the timber harvesting operations pursuant to the forest
health exemptions will contribute to the destruction of habitat for the
marbled murrelet and the northern spotted owl. Following a hearing on
September 28, 1995, the Court dissolved a temporary restraining order
("TRO") and issued a preliminary injunction enjoining Pacific Lumber and
its subsidiaries from conducting timber harvesting operations under
portions of the forest health exemptions until a trial on the merits of the
case. The majority of the timberlands which are subject to the injunction
are timberlands which have been proposed as critical habitat for the
marbled murrelet. In October 1995, Pacific Lumber appealed the issuance of
the preliminary injunction to the U.S. Ninth Circuit Court of Appeals; oral
argument in the appeal was held March 14, 1996. On March 6, 1996, the
plaintiffs asked for leave to amend their pleadings to add additional
claims and seek additional injunctive relief concerning, among other
things, Pacific Lumber's Owl Plan and up to eight other THPs (only two of
which are presently approved). The eight THPs cover approximately 1,360
acres of the Company's timberlands and represent a substantial portion of
the volume Pacific Lumber and its subsidiaries are planning to utilize in
their operations for 1996. On March 15, 1996, the Court granted
plaintiffs' motion to file an amended complaint and issued a TRO enjoining
Pacific Lumber and its subsidiaries from harvesting pursuant to the eight
THPs. On March 20, 1996, the Court held a hearing on plaintiffs' motion for
a preliminary injunction and extended the TRO for ten additional days while
it considers the motion.
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. 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 harvesting under
this THP. In April 1993, EPIC filed another action with respect to this
THP entitled EPIC, Marbled Murrelet, et al. v. Bruce Babbitt, Secretary,
Department of Interior, et al. (No. C93-1400) (the "EPIC action") 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. 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 the area covered by the THP is
occupied by the marbled murrelet and permanently enjoined implementation of
the THP in order to protect the marbled murrelet. Pacific Lumber appealed
the Court's decision to the U.S. Ninth Circuit Court of Appeals; oral
argument on the appeal was held March 14, 1996.
The Lost Coast League v. The California Department of Forestry,
et al. (No. 94DR0046) action in Superior Court of Humboldt County, filed in
February 1994, relates to a THP for approximately 121 acres of primarily
virgin old growth timber. The Court issued an injunction staying timber
harvesting pending trial. On July 14, 1994, after a trial on the merits,
the Court issued its decision setting aside CDF's approval of the THP and
remanding the THP to CDF for further review and consideration. In October
1994, Pacific Lumber submitted a revised THP, which was subsequently
approved. The Court is expected to establish a briefing and trial schedule
with respect to plaintiff's objections to the reapproval of the revised
THP.
In view of the recent developments in the Marbled Murrelet
action, the Company is uncertain whether or not the matters described above
will have a material adverse effect on the Company's liquidity,
consolidated financial position or results of operations. See Item 1.
"Business--Regulatory and Environmental Factors" above for a 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 the Company)
and certain of MAXXAM's directors in the Court of Chancery of the State 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.
USAT MATTER
In January 1995, an action entitled U.S., ex rel., Martel v.
Hurwitz, et al. was filed in the U.S. District Court for the Northern
District of California (No. C950322) (the "Martel action") against the
Company, MAXXAM and others. This action is purportedly brought by
plaintiff on behalf of the U.S. government; however, the U.S. government
has declined to participate in the suit. Plaintiff alleges, among other
things, that defendants used the federally insured assets of United Savings
Association of Texas ("USAT") to acquire junk bonds from Michael Milken and
Drexel, Burnham, Lambert Inc. ("Drexel") and that, in exchange, Mr. Milken
and Drexel arranged financing for defendants' various business ventures,
including the acquisition of the Company. Plaintiff alleges that USAT
became insolvent in 1988 and that defendants should be required to pay $1.6
billion (subject to trebling) to cover USAT's losses. Plaintiff seeks,
among other things, that the Court impose a constructive trust upon the
fruits of the alleged improper use of USAT funds. On March 22, 1996, the
Court granted defendant's motion to have this case transferred to the U.S.
District Court for the Southern District of Texas. Management is of the
opinion that the outcome of the foregoing litigation should not have a
material adverse effect on the Company's liquidity, consolidated financial
position or results of operations.
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 liquidity, consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 $4.8 million in 1995. No
dividends were declared or paid in 1994. As of December 31, 1995,
approximately $1.9 million of dividends could be paid by the Company, of
which $1.6 million was paid in January 1996. 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
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 operational and financial
information for the years ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------
1995 1994
---------- ----------
(In millions of
dollars,
except shipments
and prices)
<S> <C> <C>
Shipments:
Lumber: (1)
Redwood upper grades 46.5 52.9
Redwood common grades 216.7 218.4
Douglas-fir upper grades 7.4 8.6
Douglas-fir common grades and other 76.0 66.3
---------- ----------
Total lumber 346.6 346.2
========== ==========
Logs (2) 12.6 17.7
========== ==========
Wood chips (3) 214.0 210.3
========== ==========
Average sales price:
Lumber: (4)
Redwood upper grades $ 1,495 $ 1,443
Redwood common grades 477 460
Douglas-fir upper grades 1,301 1,420
Douglas-fir common grades 392 444
Logs (4) 440 615
Wood chips (5) 102 83
Net sales:
Lumber, net of discount $ 211.3 $ 216.5
Logs 5.6 10.9
Wood chips 21.7 17.4
Cogeneration power 2.5 3.5
Other 1.5 1.3
---------- ----------
Total net sales $ 242.6 $ 249.6
========== ==========
Operating income $ 73.2 $ 77.8
========== ==========
Operating cash flow (6) $ 99.6 $ 103.8
========== ==========
Income before income taxes and extraordinary item $ 4.7 $ 14.8
========== ==========
Net income $ 3.5 $ 3.6
========== ==========
<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 1995 were essentially
unchanged from 1994. Increased shipments of common grade Douglas-fir
lumber were mostly offset by decreased shipments of both upper and common
grades of redwood lumber. Log shipments in 1995 were 12.6 million feet
(net Scribner scale), a decrease of 5.1 million feet from 1994 shipments.
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 old growth timber (large diameter) 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 production capacity for 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 prior years,
Pacific Lumber expects that its production of premium upper grade lumber
products will decline 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 1995 decreased as
compared to 1994. Decreased shipments of upper grade redwood lumber,
lower average realized prices for common and upper grade Douglas-fir lumber
and logs, and decreased shipments of logs and redwood common lumber were
largely offset by increased shipments of common grade Douglas-fir lumber
and higher average realized prices for both common and upper grades of
redwood lumber. The increase in other sales for 1995 as compared to 1994
was due to higher average realized prices for wood chips, partially offset
by lower sales of electrical power.
Operating income
Operating income for 1995 decreased as compared to 1994. This
decrease was primarily due to lower sales of lumber, higher cost of lumber
sales and lower sales of logs and electrical power, partially offset by
increased sales of wood chips and higher gross margins on wood chip sales.
Cost of lumber sales for 1995 was unfavorably impacted by higher purchases
of logs from third parties, partially offset by improved sawmill
productivity. Cost of goods sold for 1995 was reduced by $1.5 million of
business interruption insurance proceeds for the settlement of claims
related to an April 1992 earthquake.
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, Pacific Lumber has
significantly increased its production capacity for manufactured lumber
products by assembling knot-free pieces of narrower and shorter lumber into
wider or longer pieces in its end and edge glue plant. This manufactured
lumber results in a significant increase in lumber recovery and produces a
standard size upper grade product which is sold at a premium price compared
to common grade products of similar dimensions. Pacific Lumber 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 maximize cogeneration power revenues.
Income before income taxes and extraordinary item
Income before income taxes and extraordinary item decreased for
1995 as compared to 1994. This decrease was primarily due to lower
investment, interest and other income and the decrease in operating income.
Investment, interest and other income for 1995 includes net gains on
marketable securities of $4.2 million. Investment, interest and other
income for 1994 includes the receipt of a franchise tax refund of $7.2
million (as described in Note 10 to the Consolidated Financial Statements)
and net gains on marketable securities of $1.7 million.
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.
Extraordinary item
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.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
The Company conducts its operations primarily through its
subsidiaries, Pacific Lumber and Britt. Creditors of the Company's
subsidiaries have priority with respect to the assets, cash flows 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, 1995,
the indebtedness of the subsidiaries reflected on the Company's
Consolidated Balance Sheet was $586.0 million. The indentures governing
the Pacific Lumber Senior Notes and the Timber Notes (the "Timber Note
Indenture") and Pacific Lumber's revolving credit agreement (as amended and
restated, the "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
Scotia Pacific, exclusive of the net income and depletion of Scotia Pacific
as long as any Timber Notes are outstanding. As of December 31, 1995,
under the most restrictive of these covenants, approximately $15.7 million
of dividends could be paid by Pacific Lumber. Pacific Lumber paid an
aggregate of $22.0 million and $24.5 million of dividends in 1995 and 1994,
respectively.
In March 1995, Britt paid dividends consisting of $6.0 million of
receivables from its parent, MPI. These receivables represented prior cash
advances from Britt to MPI.
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 Scotia Pacific. The Company expects that
Pacific Lumber will provide a major portion of its future operating cash
flow. Pacific Lumber is dependent upon Scotia Pacific for a significant
portion of its timber requirements from which it generates the substantial
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 flows of Scotia Pacific and the holders of the Pacific
Lumber Senior Notes 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, Scotia Pacific will
not have available cash for distribution to Pacific Lumber unless Scotia
Pacific'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 Scotia Pacific from incurring any additional
indebtedness for borrowed money and limits the business activities of
Scotia Pacific 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 Scotia
Pacific'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 Scotia Pacific 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. If all
payments of principal are made in accordance with Rated Amortization, the
payment date on which Scotia Pacific will pay the final installment of
principal is July 20, 2015. The amount of principal which Scotia Pacific
must pay through each Timber Note payment date in order to avoid payment of
prepayment or deficiency premiums is Scheduled Amortization. If all
payments of principal are made in accordance with Scheduled Amortization,
the payment date on which Scotia Pacific will pay the final installment of
principal is July 20, 2009.
The following table presents the amortization of the Timber Notes
based on Rated Amortization and Scheduled Amortization:
<TABLE>
<CAPTION>
Rated Scheduled
Amortization Amortization
--------------- ---------------
(In millions of dollars)
<S> <C> <C>
Years Ending December 31:
1996 $ 8.3 $ 14.1
1997 8.5 16.2
1998 8.7 19.3
1999 10.2 21.6
2000 12.6 24.0
Thereafter 301.9 255.0
--------------- ---------------
$ 350.2 $ 350.2
=============== ===============
</TABLE>
During 1994, 1995 and January 1996, Scotia Pacific repaid
approximately $13.1 million, $13.6 million and $8.5 million, respectively,
of the aggregate principal amount outstanding on the Timber Notes in
accordance with Scheduled Amortization.
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 Scotia Pacific to
Pacific Lumber. Accordingly, the Company expects that once Scotia
Pacific's debt service, operating and capital expenditure requirements have
been met, substantially all of Scotia Pacific's available cash will be
periodically distributed to Pacific Lumber. Scotia Pacific paid $59.0
million and $88.9 million of dividends to Pacific Lumber during the years
ended December 31, 1995 and 1994, respectively. In the event Scotia
Pacific'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, accordingly it would be precluded from distributing
funds to the Company, therefore the Company's ability to pay interest on
the MGI Notes and its other indebtedness would also be materially impaired.
During the years ended December 31, 1995 and 1994, Pacific
Lumber's operating income before depletion and depreciation ("operating
cash flow") amounted to $90.5 million and $95.9 million, respectively,
which exceeded interest incurred on all of its indebtedness in those years
by $35.0 million and $39.8 million, respectively. The Company believes
that Pacific Lumber's level of operating cash flow and other available
sources of financing will be sufficient to meet debt service, working
capital and capital expenditure requirements for the next year. With
respect to long-term liquidity, Pacific Lumber believes that its ability to
generate sufficient levels of cash flow from operations, and its ability
to obtain both short and long-term financing should provide sufficient
funds to meet debt service, long-term working capital and capital
expenditure requirements.
As of December 31, 1995, the Company (excluding Pacific Lumber
and its subsidiary companies) had cash and marketable securities of
approximately $58.4 million. The Company believes, although there can be
no assurance, that the aggregate dividends which will be available to it
from Pacific Lumber and Britt, during the 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 should 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.
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, 1995, under the most restrictive of these covenants,
approximately $1.9 million of dividends could be paid by the Company, of
which $1.6 was paid in January 1996. On September 29, 1995, the Company
paid dividends of $4.8 million. 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.
Pacific Lumber's Revolving Credit Agreement with a bank expires
on May 31, 1998. 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 $60.0 million, of which $15.0 million may be used for
standby letters of credit and $30.0 million is restricted to acquisition of
timberlands. Borrowings made pursuant to the portion of the credit
facility restricted to timberland acquisitions would also be secured by the
purchased timberlands. As of December 31, 1995, $48.1 million of
borrowings was available under the Revolving Credit Agreement, of which
$3.1 million was available for letters of credit and $30.0 million was
restricted to timberland acquisitions. No borrowings were outstanding as
of December 31, 1995, and letters of credit outstanding amounted to $11.9
million. The Revolving Credit Agreement contains covenants substantially
similar to those contained in the indenture governing the Pacific Lumber
Senior Notes.
Capital expenditures for Pacific Lumber and Britt were made to
improve production efficiency, reduce operating costs and, to a lesser
degree, acquire additional timberlands. Capital expenditures of the
Company's subsidiaries were $9.9 million and $11.3 million for the years
ended December 31, 1995 and 1994, respectively. Capital expenditures for
1996 are expected to be $12.5 million and for the 1997 - 1998 period are
estimated to be between $10.0 million and $15.0 million per year. Pacific
Lumber may purchase additional timberlands from time to time as appropriate
opportunities arise. Moreover, such purchases could exceed historical
levels. Capital expenditures attributable to the reconstruction of Pacific
Lumber's commercial facilities destroyed by an earthquake in April 1992
were $1.9 million for 1993 and $2.6 million for 1994, when construction was
completed.
As of December 31, 1995, the Company had consolidated working
capital of $124.2 million and long-term debt of $732.9 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 $102.5
million and $736.4 million, respectively, at December 31, 1994. The
decrease in long-term debt was primarily due to principal payments on the
Timber Notes. The Company and its subsidiaries anticipate that cash flow
from operations, together with existing cash, marketable securities and
available sources of financing, will be sufficient to fund their working
capital and capital expenditure requirements for the next year. With
respect to their long-term liquidity, the Company and its subsidiaries
believe that their existing cash and cash equivalents, together with their
ability to generate sufficient levels of cash flow from operations and
their ability to obtain both short and long-term financing, should provide
sufficient funds to meet their working capital and capital expenditure
requirements. However, due to their highly leveraged condition, the
Company and its subsidiaries are more sensitive than less leveraged
companies to factors affecting their operations, including litigation and
governmental regulation affecting timber harvesting practices, increased
competition from other lumber producers or alternative building products
and general economic conditions.
TRENDS
The Company's forest products operations are primarily conducted
by Pacific Lumber and are subject to a variety of California and federal
laws and regulations dealing with timber harvesting, endangered species and
critical habitat, 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 consolidated financial
position, operating results or liquidity; however, these laws and
regulations are modified from time to time, and there can be no assurance
that certain pending or future governmental regulations, legislation or
judicial or administrative decisions would not adversely affect the Company
or its ability to sell lumber, logs or timber. See "Business--Regulatory
and Environmental Factors" and Note 9 to the Consolidated Financial
Statements for information regarding sustained yield regulations, the
proposed final designation of approximately 33,000 acres of Pacific
Lumber's timberlands as critical habitat for the marbled murrelet, and
other information regarding regulatory and environmental factors affecting
the Company's operations.
Judicial or regulatory actions adverse to Pacific Lumber,
increased regulatory delays and inclement weather in northern California,
independently or collectively, could impair Pacific Lumber's ability to
maintain adequate log inventories and force Pacific Lumber to temporarily
idle or curtail operations at certain lumber mills from time to time.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS 121"). SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of the
estimated future cash flows expected to result from the use and eventual
disposition of an asset is less than the carrying amount of the asset, an
impairment loss is recognized. Measurement of an impairment loss is based
on the fair value of the asset. SFAS 121 requires that long-lived assets
and certain identifiable intangibles to be disposed of be reported at the
lower of carrying amount or fair value, less cost to sell. SFAS 121 is
effective for financial statements for fiscal years beginning after
December 31, 1995. The Company does not expect that the adoption of SFAS
121 will have a material impact on the Company's consolidated financial
statements.
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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
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.
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.
ARTHUR ANDERSEN LLP
San Francisco, California
January 19, 1996
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
---------- ----------
(In thousands of
dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 48,396 $ 48,575
Marketable securities 36,568 19,514
Receivables:
Trade 20,576 23,170
Other 1,624 7,435
Inventories 77,904 70,098
Prepaid expenses and other current assets 7,101 3,717
---------- ----------
Total current assets 192,169 172,509
Timber and timberlands, net of depletion of $204,856 and $188,003 at
December 31, 1995 and 1994, respectively 337,390 350,871
Property, plant and equipment, net 100,142 103,183
Deferred financing costs, net 27,288 30,096
Deferred income taxes 58,485 61,498
Restricted cash 31,367 32,402
Other assets 5,542 6,122
---------- ----------
$ 752,383 $ 756,681
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 4,166 $ 3,703
Accrued interest 25,354 25,765
Accrued compensation and related benefits 9,611 10,622
Deferred income taxes 10,244 12,986
Other accrued liabilities 4,435 3,266
Long-term debt, current maturities 14,195 13,670
---------- ----------
Total current liabilities 68,005 70,012
Long-term debt, less current maturities 764,310 768,786
Other noncurrent liabilities 33,813 30,365
---------- ----------
Total liabilities 866,128 869,163
---------- ----------
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 (195,032) (193,769)
---------- ----------
Total stockholder's deficit (113,745) (112,482)
---------- ----------
$ 752,383 $ 756,681
========== ==========
</TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
(In thousands of dollars)
<S> <C> <C> <C>
Net sales:
Lumber and logs $ 216,898 $ 227,430 $ 215,743
Other 25,694 22,199 17,696
---------- ---------- ----------
242,592 249,629 233,439
---------- ---------- ----------
Operating expenses:
Cost of goods sold (exclusive of depletion and 127,124 129,598 134,563
depreciation)
Selling, general and administrative 15,884 16,250 20,108
Depletion and depreciation 26,405 25,946 25,811
---------- ---------- ----------
169,413 171,794 180,482
---------- ---------- ----------
Operating income 73,179 77,835 52,957
Other income (expense):
Investment, interest and other income 9,393 14,367 9,718
Interest expense (77,824) (77,383) (80,339)
---------- ---------- ----------
Income (loss) from continuing operations before income
taxes, extraordinary items and cumulative effect of
changes in accounting principles 4,748 14,819 (17,664)
Credit (provision) in lieu of income taxes (1,211) 3,616 3,355
---------- ---------- ----------
Income (loss) from continuing operations before
extraordinary items and cumulative effect of changes
in accounting principles 3,537 18,435 (14,309)
Loss from net assets transferred to MAXXAM, net of
minority interests and related income taxes - - (512,970)
---------- ---------- ----------
Income (loss) before extraordinary items and cumulative
effect of changes in accounting principles 3,537 18,435 (527,279)
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) $ 3,537 $ 3,569 $(531,900)
========== ========== ==========
</TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
(In thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,537 $ 3,569 $(531,900)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion and depreciation 26,405 25,946 25,811
Amortization of deferred financing costs and
discounts on long-term debt 13,328 12,127 7,435
Net (purchases) sales of marketable securities (19,533) 5,321 12,389
Net losses (gains) on marketable securities (4,175) (1,669) (6,414)
Loss (income) from net assets transferred to
MAXXAM, net - - 512,970
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 (7,695) 3,634 (2,077)
Increase (decrease) in accounts payable 463 832 471
Decrease (increase) in receivables 5,778 (7,660) 7,558
Decrease (increase) in prepaids and other assets (3,384) (528) 212
Increase in accrued and deferred income taxes 2,303 (3,815) (5,123)
Decrease in other liabilities 7,734 (2,283) (185)
Decrease in accrued interest (411) (451) (7,284)
Other 1,020 (86) 848
---------- ---------- ----------
Net cash provided by operating activities 25,370 34,937 19,332
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of note receivable from affiliate 2,500 - -
Net proceeds from sale of assets 18 1,149 256
Capital expenditures (9,852) (11,322) (11,120)
Increase in net assets transferred to MAXXAM - - (11,770)
---------- ---------- ----------
Net cash used for investing activities (7,334) (10,173) (22,634)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions, repurchase of and principal payments on
long-term debt (14,300) (13,237) (716,551)
Net borrowings (payments) under revolving credit
agreements - (2,900) 2,900
Incurrence of financing costs (150) (213) (34,738)
Proceeds from issuance of long-term debt - - 790,000
Restricted cash deposits, net 1,035 1,160 (33,562)
Dividends paid (4,800) - (20,000)
---------- ---------- ----------
Net cash used for financing activities (18,215) (15,190) (11,951)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (179) 9,574 (15,253)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 48,575 39,001 54,254
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 48,396 $ 48,575 $ 39,001
========== ========== ==========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Net margin borrowings (payments) for marketable
securities $ (6,648) $ 5,628 $ 1,020
Timber and timberlands acquired subject to loan from
seller 615 910 -
Net assets transferred to MAXXAM - - 30,531
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 64,907 $ 65,707 $ 80,188
Income taxes paid (refunded) (5,190) 1,170 46
Tax allocation payments to MAXXAM - 397 1,722
</TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common
Stock Retained
($.08-1/3 Additional Earnings
Par) Capital (Deficit) Total
---------- ---------- ---------- ----------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Balance, January 1, 1993 $ - $ 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)
Net income - - 3,537 3,537
Dividend - - (4,800) (4,800)
---------- ---------- ---------- ----------
Balance, December 31, 1995 $ - $ 81,287 $(195,032) $(113,745)
========== ========== ========== ==========
</TABLE>
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." MGI is a wholly owned subsidiary of MAXXAM Inc.
("MAXXAM"). Intercompany balances and transactions have been eliminated.
Certain reclassifications have been made to prior years' financial
statements to be consistent with the current year's presentation.
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." The Company presented the loss from 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) 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
is engaged in forest products operations conducted through its wholly owned
subsidiaries, Pacific Lumber and Britt. Pacific Lumber is engaged in
several 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 manufacture of lumber into a variety of finished products.
Britt manufactures redwood and cedar fencing and decking products from
small diameter logs, a substantial portion of which is obtained from
Pacific Lumber. Housing, construction and remodeling are the principal
markets for the Company's lumber products. Export sales generally
constitute less than 4% of forest product sales. A significant portion of
forest product sales are made to third parties located west of the
Mississippi river.
The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of estimates and
assumptions that affect (i) the reported amounts of assets and liabilities,
(ii) disclosure of contingent assets and liabilities known to exist as of
the date the financial statements are published, and (iii) the reported
amount of revenues and expenses recognized during each period presented.
The Company reviews all significant estimates affecting its consolidated
financial statements on a recurring basis and records the effect of any
necessary adjustments prior to their publication. Adjustments made with
respect to the use of estimates often relate to improved information not
previously available. Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of the Company's consolidated
financial statements; accordingly, it is possible that the subsequent
resolution of any one of the contingent matters described in Note 9 could
differ materially from current estimates. The results of an adverse
resolution of such uncertainties could have a material effect on the
reported amounts of the Company's consolidated assets and liabilities.
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
Marketable securities are carried at fair value. Prior to
December 31, 1993, 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, 1995 were: 1995 - net unrealized holding gains of
$1,666 and net realized gains of $2,509; 1994 - net unrealized holding
losses of $1,094 and net realized gains of $2,763; and 1993 - net realized
gains of $3,510, the recovery of $2,063 of net unrealized losses and net
unrealized gains of $841. 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.
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
Timber and timberlands are stated at cost, net of accumulated
depletion. 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") of Scotia Pacific Holding Company ("Scotia Pacific"), a wholly
owned subsidiary of Pacific Lumber. See Note 5. The Liquidity Account is
not available, except under certain limited circumstances, for Scotia
Pacific's 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, 1995, 1994 and 1993 includes
interest of approximately $2,560, $2,638 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, 1995 and 1994, cash and cash equivalents include
$19,742 and $19,439, 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)
The adjustment to the Company's additional capital for the year
ended December 31, 1993 resulted from a transaction relating to Kaiser's
common stock prior to the Forest Products Group Formation. Pursuant to the
terms of an amended compensation plan, Kaiser issued 4,228 shares to
certain members of its management in 1993. As a result of this
transaction, the Company's equity in Kaiser's net assets differed from the
Company's historical cost. The Company accounted for this difference as an
adjustment to additional capital.
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.
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, 1995 December 31, 1994
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 48,396 $ 48,396 $ 48,575 $ 48,575
Marketable securities (held for trading
purposes) 36,568 36,568 19,514 19,514
Restricted cash 31,367 31,367 32,402 32,402
Long-term debt (778,505) (772,841) (782,456) (725,031)
</TABLE>
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.
The net loss from net assets transferred to MAXXAM is as follows:
<TABLE>
<CAPTION>
Seven
Months
Ended
July 31,
1993
-----------
<S> <C>
Net sales:
Aluminum operations $1,016,966
Real estate and other 19,654
----------
1,036,620
-----------
Costs and expenses:
Aluminum operations 1,091,353
Real estate and other 28,132
-----------
1,119,485
-----------
Loss before income taxes, minority interests, extraordinary item and cumulative effect
of changes in accounting principles (82,865)
Credit for income taxes 31,050
Minority interests 3,641
-----------
Loss before extraordinary item and cumulative effect of changes in accounting
principles (48,174)
Extraordinary item:
Loss on redemption of debt, net of related benefits for income taxes and minority
interests of $11,249 and $2,791, respectively (19,045)
Cumulative effect of changes in accounting principles:
Postretirement and postemployment benefits, net of related benefits for income
taxes and minority interests of $237,682 and $64,554, respectively (440,519)
Accounting for income taxes (5,232)
-----------
Loss from net assets transferred to MAXXAM $ (512,970)
===========
</TABLE>
Net assets transferred to MAXXAM are as follows as of the date of transfer:
<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,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
Lumber $ 59,563 $ 55,310
Logs 18,341 14,788
---------- ----------
$ 77,904 $ 70,098
========== ==========
</TABLE>
During 1993, Pacific Lumber's inventory quantities were reduced.
This reduction 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. The effect of this inventory liquidation
increased cost of goods sold by approximately $222 for the year ended
December 31, 1993.
4. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 31,
Estimated -----------------------
Useful
Lives 1995 1994
------------- ---------- ----------
Logging roads, land and improvements 15 years $ 7,929 $ 7,545
Buildings 33 years 29,661 28,209
Machinery and equipment 5 - 15 years 129,764 126,480
Construction in progress 520 30
---------- ----------
167,874 162,264
Less: accumulated depreciation (67,732) (59,081)
---------- ----------
$ 100,142 $ 103,183
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and
1993 was $9,663, $9,269 and $8,670, respectively.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized Notes due July 20,
2015 $ 350,233 $ 363,811
11-1/4% MGI Senior Secured Notes due August 1, 2003 100,000 100,000
12-1/4% MGI Senior Secured Discount Notes due August 1, 2003,
net of discount 92,498 82,779
10-1/2% Pacific Lumber Senior Notes due March 1, 2003 235,000 235,000
Other 774 866
---------- ----------
778,505 782,456
Less: current maturities (14,195) (13,670)
---------- ----------
$ 764,310 $ 768,786
========== ==========
</TABLE>
On March 23, 1993, Pacific Lumber issued $235,000 of the Pacific
Lumber Senior Notes and Scotia Pacific, its newly-formed wholly owned
subsidiary, issued $385,000 of the Timber Notes. Pacific Lumber and Scotia
Pacific 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; (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.
The indenture governing the Timber Notes (the "Timber Note
Indenture") prohibits Scotia Pacific from incurring any additional
indebtedness for borrowed money and limits the business activities of
Scotia Pacific to the ownership and operation of its timber and
timberlands. The Timber Notes are senior secured obligations of Scotia
Pacific and are not obligations of, or guaranteed by, Pacific Lumber or any
other person. The Timber Notes are secured by a lien on (i) Scotia
Pacific's timber and timberlands (representing $179,364 of the Company's
consolidated balance at December 31, 1995), (ii) Scotia Pacific's contract
rights and certain other assets, (iii) the funds deposited in the Payment
Account and the Liquidity Account, and (iv) substantially all of Scotia
Pacific's other property and equipment.
The Timber Notes are structured to link, to the extent of
available cash, the deemed depletion of Scotia Pacific'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 Scotia Pacific 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 Scotia Pacific will pay the final installment of principal is
July 20, 2015. The amount of principal which Scotia Pacific must pay
through each Timber Note payment date in order to avoid 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 Scotia Pacific 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 Scotia Pacific. The Company expects that Pacific Lumber will
provide a major portion of the Company's future operating cash flow.
Pacific Lumber is dependent upon Scotia Pacific 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 flows of Scotia Pacific, 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, Scotia Pacific will not have available
cash for distribution to Pacific Lumber unless Scotia Pacific'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 are payable semi-
annually on January 20 and July 20. The Timber Notes are redeemable at the
option of Scotia Pacific, 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 (as
amended and restated, the "Revolving Credit Agreement") which expires on
May 31, 1998. 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 $60,000, of which $15,000 may be used for standby letters of
credit and $30,000 is restricted to timberland acquisitions. Borrowings
made pursuant to the portion of the credit facility restricted to
timberland acquisitions would also be secured by the purchased timberlands.
As of December 31, 1995, $48,090 of borrowings was available under the
Revolving Credit Agreement, of which $3,090 was available for letters of
credit and $30,000 was restricted to timberland acquisitions. No
borrowings were outstanding as of December 31, 1995, and letters of credit
outstanding amounted to $11,910. The Revolving Credit Agreement contains
covenants substantially similar to those contained in the indenture
governing the Pacific Lumber Senior Notes.
The indentures governing the Pacific Lumber Senior Notes, the
Timber Notes and the 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,
1995, under the most restrictive of these covenants, approximately $15,663
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, 1995, under the most restrictive of these covenants,
approximately $1,899 of dividends could be paid by the Company, of which
$1,600 was paid in January 1996. 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
$33,222 and $43,941 at December 31, 1995 and 1994, 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.
Maturities
The following table of scheduled maturities of long-term debt
outstanding at December 31, 1995 reflects Scheduled Amortization with
respect to the Timber Notes:
<TABLE>
<CAPTION>
Years Ending December 31,
----------------------------------------------------------------------------
1996 1997 1998 1999 2000 Thereafter
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
7.95% Scotia Pacific
Timber
Collateralized
Notes $ 14,103 $ 16,165 $ 19,335 $ 21,651 $ 23,970 $ 255,009
11-1/4% MGI Senior
Secured Notes - - - - - 100,000
12-1/4% MGI Senior
Secured
Discount Notes - - - - - 125,720
10-1/2% Pacific
Lumber
Senior Notes - - - - - 235,000
Other 92 93 94 94 95 306
----------- ---------- ---------- ---------- ---------- ----------
$ 14,195 $ 16,258 $ 19,429 $ 21,745 $ 24,065 $ 716,035
=========== ========== ========== ========== ========== ==========
</TABLE>
Restricted Net Assets of Subsidiaries
At December 31, 1995, certain debt instruments restricted the
ability of Pacific Lumber to transfer assets, make loans and advances and
pay dividends to the Company. As of December 31, 1995, all of the assets
of Pacific Lumber and its subsidiaries are subject to such restrictions.
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, Scotia
Pacific 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 (as amended, the "PL Tax Allocation
Agreement"). Under the terms of the PL Tax Allocation Agreement, Pacific
Lumber is liable to MAXXAM for the federal consolidated income tax
liability of Pacific Lumber, Scotia Pacific 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 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 "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 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,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal credit (provision) in lieu of income taxes $ (167) $ - $ (988)
State and local (35) (55) (253)
---------- ---------- ----------
(202) (55) (1,241)
---------- ---------- ----------
Deferred:
Federal credit (provision) in lieu of income taxes (33) 2,366 4,825
State and local (976) 1,305 (229)
---------- ---------- ----------
(1,009) 3,671 4,596
---------- ---------- ----------
$ (1,211) $ 3,616 $ 3,355
========== ========== ==========
</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,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Income (loss) from continuing operations before income
taxes, extraordinary items and cumulative effect of
changes in accounting principles $ 4,748 $ 14,819 $ (17,664)
========== ========== ==========
Amount of federal income tax based upon the statutory rate $ (1,662) $ (5,187) $ 6,182
Revision of prior years' tax estimates and other changes in
valuation allowances 907 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 (657) 812 (313)
Other 201 252 104
---------- ---------- ----------
$ (1,211) $ 3,616 $ 3,355
========== ========== ==========
</TABLE>
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,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Loss and credit carryforwards $ 83,705 $ 86,864
Timber and timberlands 32,528 37,209
Other liabilities 17,203 10,460
Postretirement benefits other than pensions 2,316 2,145
Other 327 1,818
Valuation allowances (51,595) (52,060)
---------- ----------
Total deferred income tax assets, net 84,484 86,436
---------- ----------
Deferred income tax liabilities:
Inventories (16,068) (17,934)
Property, plant and equipment (16,560) (16,563)
Other (3,615) (3,427)
---------- ----------
Total deferred income tax liabilities (36,243) (37,924)
---------- ----------
Net deferred income tax assets $ 48,241 $ 48,512
========== ==========
</TABLE>
The valuation allowances listed above relate primarily to loss
and credit carryforwards. As of December 31, 1995, approximately $32,528
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, 1995 is $32,110 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
$43,731 and $44,351 at December 31, 1995 and 1994, 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, 1995, 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:
Net operating losses $ 224,485 2010
Net capital losses 5,177 1997
Minimum tax credit 167 -
Alternative Minimum Tax Attribute Carryforwards:
Net operating losses $ 185,803 2010
</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,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 1,483 $ 1,643 $ 1,600
Interest cost on projected benefit obligation 1,693 1,263 918
Actual loss (gain) on plan assets (3,900) 10 (2,128)
Net amortization and deferral 2,460 (859) 1,359
---------- ---------- ----------
Net periodic pension cost $ 1,736 $ 2,057 $ 1,749
========== ========== ==========
</TABLE>
The following table sets forth the funded status and amounts recognized
in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
----------- ----------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation $ 16,910 $ 11,809
Non-vested benefit obligation 1,214 779
----------- ----------
Total accumulated benefit obligation $ 18,124 $ 12,588
=========== ==========
Projected benefit obligation $ 21,841 $ 15,047
Plan assets at fair value, primarily equity and debt securities (18,363) (13,184)
----------- ----------
Projected benefit obligation in excess of plan assets 3,478 1,863
Unrecognized net transition asset 24 29
Unrecognized net gain (loss) (27) 1,475
Unrecognized prior service cost (45) (50)
----------- ----------
Accrued pension liability $ 3,430 $ 3,317
=========== ==========
</TABLE>
The assumptions used in accounting for the defined benefit plan were
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Rate of increase in compensation levels 5.0% 5.0% 5.0%
Discount rate 7.25% 8.5% 7.5%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
</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 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,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 228 $ 216 $ 153
Interest cost on accumulated postretirement benefit
obligation 317 294 315
Net amortization and deferral (53) (7) -
---------- ---------- ----------
Net periodic postretirement benefit cost $ 492 $ 503 $ 468
========== ========== ==========
</TABLE>
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,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
Retirees $ 634 $ 860
Actives eligible for benefits 726 656
Actives not eligible for benefits 3,317 2,355
---------- ----------
Accumulated postretirement benefit obligation 4,677 3,871
Unrecognized net gain 553 972
---------- ----------
Postretirement benefit liability $ 5,230 $ 4,843
========== ==========
</TABLE>
The annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 11.0% for 1996 and
is assumed to decrease gradually to 5.5% in 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, 1995 by approximately $674 and the aggregate
of the service and interest cost components of net periodic postretirement
benefit cost by approximately $90.
The discount rates used in determining the accumulated
postretirement benefit obligation were 7.25% and 8.5% at December 31, 1995
and 1994, 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 $1,281 and $1,215 for the years ended December 31, 1995 and 1994,
respectively.
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 $8,900 and $9,233 at December 31, 1995 and 1994, respectively.
Workers' compensation expenses amounted to $3,579, $4,069 and $3,776 for
the years ended December 31, 1995, 1994 and 1993, 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 of MAXXAM personnel rendering
services to the Company. Charges by MAXXAM for such services were $1,994,
$2,254 and $3,347 for the years ended December 31, 1995, 1994 and 1993,
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
$52,000 settlement, $33,000 was paid by insurance carriers of MAXXAM and
Pacific Lumber, $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, including a $2,000 accrual for certain
contingent claims and $4,400 of related legal fees, net of benefits for
federal and state income taxes of $6,312.
The Company's operations are subject to a variety of California
and federal laws and regulations dealing with timber harvesting, endangered
species and critical habitat, and air and water quality. The Company does
not expect that compliance with such existing laws and regulations will
have a material adverse effect on its future consolidated operating
results, financial position or liquidity; however, these laws are modified
from time to time and there can be no assurance that certain pending or
future legislation, governmental regulations or judicial or administrative
decisions would not adversely affect the Company or its ability to sell
lumber, logs or timber.
In 1995, the U.S. Fish and Wildlife Service (the "USFWS")
published its proposed final designation of critical habitat for the
marbled murrelet (the "Proposed Designation"), seeking to designate over
four million acres as critical habitat for the marbled murrelet, including
approximately 33,000 acres of Pacific Lumber's timberlands. The Proposed
Designation was subject to a 60-day comment period and Pacific Lumber filed
comments vigorously opposing the Proposed Designation. The USFWS has not
yet published its final designation of critical habitat for the marbled
murrelet. Pacific Lumber is unable to predict when or if it would be able
to harvest on any acreage finally designated as critical habitat.
Furthermore, it is impossible to determine the future adverse impact of
such designation on the Company's consolidated financial position, results
of operations or liquidity until such time as the Proposed Designation is
finalized and related regulatory and legal issues are fully resolved.
However, if Pacific Lumber is unable to harvest, or is severely limited in
harvesting, on timberlands designated as marbled murrelet critical habitat,
such restrictions could have a material adverse effect on the Company's
liquidity, consolidated financial position and results of operations. If
Pacific Lumber is unable to harvest or is severely limited in harvesting,
it intends to seek full compensation from the appropriate governmental
agencies on the grounds that such restrictions constitute a taking.
There continue to be other regulatory actions and lawsuits
seeking to have various other species listed as threatened or endangered
under the federal Endangered Species Act and/or the California Endangered
Species Act and to designate critical habitat for such species. It is
uncertain what impact, if any, such listings and/or designations of
critical habitat will have on the Company's consolidated financial
position, results of operations or liquidity.
In 1994, the California Board of Forestry ("BOF") 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 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. The
Company is unable to predict the ultimate impact the sustained yield
regulations will have on its future consolidated financial position,
results of operations or liquidity.
Various groups and individuals have filed objections with the
California Department of Forestry ("CDF") and the BOF regarding the CDF's
and the BOF'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 certain of the
Company's THPs. In addition, lawsuits are pending which seek to prevent
the Company from implementing certain of its approved THPs and other timber
operations. These challenges have severely restricted Pacific Lumber's
ability to harvest virgin old growth redwood timber on its property (and,
to a lesser extent, its residual old growth timber). To date, challenges
with respect to the Company's THPs relating to young growth and residual
old growth have been limited; however, no assurance can be given as to the
extent of such challenges in the future. The Company believes that
environmentally focused challenges to its THPs are likely to occur in the
future, particularly with respect to virgin and residual old growth timber.
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, results of operations or liquidity. It is, however, impossible
to predict the future nature or degree of such challenges or their ultimate
impact on the consolidated financial position, results of operations or
liquidity 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 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, results of operations or
liquidity.
10. OTHER ITEMS
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 1995 and 1993, Pacific Lumber recorded reductions in cost of
sales of $1,527 and $1,200, respectively, resulting from business
interruption insurance reimbursements for higher operating costs and the
related loss of revenues resulting from the April 1992 earthquake. Other
receivables at December 31, 1994 included $1,684 related to earthquake
related insurance claims.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summary quarterly financial information for the years ended
December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
1995:
Net sales $ 51,968 $ 65,644 $ 63,300 $ 61,680
Operating income 12,423 21,767 18,697 20,292
Net income (loss) (3,292) 3,172 1,148 2,509
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
</TABLE>
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
<TABLE>
<CAPTION>
(A) INDEX TO FINANCIAL STATEMENTS PAGE
1. FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):
<S> <C>
Report of Independent Public Accountants 23
Consolidated balance sheet at December 31, 1995 and 1994 24
Consolidated statement of operations for the years ended December 31, 1995,
1994 and 1993 25
Consolidated statement of cash flows for the years ended December 31, 1995,
1994 and 1993 26
Consolidated statement of stockholder's equity (deficit) for the years ended
December 31, 1995, 1994 and 1993 27
Notes to consolidated financial statements 28
2. FINANCIAL STATEMENT SCHEDULES:
Schedule I - Condensed financial information of Registrant at December 31, 1995
and 1994 and for the years ended December 31, 1995, 1994 and 1993 46-48
</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.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET (UNCONSOLIDATED)
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
---------- ----------
(In thousands of
dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,862 $ 24,214
Marketable securities 36,568 19,514
Other current assets 2,867 1,766
---------- ----------
Total current assets 61,297 45,494
Investments in and advances from subsidiaries 141 17,083
Deferred financing costs and other assets 4,905 5,593
Deferred income taxes 17,671 13,609
---------- ----------
$ 84,014 $ 81,779
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 573 $ 178
Accrued interest 4,688 4,656
Margin borrowings for marketable securities - 6,648
---------- ----------
Total current liabilities 5,261 11,482
Long-term debt 192,498 182,779
---------- ----------
Total liabilities 197,759 194,261
---------- ----------
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 (195,032) (193,769)
---------- ----------
Total stockholder's deficit (113,745) (112,482)
---------- ----------
$ 84,014 $ 81,779
========== ==========
</TABLE>
STATEMENT OF OPERATIONS (UNCONSOLIDATED)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
(In thousands of dollars)
<S> <C> <C> <C>
Investment, interest and other income (expense) $ 1,341 $ (2,159) $ (718)
Interest expense (22,341) (21,180) (20,917)
General and administrative expenses (370) (598) (720)
Equity in earnings of subsidiaries 16,170 18,790 6,534
---------- ---------- ----------
Loss from continuing operations before income taxes,
extraordinary item and cumulative effect of change in
accounting principle (5,200) (5,147) (15,821)
Credit in lieu of income taxes 8,737 8,716 3,334
---------- ---------- ----------
Income (loss) from continuing operations before
extraordinary item and cumulative effect of change in
accounting principle 3,537 3,569 (12,487)
Loss from net assets transferred to MAXXAM, net of
minority interests and related income taxes - - (512,970)
---------- ---------- ----------
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle 3,537 3,569 (525,457)
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) $ 3,537 $ 3,569 $(531,900)
========== ========== ==========
</TABLE>
STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
(In thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,537 $ 3,569 $(531,900)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Amortization of deferred financing costs and
discounts on long-term debt 11,059 9,930 4,855
Equity in earnings of subsidiaries (16,170) (18,790) (6,534)
Net purchases of marketable securities (20,011) (1,808) (5,586)
Net gains on marketable securities (3,697) (731) (2,551)
Loss from net assets transferred to MAXXAM, net - - 512,970
Extraordinary loss on early extinguishment of
debt, net - - 6,387
Cumulative effect of change in accounting
principle - - 56
Decrease (increase) in receivables 171 90 (380)
Increase in accrued and deferred income taxes (5,237) (8,518) (3,356)
Increase (decrease) in accrued interest and other
liabilities 330 (911) 3,272
Increase (decrease) in accounts payable - (53) 53
Other (16) 232 62
---------- ---------- ----------
Net cash used for operating activities (30,034) (16,990) (22,652)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net advances from subsidiaries 33,112 41,112 35,695
Increase in net assets transferred to MAXXAM - - (11,770)
---------- ---------- ----------
Net cash provided by investing activities 33,112 41,112 23,925
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - - 170,000
Redemptions of long-term debt (630) - (155,263)
Dividends paid (4,800) - (20,000)
Incurrence of financing costs - - (6,503)
---------- ---------- ----------
Net cash used for financing activities (5,430) - (11,766)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,352) 24,122 (10,493)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24,214 92 10,585
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 21,862 $ 24,214 $ 92
========== ========== ==========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Net margin borrowings (payments) for marketable $ (6,648) $ 5,628 $ 1,020
securities
Net assets transferred to MAXXAM - - 30,531
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 11,250 $ 11,156 $ 13,975
Tax allocation payments to (refunds from) MAXXAM (3,500) (198) 22
</TABLE>
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 present the loss from net assets transferred to
MAXXAM 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.
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 28, 1996 By: PAUL N. SCHWARTZ
Paul N. Schwartz
Vice President and Chief Financial
Officer
(Principal Financial Officer)
Date: March 28, 1996 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 28, 1996 By: CHARLES E. HURWITZ
Charles E. Hurwitz
Chairman of the Board, President
and
Chief Executive Officer
Date: March 28, 1996 By: PAUL N. SCHWARTZ
Paul N. Schwartz
Vice President, Chief Financial
Officer
and Director
Date: March 28, 1996 By: JOHN A. CAMPBELL
John A. Campbell
Vice President and Director
Date: March 28, 1996 By: JOHN T. LA DUC
John T. La Duc
Vice President and Director
Date: March 28, 1996 By: ANTHONY R. PIERNO
Anthony R. Pierno
Vice President, General Counsel
and Director
Date: March 28, 1996 By: WILLIAM S. RIEGEL
William S. Riegel
Vice President and Director
MAXXAM GROUP INC.
INDEX OF EXHIBITS
Exhibit
Number Description
[S] [C]
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 State Street Bank and Trust Company (as
successor trustee to the First National Bank of
Boston) ("State Street"), 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
("Scotia Pacific") and State Street, as Trustee,
regarding Scotia Pacific's 7.95% Timber Collateralized
Notes due 2015 (incorporated herein by reference to
Exhibit 4.1 to Scotia Pacific's Annual Report on Form
10-K for the fiscal year ended December 31, 1993, File
No. 55538; the "Scotia Pacific 1993 Form 10-K")
4.4 Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment among Scotia
Pacific, State Street, as Trustee, and State Street,
as Collateral Agent (incorporated herein by reference
to Exhibit 4.2 to the Scotia Pacific 1993 Form 10-K)
4.5 Amended and Restated Credit Agreement dated as of
November 10, 1995 between Pacific Lumber and Bank of
America National Trust and Savings Association
(incorporated herein by reference to Exhibit 4.1 to
the Quarterly Report on Form 10-Q of Pacific Lumber
for the quarter ended September 30, 1995; File No. 1-
9204)
4.6 Form of Deed of Trust, Assignment of Rents, Grant of
Easement and Fixture Filing (incorporated herein by
reference to Exhibit 4.2 to the Quarterly Report on
Form 10-Q of Pacific Lumber for the quarter ended
September 30, 1995; File No. 1-9204)
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 Amendment No. 3 to
the Registration Statement on Form S-2 of the Company,
Registration No. 33-64042; 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, Scotia
Pacific, 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 Scotia Pacific, 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 Master Purchase Agreement between Pacific Lumber and
Scotia Pacific (incorporated herein by reference to
Exhibit 10.1 to the Scotia Pacific 1993 Form 10-K)
10.9 Services Agreement between Pacific Lumber and Scotia
Pacific (incorporated herein by reference to Exhibit
10.2 to the Scotia Pacific 1993 Form 10-K)
10.10 Additional Services Agreement between Pacific Lumber
and Scotia Pacific (incorporated herein by reference
to Exhibit 10.3 to the Scotia Pacific 1993 Form 10-K)
10.11 Reciprocal Rights Agreement among Pacific Lumber,
Scotia Pacific and Salmon Creek Corporation
(incorporated herein by reference to Exhibit 10.4 to
the Scotia Pacific 1993 Form 10-K)
10.12 Environmental Indemnification Agreement between
Pacific Lumber and Scotia Pacific (incorporated herein
by reference to Exhibit 10.5 to the Scotia Pacific
1993 Form 10-K)
10.13 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)
10.14 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")
10.15 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)
10.16 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)
10.22 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)
10.23 Undertaking, dated August 4, 1993, executed by MAXXAM
in favor of the Company (incorporated herein by
reference to Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1994)
*27 Financial Data Schedule
*99.1 The consolidated financial statements and notes
thereto of Kaiser Aluminum Corporation for the fiscal
year ended December 31, 1995
*99.2 The consolidated financial statements and notes
thereto of The Pacific Lumber Company for the fiscal
year ended December 31, 1995
- ---------------
* 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.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 48,396
<SECURITIES> 36,568
<RECEIVABLES> 20,576
<ALLOWANCES> 0
<INVENTORY> 77,904
<CURRENT-ASSETS> 192,169
<PP&E> 167,874
<DEPRECIATION> 67,732
<TOTAL-ASSETS> 752,383
<CURRENT-LIABILITIES> 68,005
<BONDS> 778,505
0
0
<COMMON> 0
<OTHER-SE> (113,745)
<TOTAL-LIABILITY-AND-EQUITY> 752,383
<SALES> 242,592
<TOTAL-REVENUES> 242,592
<CGS> 127,124
<TOTAL-COSTS> 127,124
<OTHER-EXPENSES> 42,289
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,824
<INCOME-PRETAX> 4,748
<INCOME-TAX> 1,211
<INCOME-CONTINUING> 3,537
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,537
<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, 1995 and 1994, and the related statements of consolidated
income and cash flows for each of the three years in the period ended
December 31, 1995. 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, 1995 and
1994, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 16, 1996
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------
(In millions of dollars, except share amounts) 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 21.9 $ 17.6
Receivables:
Trade, less allowance for doubtful receivables of $5.0 in 1995 and $4.2 in 1994 222.9 150.7
Other 85.7 48.5
Inventories 525.7 468.0
Prepaid expenses and other current assets 76.6 158.0
-------- --------
Total current assets 932.8 842.8
Investments in and advances to unconsolidated affiliates 178.2 169.7
Property, plant, and equipment - net 1,109.6 1,133.2
Deferred income taxes 269.1 271.2
Other assets 323.5 281.2
-------- --------
Total $2,813.2 $2,698.1
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 184.5 $ 152.1
Accrued interest 32.0 32.6
Accrued salaries, wages, and related expenses 105.3 77.7
Accrued postretirement medical benefit obligation - current portion 46.8 47.0
Other accrued liabilities 129.4 176.9
Payable to affiliates 94.2 85.3
Long-term debt - current portion 8.9 11.5
-------- --------
Total current liabilities 601.1 583.1
Long-term liabilities 548.5 495.5
Accrued postretirement medical benefit obligation 734.0 734.9
Long-term debt 749.2 751.1
Minority interests 122.7 116.2
Stockholders' equity:
Preferred stock, par value $.05, authorized 20,000,000 shares:
Series A Convertible, stated value $.10, issued and outstanding,
nil and 1,938,295 in 1995 and 1994 .2
PRIDES Convertible, par value $.05, issued and outstanding,
8,673,850 and 8,855,550 in 1995 and 1994 .4 .4
Common stock, par value $.01, authorized 100,000,000 shares; issued and
outstanding, 71,638,514 and 58,205,083 in 1995 and 1994 .7 .6
Additional capital 530.3 527.8
Accumulated deficit (459.9) (502.6)
Additional minimum pension liability (13.8) (9.1)
-------- --------
Total stockholders' equity 57.7 17.3
-------- --------
Total $2,813.2 $2,698.1
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
Year Ended December 31,
------------------------------
(In millions of dollars, except share amounts) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $2,237.8 $1,781.5 $1,719.1
-------- -------- --------
Costs and expenses:
Cost of products sold 1,798.4 1,625.5 1,587.7
Depreciation 94.3 95.4 97.1
Selling, administrative, research and development, and general 134.5 116.8 121.9
Restructuring of operations 35.8
-------- -------- --------
Total costs and expenses
2,027.2 1,837.7 1,842.5
-------- -------- --------
Operating income (loss): 210.6 (56.2) (123.4)
Other expense:
Interest expense (93.9) (88.6) (84.2)
Other - net (14.1) (7.3) (.9)
-------- -------- --------
Income (loss) before income taxes, minority interests, extraordinary loss, and
cumulative effect of changes in accounting principles 102.6 (152.1) (208.5)
(Provision) credit for income taxes (37.2) 53.8 86.9
Minority interests (5.1) (3.1) (1.5)
-------- -------- --------
Income (loss) before extraordinary loss and cumulative effect of changes in
accounting principles 60.3 (101.4) (123.1)
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) 60.3 (106.8) (652.2)
Dividends on preferred stock (17.6) (20.1) (6.3)
-------- -------- --------
Net income (loss) available to common shareholders $ 42.7 $ (126.9) $ (658.5)
======== ======== ========
Earnings (loss) per common and common equivalent share:
Primary:
Income (loss) before extraordinary loss and cumulative effect of changes
in accounting principles $ .69 $ (2.09) $ (2.25)
Extraordinary loss (.09) (.38)
Cumulative effect of changes in accounting principles (8.84)
-------- -------- --------
Net income (loss) $ .69 $ (2.18) $ (11.47)
======== ======== ========
Fully diluted $ .72
========
Weighted average common and common equivalent shares outstanding (000):
Primary 62,264 58,139 57,423
======== ======== ========
Fully diluted 71,809
========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
(In millions of dollars) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 60.3 $ (106.8) $ (652.2)
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation 94.3 95.4 97.1
Amortization of excess investment over equity in unconsolidated affiliates 11.4 11.6 11.9
Amortization of deferred financing costs and discount on long-term debt 5.4 6.2 11.2
Equity in (income) losses of unconsolidated affiliates (19.2) 1.9 3.3
Restructuring of operations 35.8
Minority interests 5.1 3.1 1.5
Extraordinary loss on early extinguishment of debt - net 5.4 21.8
Cumulative effect of changes in accounting principles - net 507.3
(Increase) decrease in receivables (109.7) 36.4 (6.1)
(Increase) decrease in inventories (57.7) (41.1) 13.0
Decrease (increase) in prepaid expenses and other assets 82.9 (60.6) (5.2)
Increase (decrease) in accounts payable 32.4 25.8 (10.3)
(Decrease) increase in accrued interest (.6) 9.3 19.2
Increase in payable to affiliates and accrued liabilities 10.6 50.8 76.9
Decrease in accrued and deferred income taxes (7.4) (68.8) (96.4)
Other 10.9 9.3 8.1
-------- -------- --------
Net cash provided by (used for) operating activities 118.7 (22.1) 36.9
-------- -------- --------
Cash flows from investing activities:
Net proceeds from disposition of property and investments 8.6 4.1 13.1
Capital expenditures (79.4) (70.0) (67.7)
Investments in joint ventures (9.0)
-------- -------- --------
Net cash used for investing activities (79.8) (65.9) (54.6)
-------- -------- --------
Cash flows from financing activities:
Repayments of long-term debt, including revolving credit (537.7) (345.1) (1,134.5)
Borrowings of long-term debt, including revolving credit 532.3 378.9 1,068.1
Borrowings from MAXXAM Group Inc. (see supplemental disclosure below) 15.0
Tender premiums and other costs of early extinguishment of debt (27.1)
Net short-term debt repayments (.5) (4.3)
Incurrence of financing costs (.8) (19.2) (12.7)
Dividends paid (20.8) (14.8) (6.3)
Capital stock issued 1.2 100.1 119.3
Redemption of minority interests' preference stock (8.8) (8.5) (4.2)
-------- -------- --------
Net cash (used for) provided by financing activities (34.6) 90.9 13.3
-------- -------- --------
Net increase (decrease) in cash and cash equivalents during the year 4.3 2.9 (4.4)
Cash and cash equivalents at beginning of year 17.6 14.7 19.1
-------- -------- --------
Cash and cash equivalents at end of year $ 21.9 $ 17.6 $ 14.7
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 88.8 $ 73.1 $ 53.7
Income taxes paid 35.7 16.0 13.5
Tax allocation payments from MAXXAM Inc. (3.9)
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.
<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. The Company is a direct subsidiary of MAXXAM Inc.
("MAXXAM") and conducts its operations through its wholly owned
subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). KACC
operates in all principal aspects of the aluminum industry - the mining
of bauxite (the major aluminum-bearing ore), the refining of bauxite
into alumina (the intermediate material), the production of primary
aluminum, and the manufacture of fabricated and semi-fabricated
aluminum products. Kaiser's production levels of alumina and primary
aluminum exceed its internal processing needs, which allows it to be a
major seller of alumina and primary aluminum to domestic and
international third parties (see Note 10).
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities known to
exist as of the date the financial statements are published, and the
reported amount of revenues and expenses during the reporting period.
Uncertainties, with respect to such estimates and assumptions, are
inherent in the preparation of the Company's consolidated financial
statements; accordingly, it is possible that the actual results could
differ from these estimates and assumptions, which could have a
material effect on the reported amounts of the Company's consolidated
financial position and results of operation.
Investments in 50%-or-less-owned entities are accounted for primarily
by the equity method. Intercompany balances and transactions are
eliminated. 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 changed 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". 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
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share amounts) (continued)
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 these 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:
<TABLE>
<CAPTION>
December 31,
---------------
1995 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Finished fabricated products $ 91.5 $ 49.4
Primary aluminum and work in process 195.9 203.1
Bauxite and alumina 119.6 102.3
Operating supplies and repair and maintenance parts 118.7 113.2
------ ------
$525.7 $468.0
====== ======
</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
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
in accounting for a stock-based compensation plan. Accordingly, no
compensation cost has been recognized for this plan (see Note 6).
Other Expense
Other expense in 1995, 1994, and 1993 includes $17.8, $16.5, and $17.9
of pre-tax charges related principally to establishing additional:
(i) litigation reserves for asbestos claims and (ii) environmental reserves
for potential soil and groundwater remediation matters, each pertaining
to operations which were discontinued prior to the acquisition
of the Company by MAXXAM in 1988.
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 $5.3, $6.0, and $11.2 for the years ended
December 31, 1995, 1994, and 1993, respectively, are included in
interest expense.
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
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, 1995, 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 9).
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>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt $758.1 $806.3 $762.6 $747.6
Foreign currency contracts 1.9 3.5
</TABLE>
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 4). 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 9).
Earnings (Loss) per Common and Common Equivalent Share
Primary earnings (loss) per common and common equivalent share are
computed by dividing net income (loss) available to common
shareholders by the weighted average number of common and common
equivalent shares outstanding during the period. Fully diluted
earnings per common and common equivalent share are computed as if the
Series A Shares and 181,700 shares of PRIDES (the "Converted PRIDES")
had been converted to common shares at the beginning of the period.
Accordingly, for purposes of the fully diluted calculations, the
dividends attributable to the Series A shares and the Converted PRIDES
($9.2 for the year ended December 31, 1995) have not been deducted
from net income, and the weighted average number of common and common
equivalent shares outstanding includes the shares issued upon
conversion of the Series A Shares and the Converted PRIDES as if they
had been outstanding for the entire period. As a result of the
redemption of the Series A Shares and conversion of the Converted
PRIDES during the 1995 period, fully diluted earnings per share are
presented for such period, even though the result is antidilutive. For
the years ended December 31, 1994 and 1993, common equivalent shares
attributable to the preferred stock and non-qualified stock options
were excluded from the calculation of weighted average shares because
they were antidilutive.
2. 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
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
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, 1995 and 1994, KACC's net
receivables from these affiliates were not material.
Summary of Combined Financial Position
<TABLE>
<CAPTION>
December 31,
---------------
1995 1994
- -----------------------------------------------------------------
<S> <C> <C>
Current assets $429.0 $342.3
Property, plant, and equipment - net 330.8 349.4
Other assets 39.3 42.4
------ ------
Total assets $799.1 $734.1
====== ======
Current liabilities $125.4 $122.4
Long-term debt 331.8 307.6
Other liabilities 35.6 31.0
Stockholders' equity 306.3 273.1
------ ------
Total liabilities and stockholders' equity $799.1 $734.1
====== ======
</TABLE>
Summary of Combined Operations
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Net sales $ 685.9 $ 489.8 $ 510.3
Costs and expenses (618.7) (494.8) (527.2)
(Provision) credit for income taxes (18.7) (6.3) 1.9
------- ------- -------
Net income (loss) $ 48.5 $ (11.3) $ (15.0)
======= ======= =======
Company's equity in income (loss) $ 19.2 $ (1.9) $ (3.3)
======= ======= =======
</TABLE>
The Company's equity in income (loss) differs from the summary net
income (loss) due to various percentage ownerships in the entities and
equity method accounting adjustments. At December 31, 1995, KACC's
investment in its unconsolidated affiliates exceeded its equity in their
net assets by approximately $54.9. The Company is amortizing this amount
over a 12-year period, which results in an annual amortization charge of
approximately $11.4.
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 $284.4, $219.7, and $206.6
in the years ended December 31, 1995, 1994, and 1993, respectively.
Dividends of $8.1, nil, and nil were received from investees in the years
ended December 31, 1995, 1994, and 1993, respectively.
In 1995, a subsidiary of the Company invested $9.0 in a foreign joint venture.
This amount is included in Investments in and advances to unconsolidated
affiliates.
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
3. Property, Plant, and Equipment
- ----------------------------------
The major classes of property, plant, and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1994
- ---------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 151.8 $ 153.5
Buildings 198.5 196.8
Machinery and equipment 1,337.6 1,285.0
Construction in progress 59.6 45.0
-------- --------
1,747.5 1,680.3
Accumulated depreciation 637.9 547.1
-------- --------
Property, plant, and equipment - net $1,109.6 $1,133.2
======== ========
</TABLE>
4. Long-Term Debt
- ------------------
Long-term debt and its maturity schedule are as follows:
<TABLE>
<CAPTION>
December 31,
2001 --------------
and 1995 1994
1996 1997 1998 1999 2000 After Total Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 Credit Agreement (9.00% at December 31,
1995 $ 13.1 $ 13.1 $ 6.7
9-7/8% Senior Notes, net $223.8 223.8 223.6
Pollution Control and Solid Waste Disposal
Facilities Obligations (6.00% - 7.75%) $ 1.2 $ 1.3 $ 1.4 .2 $ .2 32.6 36.9 38.1
Alpart CARIFA Loan (fixed and variable rates) 60.0 60.0 60.0
Alpart Term Loan (8.95%) 6.3 6.2 12.5 18.7
12-3/4% Senior Subordinated Notes 400.0 400.0 400.0
Other borrowings (fixed and variable rates) 1.4 1.4 7.7 .3 .2 .8 11.8 15.5
------ ------ ------ ------ ------ ------ ------ ------
Total $ 8.9 $ 8.9 $ 9.1 $ 13.6 $ .4 $717.2 758.1 762.6
====== ====== ====== ====== ====== ======
Less current portion 8.9 11.5
------ ------
Long-term debt $749.2 $751.1
====== ======
</TABLE>
1994 Credit Agreement
On February 17, 1994, the Company and KACC entered into a credit
agreement with BankAmerica Business Credit, Inc. and certain other
lenders (as amended, the "1994 Credit Agreement"). The 1994 Credit
Agreement consists of a $325.0 five-year secured, revolving line of
credit, scheduled to mature in 1999. 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 $325.0 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 previous credit agreement. As of December 31, 1995,
$259.3 (of which $72.4 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
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
test, determined quarterly. As of December 31, 1995, the financial
test permitted a reduction of 1-1/2% per annum in margins effective
January 1, 1996.
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.
Senior Notes
Concurrent with the offering by the Company of its 8.255% PRIDES,
Convertible Preferred Stock (the "PRIDES") (see Note 7), 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.
Gramercy Solid Waste Disposal 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, 1995, $3.8 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. Substantially all of the Series A bonds
bear interest at a floating rate of 87% of the applicable LIBID Rate
(LIBOR less 1/8 of 1%). 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).
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Senior Subordinated Notes
On February 1, 1993, KACC issued $400.0 of its 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.
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 (the "Indentures") 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. Further, the
Indentures provide that KACC must offer to purchase the Senior Notes
and the 12-3/4% Notes, respectively, upon the occurrence of a Change
of Control (as defined therein), and the 1994 Credit Agreement
provides that the occurrence of a Change in Control (as defined
therein) shall constitute an Event of Default thereunder.
Capitalized Interest
Interest capitalized in 1995, 1994, and 1993 was $2.8, $2.7, and $3.4,
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
restricted net assets of KACC totaled $24.0 at December 31, 1995.
5. 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,
---------------------------
1995 1994 1993
- -------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ (55.9) $(168.4) $(232.0)
Foreign 158.5 16.3 23.5
------- ------- -------
Total $ 102.6 $(152.1) $(208.5)
======= ======= =======
</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.
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
The (provision) credit 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>
1995 Current $ (4.3) $ (40.2) $ (.1) $ (44.6)
Deferred 15.2 (4.9) (2.9) 7.4
------- ------- ------- -------
Total $ 10.9 $ (45.1) $ (3.0) $ (37.2)
======= ======= ======= =======
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
======= ======= ======= =======
</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 (provision) credit 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:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount of federal income tax (provision) credit based on the statutory rate $(35.9) $ 53.2 $ 73.0
Percentage depletion 4.2 5.6 6.4
Revision of prior years' tax estimates and other changes in valuation allowances 1.5 .2 3.9
Foreign taxes, net of federal tax benefit (5.4) (5.3) (2.6)
Increase in net deferred income tax assets due to tax rate change 1.8 3.4
Other (1.6) (1.7) 2.8
------ ------ ------
(Provision) credit for income taxes $(37.2) $ 53.8 $ 86.9
====== ====== ======
</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.
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
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,
------------------
1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Postretirement benefits other than pensions $ 289.9 $ 293.7
Loss and credit carryforwards 156.1 187.6
Other liabilities 107.8 109.6
Pensions 56.0 51.0
Foreign and state deferred income tax liabilities 30.8 28.1
Property, plant, and equipment 22.9 23.1
Inventories 1.8
Other 10.7 3.5
Valuation allowances (128.5) (133.9)
------- -------
Total deferred income tax assets - net 547.5 562.7
------- -------
Deferred income tax liabilities:
Property, plant, and equipment (179.8) (203.2)
Investments in and advances to unconsolidated affiliates (66.4) (63.8)
Inventories (8.3)
Other (9.5) (6.4)
------- -------
Total deferred income tax liabilities (255.7) (281.7)
------- -------
Net deferred income tax assets $ 291.8 $ 281.0
======= =======
</TABLE>
The valuation allowances listed above relate primarily to loss and
credit carryforwards and postretirement benefits other than pensions.
As of December 31, 1995, approximately $97.7 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
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, 1995, is approximately $194.1. 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.
As of December 31, 1995 and 1994, $53.5 and $37.9, respectively, of
the net deferred income tax assets listed above are included on the
Consolidated Balance Sheets in the caption entitled Prepaid expenses
and other current assets. Certain other portions of the deferred
income tax assets and liabilities listed above are included on the
Consolidated Balance Sheets in the captions entitled Other accrued
liabilities and Long-term liabilities.
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
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 7, 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
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.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
The following table presents the Company's tax attributes for federal
income tax purposes as of December 31, 1995. The utilization of
certain of these tax attributes is subject to limitations:
<TABLE>
<CAPTION>
Expiring
Through
- --------------------------------------------------------------------------
<S> <C> <C>
Regular tax attribute carryforwards:
Net operating losses $ 32.9 2007
General business tax credits 28.4 2008
Foreign tax credits 89.7 2000
Alternative minimum tax credits 19.4 Indefinite
Alternative minimum tax attribute carryforwards:
Net operating losses $ 17.1 2002
Foreign tax credits 83.5 2000
</TABLE>
6. 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 (1)
December 31,
-------------------------
1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation:
Vested employees $ 753.0 $ 663.9
Nonvested employees 28.7 41.1
------- -------
Accumulated benefit obligation 781.7 705.0
Additional amounts related to projected salary increases 34.2 30.0
------- -------
Projected benefit obligation 815.9 735.0
Plan assets (principally common stocks and fixed income obligations) at fair value (592.3) (524.6)
------- -------
Plan assets less than projected benefit obligation 223.6 210.4
Unrecognized net losses (54.7) (42.5)
Unrecognized net obligations (.5) (.8)
Unrecognized prior-service cost (28.2) (30.9)
Adjustment required to recognize minimum liability 49.8 42.9
------- -------
Accrued pension obligation included in the Consolidated Balance Sheets
(principally in Long-term liabilities) $ 190.0 $ 179.1
======= =======
(1) Includes plans with assets exceeding accumulated benefits by
approximately $.1 and $.3 in 1995 and 1994, respectively.
</TABLE>
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 $(4.7) and $12.5 at December 31, 1995
and 1994, respectively, for the reduction (excess) of the minimum
liability over the unrecognized net obligation and prior-service cost.
These amounts
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
were recorded net of the related income tax (provision) credit of $2.8
and $(7.3) as of December 31, 1995 and 1994, respectively, which
approximated the federal and state statutory rates.
The components of net periodic pension cost are:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 10.0 $ 11.2 $ 10.8
Interest cost on projected benefit obligation 59.8 57.3 59.2
Return on assets:
Actual gain (112.2) (.8) (70.3)
Deferred gain (loss) 64.6 (53.0) 15.9
Net amortization and deferral 4.2 4.1 2.3
------- ------- -------
Net periodic pension cost $ 26.4 $ 18.8 $ 17.9
======= ======= =======
</TABLE>
Assumptions used to value obligations at year-end, and to determine
the net periodic pension cost in the subsequent year are:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 8.5% 7.5%
Expected long-term rate of return on assets 9.5% 9.5% 10.0%
Rate of increase in compensation levels 5.0% 5.0% 5.0%
</TABLE>
Postretirement Benefits Other Than Pensions
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, which are expected to be paid out of
cash generated by operations. The Company adopted SFAS 106 to account
for Postretirement benefits other than pensions as of January 1, 1993,
as discussed in Note 1.
In 1995, the Company adopted the Kaiser Aluminum Medicare Program
("KAMP"). KAMP is mandatory for all salaried retirees over 65 and for
USWA retirees who retire after December 31, 1995, when they become 65,
and voluntary for other hourly retirees of the Company's operations in
the states of California, Louisiana, and Washington. The USWA
contract, ratified on February 28, 1995, also contained changes to the
retiree health benefits. These changes included increased retirees'
copayments, deductibles, and coinsurance, and restricted Medicare Part
B premium reimbursement to the 1995 level for employees retiring after
November 1, 1994. These changes will lower the Company's expenses for
retiree medical care.
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
The Company's accrued postretirement benefit obligation is composed of
the following:
<TABLE>
<CAPTION>
December 31,
----------------
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $557.6 $566.2
Active employees eligible for postretirement benefits 30.7 30.2
Active employees not eligible for postretirement benefits 61.1 98.7
------ ------
Accumulated postretirement benefit obligation 649.4 695.1
Unrecognized net gains 20.5 55.0
Unrecognized gains related to prior-service costs 110.9 31.8
------ ------
Accrued postretirement benefit obligation $780.8 $781.9
====== ======
</TABLE>
The components of net periodic postretirement benefit cost are:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 4.5 $ 8.2 $ 7.1
Interest cost 52.3 56.9 58.5
Amortization of prior service cost (8.9) (3.2)
------ ------ ------
Net periodic postretirement benefit cost $ 47.9 $ 61.9 $ 65.6
====== ====== ======
</TABLE>
The 1996 annual assumed rates of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) are 8.0% and
7.5% for retirees under 65 and over 65, respectively, and are assumed
to decrease gradually to 5.0% 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, 1995, by
approximately $68.7 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1995 by
approximately $7.8. The weighted average discount rate used to
determine the accumulated postretirement benefit obligation at
December 31, 1995 and 1994, was 7.5% and 8.5%, respectively.
Postemployment Benefits
The Company provides certain benefits to former or inactive employees
after employment but before retirement. The Company adopted SFAS 112
to account for postemployment benefits as of January 1, 1993, as
discussed in Note 1.
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 544,839 shares were available
to be awarded at December 31, 1995. 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
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
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>
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 1,119,680 664,400
Granted 494,800 664,400
Exercised (at $7.25 and $9.75 per share) (155,500) (6,920)
Expired or forfeited (38,095) (32,600)
--------- --------- -------
Outstanding at end of year (prices ranging from $7.25 to $12.75 per share) 926,085 1,119,680 664,400
========= ========= =======
Exercisable at end of year 211,755 120,180
========= =========
</TABLE>
In 1995, the Company adopted the Kaiser Aluminum Total Compensation
System, an unfunded incentive compensation program. The program
provides incentive pay based on performance against plan over a three-
year period. 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 $11.9, $6.1, and $5.3
for the years ended December 31, 1995, 1994, and 1993, respectively.
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
7. Stockholders' Equity and Minority Interests
- -----------------------------------------------
Changes in stockholders' equity and minority interests were:
<TABLE>
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, 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)
Net income 60.3
Redeemable preference stock:
Accretion 3.9
Stock redemption (8.7)
Stock repurchase 5.4
Conversions (1,222 preference shares into cash) (.1)
Common stock issued upon redemption and
conversion of preferred stock (.2) .1 1.1
Dividends on preferred stock (17.6)
Minority interest in majority-owned subsidiaries 6.0
Incentive plans accretion 1.4
Additional minimum pension liability (4.7)
------ ------ ----- ----- ----- ------- ------
BALANCE, DECEMBER 31, 1995 $ 29.7 $ 93.0 $ .4 $ .7 $530.3 $(459.9) $(13.8)
====== ====== ===== ===== ====== ======= ======
</TABLE>
<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 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>
1995 1994 1993
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Shares:
Beginning of year 912,167 1,081,548 1,163,221
Redeemed (174,804) (169,381) (81,673)
-------- --------- ---------
End of year 737,363 912,167 1,081,548
======== ========= =========
</TABLE>
No additional Series A or B Stock will be issued. 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 1994 and 1995, KACC contributed $4.3 for
each of the years 1993 and 1994, and will contribute $4.3 in March
1996 for 1995.
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, a
profitability test was satisfied for 1995; therefore, 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 1996. 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.
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.
<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 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, 1995, 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,
---------------
1995 1994
- -----------------------------------------------------------------
<S> <C> <C>
4-1/8% 3,237 3,657
4-3/4% (1957 Series) 2,342 2,605
4-3/4% (1959 Series) 13,162 13,534
4-3/4% (1966 Series) 3,473 3,640
</TABLE>
Preferred Stock
Series A Convertible - In 1993, Kaiser issued 19,382,950 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"). On September 19, 1995, the
Company redeemed all 1,938,295 Series A Shares, which resulted in the
simultaneous redemption of all Depositary Shares in exchange for (i)
13,126,521 shares of the Company's common stock and (ii) $2.8 in cash
comprised of (a) an amount equal to all accrued and unpaid dividends
up to and including the day immediately prior to redemption date and
(b) cash in lieu of any fractional shares of common stock that would
have otherwise been issuable.
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
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
the holders of any other classes or series of stock 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, at the election of the Company,
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) 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 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, 1995, 28,000,000 shares of the Company's common stock
owned by MAXXAM were pledged as security for debt of a wholly owned
subsidiary of MAXXAM, consisting of $100.0 aggregate principal amount of
11-1/4% Senior Secured Notes due 2003 and $125.7 aggregate principal
amount of 12-1/4% Senior Secured Discount Notes due 2003.
Proposed Recapitalization
On February 5, 1996, the Company announced that it filed with the SEC
a preliminary proxy statement relating to a proposed recapitalization
and a special meeting of stockholders to consider and vote upon the
proposal. The proposed recapitalization would: (i) provide for two
classes of common stock: Class A Common Shares, $.01 par value, with
one vote per share and a new lesser-voting class designated as Common
Stock, $.01 par value, with 1/10 vote per share; (ii) redesignate as
Class A Common Shares the 100 million currently authorized shares of
existing common stock and authorize an additional 250 million shares
to be designated as Common Stock; and (iii) change each issued share
of the Company's existing common stock, par value $.01 per share, into
(a) .33 of a Class A Common Share and (b) .67 of a share of Common Stock.
The Company would pay cash in lieu of fractional shares. The Company
anticipates that both the Class A Common Shares and the Common Stock will
be approved for trading on the New York Stock Exchange. Upon the effective
date of the recapitalization, approximately 23,640,000 Class A Common
Shares and 47,998,000 shares of Common Stock would be issued and
outstanding. The proportionate voting power of the holders of the PRIDES
will increase immediately after the effectiveness of the recapitalization
until such shares are redeemed or converted, which will occur on or before
December 31, 1997. As of January 31, 1996, holders of the existing
common stock and the PRIDES had 91.2% and 8.8%, respectively, of the
total voting power of all stockholders. Immediately after the
recapitalization, the
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
voting power of such holders of the PRIDES will increase to 19.6% in
the aggregate, with a corresponding reduction in the voting power of
such holders of the existing common stock. At such time as the PRIDES
are redeemed or converted, the relative voting power of such holders
of the PRIDES will decrease and the voting power for both such holders
of the PRIDES and the existing common stock will be approximately the
same as it would have been had the recapitalization not occurred.
8. Commitments and Contingencies
- ---------------------------------
Commitments
KACC has financial commitments, including purchase agreements, tolling
arrangements, forward foreign exchange and forward sales contracts
(see Note 9), 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, 1995, is
$88.9, of which $26.7 is due in 1997 and the rest is due in 2002. The
KACC share of payments, including operating costs and certain other
expenses under the agreement, was $77.5, $85.6, and $86.7 for the
years ended December 31, 1995, 1994, and 1993, respectively. KACC also
has agreements to supply alumina to and to purchase aluminum from
Anglesey.
Minimum rental commitments under operating leases at December 31,
1995, are as follows: years ending December 31, 1996 - $22.7; 1997 -
$21.6; 1998 - $24.6; 1999 - $29.7; 2000 - $27.3; thereafter - $187.0.
The future minimum rentals receivable under noncancelable subleases
was $67.0 at December 31, 1995.
Rental expenses were $29.0, $26.8, and $29.0 for the years ended
December 31, 1995, 1994, and 1993, respectively.
Environmental Contingencies
The Company and KACC are subject to a number of environmental laws, 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 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, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 40.1 $ 40.9 $ 46.4
Additional amounts 3.3 2.8 1.7
Less expenditures (4.5) (3.6) (7.2)
------ ------ ------
Balance at end of period $ 38.9 $ 40.1 $ 40.9
====== ====== ======
</TABLE>
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
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 $9.0 for the
years 1996 through 2000 and an aggregate of approximately $10.0
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 an estimated $23.0 and that the factors upon
which a substantial portion of this estimate is based are expected to
be resolved over the next twelve months. 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, results of operations, or
liquidity.
Asbestos Contingencies
KACC is a defendant in a number of lawsuits, some of which involve
claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, 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.
The following table presents the changes in number of such claims
pending for the years ended December 31, 1995, 1994, and 1993.
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Number of claims at beginning of period 25,200 23,400 13,500
Claims received 41,700 14,300 11,400
Claims settled or dismissed (7,200) (12,500) (1,500)
------ ------- ------
Number of claims at end of period 59,700 25,200 23,400
====== ======= ======
</TABLE>
KACC has been advised by its regional counsel that, although there can
be no assurance, the recent increase in pending claims may be
attributable in part to tort reform legislation in Texas which was
passed by the legislature in March 1995 and which became effective on
September 1, 1995. The legislation, among other things, is designed to
restrict, beginning September 1, 1995, the filing of cases in Texas
that do not have a sufficient nexus to that jurisdiction, and to
impose, generally as of September 1, 1996, limitations relating to
joint and several liability in tort cases. A substantial portion of
the asbestos-related claims that were filed and served on KACC between
June 30, 1995, and November 30, 1995, were filed in Texas prior to
September 1, 1995.
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
2008. There are inherent uncertainties involved in estimating
asbestos-related costs, and the Company's actual costs could exceed
these estimates. The Company's accrual was calculated based on the
current and anticipated number of asbestos-related claims, the prior
timing and amounts of asbestos-related payments, and the advice of
Wharton, Levin, Ehrmantraut, Klein & Nash, P.A. with respect to the
current state of the law related to asbestos claims. Accordingly, an
asbestos-related cost accrual of $160.1, before
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
consideration of insurance recoveries, is included primarily in Long-term
liabilities at December 31, 1995. The Company estimates that annual
future cash payments in connection with such litigation will be
approximately $13.0 to $20.0 for each of the years 1996 through 2000,
and an aggregate of approximately $78.0 thereafter through 2008. While
the Company does not presently believe there is a reasonable basis for
estimating such costs beyond 2008 and, accordingly, no accrual has been
recorded for such costs which may be incurred beyond 2008, there is a
reasonable possibility that such costs may continue beyond 2008, and
such costs may be substantial.
The Company believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs. Claims
for recovery from some of KACC's insurance carriers are currently
subject to pending litigation and other carriers have raised certain
defenses, which have resulted in delays in recovering costs from the
insurance carriers. The timing and amount of ultimate recoveries from
these insurance carriers are dependent upon the resolution of these
disputes. The Company believes, based on prior insurance-related
recoveries in respect of asbestos-related claims, existing insurance
policies, and the advice of Thelen, Marrin, Johnson & Bridges with
respect to applicable insurance coverage law relating to the terms and
conditions of those policies, that substantial recoveries from the
insurance carriers are probable. Accordingly, an estimated aggregate
insurance recovery of $137.9, determined on the same basis as the
asbestos-related cost accrual, is recorded primarily in Other assets
at December 31, 1995.
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 insurance recoveries
that will be received, management currently believes that, based on
the factors discussed in the preceding paragraphs, the resolution of
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,
results of operations, or liquidity.
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, results of operations, or liquidity.
9. Derivative Financial Instruments and Related Hedging Programs
- -----------------------------------------------------------------
KACC enters into a number of financial instruments 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, 1995, KACC had net forward foreign exchange
contracts totaling approximately $102.8 for the purchase of 142.4
Australian dollars through April 30, 1997.
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
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
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 1996 anticipated production, as of
December 31, 1995, KACC had sold forward 15,750 metric tons of primary
aluminum at fixed prices.
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, 1995 KACC had purchased
53,300 metric tons of primary aluminum under forward purchase
contracts at fixed prices that expire at various times through
December 1996.
At December 31, 1995, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price
of $1,721 per metric ton ($.78 per pound) of aluminum, and forward
foreign exchange contracts was $4.1.
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 creditworthiness. When appropriate, KACC arranges master netting
agreements.
10. 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 $5.3, $.8, and $4.9 for the years ended December 31, 1995, 1994,
and 1993, respectively.
Sales of more than 10% of total revenue to a single customer were nil
in 1995 and were $58.2 and $40.7 of bauxite and alumina and $147.7 and
$145.7 of aluminum processing for the years ended December 31, 1994,
and 1993, respectively.
Export sales were less than 10% of total revenue during the years
ended December 31, 1995, 1994, and 1993, respectively.
<PAGE>
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
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> <C>
Net sales to unaffiliated customers 1995 $1,589.5 $ 191.7 $ 239.4 $ 217.2 $2,237.8
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
Sales and transfers among 1995 $ 79.6 $ 191.5 $(271.1)
geographic areas 1994 98.7 139.4 (238.1)
1993 88.2 79.6 (167.8)
Equity in income (losses) of 1995 $ (.2) $ 19.4 $ 19.2
unconsolidated affiliates 1994 .2 (2.1) (1.9)
1993 (3.3) (3.3)
Operating income (loss) 1995 $ 32.0 $ 9.8 $ 83.5 $ 85.3 $ 210.6
1994 (128.8) 9.9 18.3 44.4 (56.2)
1993 (145.9) (11.8) 21.9 12.4 (123.4)
Investment in and advances to 1995 $ 1.2 $ 27.1 $ 149.9 $ 178.2
unconsolidated affiliates 1994 1.2 28.8 139.7 169.7
Identifiable assets 1995 $2,017.9 $ 381.9 $ 196.5 $ 216.9 $2,813.2
1994 1,933.8 364.8 200.0 199.5 2,698.1
</TABLE>
<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, 1995 and
1994, and for the years ended December 31, 1995, 1994, and 1993, 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 1995 $514.2 $1,723.6 $2,237.8
1994 432.5 1,349.0 1,781.5
1993 423.4 1,295.7 1,719.1
Intersegment sales 1995 $159.7 $ 159.7
1994 146.8 146.8
1993 129.4 129.4
Equity in income (losses) of 1995 $ 3.6 $ 15.8 $ (.2) $ 19.2
unconsolidated affiliates 1994 (4.7) 2.6 .2 (1.9)
1993 (2.5) (.8) (3.3)
Operating income (loss) 1995 $ 54.0 $ 238.9 $ (82.3) $ 210.6
1994 19.8 (8.4) (67.6) (56.2)
1993 (4.5) (46.3) (72.6) (123.4)
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 1995 $ 31.1 $ 60.4 $ 2.8 $ 94.3
1994 33.5 59.1 2.8 95.4
1993 35.3 59.9 1.9 97.1
Capital expenditures 1995 $ 27.3 $ 44.0 $ 8.1 $ 79.4
1994 28.9 39.9 1.2 70.0
1993 35.3 31.2 1.2 67.7
Investment in and advances to 1995 $129.9 $ 47.1 $ 1.2 $ 178.2
unconsolidated affiliates 1994 136.6 31.9 1.2 169.7
Identifiable assets 1995 $746.0 $1,341.2 $ 726.0 $2,813.2
1994 749.6 1,242.3 706.2 2,698.1
</TABLE>
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, 1995 and 1994, 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, 1995. 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, 1995 and
1994, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, 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 19, 1996
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
------------ ------------
(In thousands of dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,480 $ 24,330
Receivables:
Trade 19,688 23,258
Other 1,565 4,035
Inventories 75,580 68,168
Prepaid expenses and other current assets 6,933 3,660
------------ ------------
Total current assets 130,246 123,451
Timber and timberlands, net of depletion of $204,856 and $188,003 at
December 31, 1995 and 1994, respectively 337,390 350,871
Property, plant and equipment, net 93,726 96,960
Deferred financing costs, net 22,397 24,516
Deferred income taxes 41,958 50,142
Restricted cash 31,367 32,402
Other assets 5,502 5,925
------------ ------------
$ 662,586 $ 684,267
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 3,898 $ 3,309
Accrued compensation and related benefits 9,241 10,285
Accrued interest 20,666 21,109
Deferred income taxes 10,244 12,986
Other accrued liabilities 3,077 2,105
Long-term debt, current maturities 14,195 13,670
------------ ------------
Total current liabilities 61,321 63,464
Long-term debt, less current maturities 571,812 586,007
Other noncurrent liabilities 33,613 23,517
------------ ------------
Total liabilities 666,746 672,988
------------ ------------
Contingencies
Stockholder's equity (deficit):
Common stock, $.01 par value, 100 shares authorized and issued - -
Additional capital 157,520 157,520
Accumulated deficit (161,680) (146,241)
------------ ------------
Total stockholder's equity (deficit) (4,160) 11,279
------------ ------------
$ 662,586 $ 684,267
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
(In thousands of dollars)
<S> <C> <C> <C>
Net sales:
Lumber and logs $ 197,320 $ 205,504 $ 193,227
Other 24,619 21,875 17,407
---------- ---------- ----------
221,939 227,379 210,634
---------- ---------- ----------
Operating expenses:
Cost of goods sold (exclusive of depletion and depreciation) 116,445 116,316 115,175
Selling, general and administrative 14,992 15,190 18,869
Depletion and depreciation 25,927 25,485 25,374
---------- ---------- ----------
157,364 156,991 159,418
---------- ---------- ----------
Operating income 64,575 70,388 51,216
Other income (expense):
Investment, interest and other income 3,928 12,022 3,884
Interest expense (55,462) (56,067) (59,145)
---------- ---------- ----------
Income (loss) before income taxes, extraordinary items and cumulative
effect of changes in accounting principles 13,041 26,343 (4,045)
Credit (provision) in lieu of income taxes (6,480) (1,429) 1,683
---------- ---------- ----------
Income (loss) before extraordinary items and cumulative effect of
changes in accounting principles 6,561 24,914 (2,362)
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:<PAGE>
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) $ 6,561 $ 10,048 $ (10,539)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
(In thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,561 $ 10,048 $ (10,539)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion and depreciation 25,927 25,485 25,374
Net sales of marketable securities 478 6,619 6,025
Amortization of deferred financing costs 2,269 2,197 2,580
Net gains on marketable securities (478) (984) (1,310)
Net loss (gain) on asset dispositions 419 (830) 134
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 7,572 1,627 (1,697)
Increase in accounts payable 589 949 53
Decrease (increase) in receivables 5,913 (8,742) 9,991
Increase (decrease) in other liabilities 7,406 (2,027) (394)
Decrease (increase) in inventories, net of
depletion (7,301) (1,608) 987
Decrease (increase) in prepaid expenses and other
current assets (3,273) (721) 237
Decrease in accrued interest (443) (518) (9,398)
Other 423 706 (74)
---------- ---------- ----------
Net cash provided by operating activities 46,062 32,201 30,146
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets 13 1,119 229
Capital expenditures (9,140) (10,962) (10,472)
---------- ---------- ----------
Net cash used for investing activities (9,127) (9,843) (10,243)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (22,000) (24,500) (25,000)
Redemptions, repurchase of and principal payments on
long-term debt (13,670) (13,235) (557,883)
Incurrence of financing costs (150) (213) (28,235)
Proceeds from issuance of long-term debt - - 620,000
Restricted cash deposits, net 1,035 1,160 (33,562)
---------- ---------- ----------
Net cash used for financing activities (34,785) (36,788) (24,680)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,150 (14,430) (4,777)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24,330 38,760 43,537
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 26,480 $ 24,330 $ 38,760
========== ========== ==========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Timber and timberlands acquired subject to loans from
seller $ 615 $ 910 $ -
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 53,636 $ 54,388 $ 65,963
Income taxes paid (refunded) (5,190) 1,170 14
</TABLE>
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common
Stock Additional Accumulated
($.01 Par) Capital Deficit Total
------------ ------------ ------------ ------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Balance, January 1, 1993 $ - $ 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
Net income - - 6,561 6,561
Dividends - - (22,000) (22,000)
------------ ------------ ------------ ------------
Balance, December 31, 1995 $ - $ 157,520 $ (161,680) $ (4,160)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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"). Intercompany balances and
transactions have been eliminated. Certain reclassifications have been
made to prior years' financial statements to be consistent with the current
year's presentation.
The Company operates in several principal aspects of the lumber
industry - the growing and harvesting of redwood and Douglas-fir timber,
the milling of logs in lumber and the manufacture of lumber into a variety
of finished products. Housing, construction and remodeling are the
principal markets for the Company's lumber products. Export sales
generally constitute approximately 4% of the Company's sales. A
significant portion of the Company's sales are made to third parties
located west of the Mississippi river.
The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of estimates and
assumptions that affect (i) the reported amounts of assets and liabilities,
(ii) disclosure of contingent assets and liabilities known to exist as of
the date the financial statements are published, and (iii) the reported
amount of revenues and expenses recognized during each period presented.
The Company reviews all significant estimates affecting its consolidated
financial statements on a recurring basis and records the effect of any
necessary adjustments prior to their publication. Adjustments made with
respect to the use of estimates often relate to improved information not
previously available. Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of the Company's consolidated
financial statements; accordingly, it is possible that the subsequent
resolution of any one of the contingent matters described in Note 8 could
differ materially from current estimates. The results of an adverse
resolution of such uncertainties could have a material effect on the
reported amounts of the Company's consolidated assets and liabilities.
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, 1995 were: 1995 - net realized gains of
$478; 1994 - a decrease in net unrealized gains of $264 and net realized
gains of $1,248; and 1993 - net realized gains of $1,046 and net unrealized
gains of $264.
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
Timber and timberlands are stated at cost, net of accumulated
depletion. 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.
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") of Scotia Pacific Holding Company ("Scotia Pacific"), a wholly
owned subsidiary of the Company. See Note 4. The Liquidity Account is not
available, except under certain limited circumstances, for Scotia Pacific's
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, 1995, 1994 and 1993 includes
interest of approximately $2,560, $2,638 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, 1995 and 1994, cash and cash equivalents include
$19,742 and $19,439, 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.
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.
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, 1995 December 31, 1994
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 26,480 $ 26,480 $ 24,330 $ 24,330
Restricted cash 31,367 31,367 32,402 32,402
Long-term debt (586,007) (590,594) (599,677) (558,801)
</TABLE>
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
Lumber $ 57,905 $ 53,393
Logs 17,675 14,775
---------- ----------
$ 75,580 $ 68,168
========== ==========
</TABLE>
During 1993, inventory quantities were reduced. This reduction
resulted in the liquidation of LIFO inventory quantities carried at
prevailing costs from prior years which were higher than the current cost
of inventory. The effect of this inventory liquidation increased cost of
goods sold by approximately $222 for the year ended December 31, 1993.
3. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
Estimated
Useful
Lives 1995 1994
------------- ---------- ----------
<S> <C> <C> <C>
Machinery and equipment 5 - 15 years $ 122,437 $ 119,280
Buildings 33 years 29,079 27,666
Logging roads 15 years 7,486 7,102
---------- ----------
159,002 154,048
Less: accumulated depreciation (65,276) (57,088)
---------- ----------
$ 93,726 $ 96,960
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and
1993 was $9,185, $8,808 and $8,233, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015 $ 350,233 $ 363,811
10-1/2% Pacific Lumber Senior Notes due March 1, 2003 235,000 235,000
Other 774 866
---------- ----------
586,007 599,677
Less: current maturities (14,195) (13,670)
---------- ----------
$ 571,812 $ 586,007
========== ==========
</TABLE>
On March 23, 1993, the Company issued $235,000 of the Senior
Notes and Scotia Pacific, its newly-formed wholly owned subsidiary, issued
$385,000 of the Timber Notes. The Company and Scotia Pacific 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; (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 Scotia Pacific from incurring any additional
indebtedness for borrowed money and limits the business activities of
Scotia Pacific to the ownership and operation of its timber and
timberlands. The Timber Notes are senior secured obligations of Scotia
Pacific and are not obligations of, or guaranteed by, the Company or any
other person. The Timber Notes are secured by a lien on (i) Scotia
Pacific's timber and timberlands (representing $179,364 of the Company's
consolidated balance at December 31, 1995), (ii) Scotia Pacific's contract
rights and certain other assets, (iii) the funds deposited in the Payment
Account and the Liquidity Account, and (iv) substantially all of Scotia
Pacific's other property and equipment.
The Timber Notes are structured to link, to the extent of
available cash, the deemed depletion of Scotia Pacific'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 Scotia Pacific 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 Scotia Pacific will pay the final installment of principal is
July 20, 2015. The amount of principal which Scotia Pacific must pay
through each Timber Note payment date in order to avoid 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 Scotia Pacific will pay
the final installment of principal is July 20, 2009. Scheduled
Amortization on the Timber Notes is as follows: years ending December 31,
1996 - $14,103; 1997 - $16,165; 1998 - $19,335; 1999 - $21,651; 2000 -
$23,970; thereafter - $255,009.
Principal and interest on the Timber Notes are payable semi-
annually on January 20 and July 20. The Timber Notes are redeemable at the
option of Scotia Pacific, 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 (as
amended and restated, the "Revolving Credit Agreement") which expires on
May 31, 1998. 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
$60,000, of which $15,000 may be used for standby letters of credit and
$30,000 is restricted to timberland acquisitions. Borrowings made pursuant
to the portion of the credit facility restricted to timberland acquisitions
would also be secured by the purchased timberlands. As of December 31,
1995, $48,090 of borrowings was available under the Revolving Credit
Agreement, of which $3,090 was available for letters of credit and $30,000
was restricted to timberland acquisitions. No borrowings were outstanding
as of December 31, 1995, and letters of credit outstanding amounted to
$11,910.
The indentures governing the Senior Notes and the Timber Notes
and the 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, 1995, under the
most restrictive of these covenants, approximately $15,663 of dividends
could be paid by the Company.
Scheduled maturities of long-term debt outstanding at December
31, 1995 are as follows: years ending December 31, 1996 - $14,195; 1997 -
$16,258; 1998 - $19,429; 1999 - $21,745; 2000 - $24,065; thereafter -
$490,315.
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
"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,
Scotia Pacific 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 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.
The credit (provision) in lieu of income taxes on income (loss)
before income taxes, extraordinary items and cumulative effect of changes
in accounting principles consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal credit (provision) in lieu of income taxes $ (239) $ - $ -
State and local (61) (50) -
---------- ---------- ----------
(300) (50) -
---------- ---------- ----------
Deferred:
Federal credit (provision) in lieu of income taxes (4,755) (1,748) 1,913
State and local (1,425) 369 (230)
---------- ---------- ----------
(6,180) (1,379) 1,683
---------- ---------- ----------
$ (6,480) $ (1,429) $ 1,683
========== ========== ==========
</TABLE>
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,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Income (loss) before income taxes, extraordinary items and cumulative
effect of changes in accounting principles $ 13,041 $ 26,343 $ (4,045)
========== ========== ==========
Amount of federal income tax based upon the statutory
rate $ (4,564) $ (9,220) $ 1,416
State and local taxes, net of federal tax benefit (966) 207 (150)
Revision of prior years' tax estimates and other changes in valuation
allowances (651) 7,148 (566)
Increase in net deferred income tax assets due to tax rate change - - 850
Other (299) 436 133
---------- ---------- ----------
$ (6,480) $ (1,429) $ 1,683
========== ========== ==========
</TABLE>
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,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Timber and timberlands $ 32,528 $ 37,209
Loss and credit carryforwards 25,408 29,301
Other liabilities 7,806 4,840
Postretirement benefits other than pensions 2,316 2,145
Other 222 892
Valuation allowances (2,825) (2,664)
---------- ----------
Total deferred income tax assets, net 65,455 71,723
---------- ----------
Deferred income tax liabilities:
Inventories (16,056) (16,339)
Property, plant and equipment (15,023) (14,848)
Other (2,662) (3,380)
---------- ----------
Total deferred income tax liabilities (33,741) (34,567)
---------- ----------
Net deferred income tax assets $ 31,714 $ 37,156
========== ==========
</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
$28,199 and $33,540 at December 31, 1995 and 1994, respectively, which are
recorded pursuant to the Tax Allocation Agreement with MAXXAM.
The following table presents the Company's estimated tax
attributes, for federal income tax purposes, under the terms of the Tax
Allocation Agreement at December 31, 1995.
<TABLE>
<CAPTION>
Expiring
Through
----------
<S> <C> <C>
Regular Tax Attribute Carryforwards:
Net operating losses $ 60,718 2010
Net capital losses 3,121 1997
Minimum tax credit 239 -
Alternative Minimum Tax Attribute Carryforwards:
Net operating losses $ 23,618 2010
</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:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 1,483 $ 1,643 $ 1,600
Interest cost on projected benefit obligation 1,693 1,263 918
Actual loss (gain) on plan assets (3,900) 10 (2,128)
Net amortization and deferral 2,460 (859) 1,359
---------- ---------- ----------
Net periodic pension cost $ 1,736 $ 2,057 $ 1,749
</TABLE>
The following table sets forth the funded status and amounts recognized
in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation $ 16,910 $ 11,809
Non-vested benefit obligation 1,214 779
---------- ----------
Total accumulated benefit obligation $ 18,124 $ 12,588
========== ==========
Projected benefit obligation $ 21,841 $ 15,047
Plan assets at fair value, primarily equity and debt securities (18,363) (13,184)
---------- ----------
Projected benefit obligation in excess of plan assets 3,478 1,863
Unrecognized net transition asset 24 29
Unrecognized net gain (loss) (27) 1,475
Unrecognized prior service cost (45) (50)
---------- ----------
Accrued pension liability $ 3,430 $ 3,317
========== ==========
</TABLE>
The assumptions used in accounting for the defined benefit plan were
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Rate of increase in compensation levels 5.0% 5.0% 5.0%
Discount rate 7.25% 8.5% 7.5%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
</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 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,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 228 $ 216 $ 153
Interest cost on accumulated postretirement benefit obligation 317 294 315
Net amortization and deferral (53) (7) -
---------- ---------- ----------
Net periodic postretirement benefit cost $ 492 $ 503 $ 468
========== ========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
Retirees $ 634 $ 860
Actives eligible for benefits 726 656
Actives not eligible for benefits 3,317 2,355
---------- ----------
Accumulated postretirement benefit obligation 4,677 3,871
Unrecognized net gain 553 972
---------- ----------
Postretirement benefit liability $ 5,230 $ 4,843
========== ==========
</TABLE>
The annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 11.0% for 1996 and
is assumed to decrease gradually to 5.5% in 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, 1995 by approximately $674 and the aggregate
of the service and interest cost components of net periodic postretirement
benefit cost by approximately $90.
The discount rates used in determining the accumulated
postretirement benefit obligation were 7.25% and 8.5% at December 31, 1995
and 1994, 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 $1,281 and $1,215 for the years ended December 31, 1995 and 1994,
respectively.
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
$8,900 and $9,233 at December 31, 1995 and 1994, respectively. Workers'
compensation expenses amounted to $3,302, $3,698 and $3,317 for the years
ended December 31, 1995, 1994 and 1993, 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 $1,694, $1,744 and
$2,598 for the years ended December 31, 1995, 1994 and 1993, respectively.
An agreement with Britt Lumber Co., Inc., an indirect wholly
owned subsidiary of MGI ("Britt"), governs, among other things, the sale of
logs and lumber by the Company and Britt to each other and the sale of hog
fuel (wood residue) by Britt to the Company. The logs which the Company
sells to Britt are sold at approximately 75% of the applicable price for
such species and category as established by the California State Board of
Equalization, which reflects the lower quality of these logs. Logs which
either the Company 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 to the Company by Britt at applicable market prices. Net
sales for the years ended December 31, 1995, 1994 and 1993 include revenues
of $13,627, $10,326 and $9,198, respectively, from Britt. The Company
recognized operating income of $5,527, $5,571 and $1,972 on these revenues
for the years ended December 31, 1995, 1994 and 1993, respectively. At
December 31, 1995 and 1994, receivables include $813 and $1,283,
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 $52,000 settlement,
$33,000 was paid by insurance carriers of MAXXAM and the Company, $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, including a $2,000 accrual for certain contingent claims and $4,400
of related legal fees, net of benefits for federal and state income taxes
of $6,312.
The Company's operations are subject to a variety of California
and federal laws and regulations dealing with timber harvesting, endangered
species and critical habitat, and air and water quality. The Company does
not expect that compliance with such existing laws and regulations will
have a material adverse effect on its future consolidated financial
position, results of operations or liquidity; however, these laws are
modified from time to time and there can be no assurance that certain
pending or future legislation, governmental regulations or judicial or
administrative decisions would not materially adversely affect the Company
or its ability to sell lumber, logs or timber.
In 1995, the U.S. Fish and Wildlife Service (the "USFWS")
published its proposed final designation of critical habitat for the
marbled murrelet (the "Proposed Designation"), seeking to designate over
four million acres as critical habitat for the marbled murrelet, including
approximately 33,000 acres of the Company's timberlands. The Proposed
Designation was subject to a 60-day comment period and the Company filed
comments vigorously opposing the Proposed Designation. The USFWS has not
yet published its final designation of critical habitat for the marbled
murrelet. The Company is unable to predict when or if it would be able to
harvest on any acreage finally designated as critical habitat.
Furthermore, it is impossible to determine the future adverse impact of
such designation on the Company's consolidated financial position, results
of operations or liquidity until such time as the Proposed Designation and
related regulatory and legal issues are fully resolved. However, if the
Company is unable to harvest, or is severely limited in harvesting, on
timberlands designated as marbled murrelet critical habitat, such
restrictions could have a material adverse effect on the Company's
consolidated financial position, results of operations and liquidity. If
the Company is unable to harvest or is severely limited in harvesting, the
Company intends to seek full compensation from the appropriate governmental
agencies on the grounds that such restrictions constitute a taking.
There continue to be other regulatory actions and lawsuits
seeking to have various other species listed as threatened or endangered
under the federal Endangered Species Act and/or the California Endangered
Species Act and to designate critical habitat for such species. It is
uncertain what impact, if any, such listings and/or designations of
critical habitat will have on the Company's consolidated financial
position, results of operations or liquidity.
In 1994, the California Board of Forestry (the "BOF") 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 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. The Company is required to submit, by October 1996, a
plan setting forth, among other things, its Projected Annual Growth. The
Company 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 the Company 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. The Company
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. The Company is unable to
predict the ultimate impact the sustained yield regulations will have on
its future consolidated financial position, results of operations or
liquidity.
Various groups and individuals have filed objections with the
California Department of Forestry ("CDF") and the BOF regarding the CDF's
and the BOF'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 certain of the
Company's THPs. In addition, lawsuits are pending which seek to prevent
the Company from implementing certain of its approved THPs and other timber
operations. These challenges have severely restricted the Company's
ability to harvest virgin old growth redwood timber on its property (and,
to a lesser extent, its residual old growth timber). To date, challenges
with respect to the Company's THPs relating to young growth and residual
old growth have been limited; however, no assurance can be given as to the
extent of such challenges in the future. The Company believes that
environmentally focused challenges to its THPs are likely to occur in the
future, particularly with respect to virgin and residual old growth timber.
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, results of operations or liquidity. It is, however, impossible
to predict the future nature or degree of such challenges or their ultimate
impact on the consolidated financial position, results of operations or
liquidity 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 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, results of operations or
liquidity.
9. OTHER ITEMS
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 1995 and 1993, the Company recorded reductions in cost of
sales of $1,527 and $1,200, respectively, resulting from business
interruption insurance reimbursements for higher operating costs and the
related loss of revenues resulting from the April 1992 earthquake. Other
receivables at December 31, 1994 included $1,684 related to earthquake
related insurance claims.
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summary quarterly financial information for the years ended
December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
1995:
Net sales $ 47,309 $ 58,408 $ 58,807 $ 57,415
Operating income 9,991 18,785 17,115 18,684
Net income (loss) (2,013) 3,861 2,669 2,044
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
</TABLE>
