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, 1996 COMMISSION FILE NUMBER 1-8857
MAXXAM GROUP INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 13-1310680
(State or other (I.R.S. Employer
jurisdiction Identification Number)
of incorporation or
organization)
5847 SAN FELIPE, SUITE 2600 77057
HOUSTON, TEXAS (Zip Code)
(Address of Principal
Executive Offices)
Registrant's telephone number, including area code: (713) 975-7600
---------------
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
None.
---------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
All of the Registrant's voting stock is held by an affiliate of
the Registrant.
Number of shares of Common Stock outstanding at March 15, 1997: 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:
Not applicable.
MAXXAM GROUP INC.
ITEM 1. BUSINESS
GENERAL
MAXXAM Group Inc. (the "Company" or "MGI") is a wholly owned
subsidiary of MAXXAM Group Holdings Inc. ("MGHI") which in turn 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's principal wholly owned
subsidiaries are Scotia Pacific Holding Company ("Scotia Pacific") and
Salmon Creek Corporation ("Salmon Creek"). As used herein, the terms
"Company" or "MGI," "MGHI," "Pacific Lumber" or "MAXXAM" refer to the
respective companies and their subsidiaries, unless otherwise noted or the
context indicates otherwise.
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 (as Pacific Lumber
cannot efficiently process them in its own mills).
This Annual Report on Form 10-K contains statements which
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a
number of places (see Item 1. "Business--Regulatory and Environmental
Factors," Item 3. "Legal Proceedings," and Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Background,"
"Financial Condition and Investing and Financing Activities" and "Trends").
Such statements can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "estimates,""will," "should," "plans"
or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. Readers are
cautioned that any such forward-looking statements are not guarantees of
future performance and involve significant risks and uncertainties, and
that actual results may vary materially from those in the forward-looking
statements as a result of various factors. These factors include the
effectiveness of management's strategies and decisions, general economic
and business conditions, developments in technology, new or modified
statutory or regulatory requirements and changing prices and market
conditions. This report identifies other factors that could cause such
differences. No assurance can be given that these are all of the factors
that could cause actual results to vary materially from the forward-looking
statements.
PACIFIC LUMBER OPERATIONS
Timberlands
Pacific Lumber owns and manages approximately 193,000 acres of
virtually contiguous commercial timberlands 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, are located in close proximity
to Pacific Lumber's four sawmills and contain an extensive network of
roads. Approximately 179,000 acres of Pacific Lumber's timberlands are
owned by Scotia Pacific (the "Scotia Pacific Timberlands"), a special
purpose Delaware corporation and wholly owned subsidiary of Pacific Lumber.
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. Approximately 6,000 acres of Pacific
Lumber's timberlands are owned by Salmon Creek.
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 engages 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. 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. During
1996, Pacific Lumber planted an estimated 529,000 redwood and Douglas-fir
seedlings.
Harvesting Practices
The ability of Pacific Lumber to sell logs or lumber products
will depend, in part, upon its ability to obtain regulatory approval of
timber harvesting plans ("THPs"). THPs are required to be 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 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 a critical habitat designation, sustained yield regulations and
similar matters concerning Pacific Lumber and its operations. 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 better
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.
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. The systems chosen are those which will most
closely emulate those natural processes that result in the cycling of
natural forest stands. Due to the magnitude of its timberlands and
conservative application of silvicultural systems, 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 that 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 289 million
board feet, with approximately 291, 290 and 286 million board feet produced
in 1996, 1995 and 1994, respectively. The Fortuna sawmill produces
primarily common grade lumber. During 1996, the Fortuna mill produced
approximately 99 million board feet of lumber. The Carlotta sawmill
produces both common and upper grade redwood lumber. During 1996, the
Carlotta mill produced approximately 63 million board feet of lumber.
Sawmills "A" and "B" are both located in Scotia. Sawmill "A" processes
Douglas-fir logs and Sawmill "B" primarily processes large diameter redwood
logs. During 1996, Sawmills "A" and "B" produced 88 million and 41 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 redwood lumber industry's
largest variety of customized trim and fascia patterns. Pacific Lumber
also enhances the value of some grades of narrower and shorter lumber by
assembling knot-free pieces of lumber into wider or longer pieces in its
state-of-the-art end and edge glue plants. The result is a standard sized
upper grade product which can be sold at a significant premium over common
grade products. Pacific Lumber has installed a lumber remanufacturing
facility at its mill in Fortuna which processes low grade redwood common
lumber into value-added, higher grade redwood fence and related 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 three to twelve 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 27 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 1996, 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, 1996 Year Ended December 31, 1995
----------------------------------------- -----------------------------------------
% of Total % of Total
Lumber % of Total Lumber % of Total
Production Lumber % of Total Production Lumber % of Total
Product Volume Revenues Revenues Volume Revenues Revenues
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Upper grade redwood
lumber 13% 33% 28% 17% 38% 31%
Common grade redwood
lumber 53% 42% 35% 54% 40% 32%
------------- ------------- ------------- ------------- ------------- -------------
Total redwood
lumber 66% 75% 63% 71% 78% 63%
------------- ------------- ------------- ------------- ------------- -------------
Upper grade Douglas-
fir lumber 3% 6% 5% 3% 5% 4%
Common grade Douglas-
fir lumber 27% 16% 13% 23% 14% 11%
------------- ------------- ------------- ------------- ------------- -------------
Total Douglas-
fir lumber 30% 22% 18% 26% 19% 15%
------------- ------------- ------------- ------------- ------------- -------------
Other grades of
lumber 4% 3% 2% 3% 3% 4%
------------- ------------- ------------- ------------- ------------- -------------
Total lumber 100% 100% 83% 100% 100% 82%
============= ============= ============= ============= ============= =============
Logs 9% 7%
============= =============
Hardwood chips 2% 4%
Softwood chips 4% 5%
------------- -------------
Total wood chips 6% 9%
============= =============
</TABLE>
Lumber. Pacific Lumber primarily produces and markets lumber.
In 1996, Pacific Lumber sold approximately 307 million board feet of
lumber, which accounted for approximately 83% 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 that 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 large
diameter logs and is characterized by an absence of knots and other defects,
is used primarily in 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, and 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--Background." 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 majority of these logs are purchased by Britt. The balance
are purchased by 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
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, 1996 and
1995 was approximately $21.3 million and approximately $11.5 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 66% of these sales in
1996. Common grades of Douglas-fir lumber are sold primarily in
California. In 1996, the largest and top five of Pacific Lumber's
customers accounted for approximately 9% and 24%, respectively, of total
revenues. Exports of lumber accounted for approximately 5% of Pacific
Lumber's total revenues in 1996. 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 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, 1997, 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.
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 $112,000 per month in 1996 and is expected to be
approximately $115,200 per month in 1997. 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 the purpose 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 the purchase
price is therefore 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 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 1996, Britt sold approximately 79 million board feet of lumber
products to approximately 75 different customers. Over one-half of its
1996 lumber sales were in northern California. The remainder of its 1996
sales were in southern California and ten other western states. The
largest and top five of such customers accounted for approximately 27% and
68%, respectively, of such 1996 sales. Britt markets its products through
its own salesmen to a variety of customers, including distribution centers,
industrial remanufacturers, wholesalers and retailers.
Britt's backlog of sales orders at December 31, 1996 and 1995 was
approximately $4.2 million and $3.2 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 37.4 million board feet of fencing products per year. As of
March 1, 1997, Britt employed approximately 120 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 1996. Britt competes primarily with
the northern California mills of Louisiana Pacific, Georgia Pacific and Eel
River.
REGULATORY AND ENVIRONMENTAL FACTORS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.
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. Moreover, these laws and
regulations are modified from time to time and are subject to judicial and
administrative interpretation. 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 and Federal Clean
Water Act require, in part, that Pacific Lumber's operations be conducted
so as to reasonably protect the water quality of nearby rivers and streams.
Pacific Lumber is subject to certain pending matters described below which
could have a material adverse effect on the consolidated financial
position, results of operations or liquidity of Pacific Lumber and in turn
the Company. There can be no assurance that certain pending or future
legislation, governmental regulations or judicial or administrative
decisions will not have a material adverse effect on the Company.
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 6,600 acres (all containing virgin or residual old growth
timber) which are occupied marbled murrelet habitat. Pacific Lumber is
unable to predict when or if it will be able to harvest this acreage.
In May 1996, the USFWS published its final designation of
critical habitat for the marbled murrelet (the "Final Designation"),
designating over four million acres as critical habitat for the marbled
murrelet. Although nearly all of the designated habitat is public land,
approximately 33,000 acres of Pacific Lumber's timberlands are included in
the Final Designation, the substantial portion of such acreage being young
growth timber. The bulk of Pacific Lumber's 6,600 acres of occupied
marbled murrelet habitat falls within the 33,000 acres of Pacific Lumber's
timberlands included in the Final Designation. In order to mitigate the
impact of the Final Designation, particularly with respect to timberlands
occupied by the marbled murrelet, Pacific Lumber over the last few years
has attempted to develop a habitat conservation plan for the marbled
murrelet (the "Murrelet HCP"). Due to, among other things, the unfavorable
response of the USFWS to Pacific Lumber's initial Murrelet HCP efforts,
Pacific Lumber and its subsidiaries filed two actions (the "Takings
Litigation") alleging that certain portions of their timberlands have been
"taken" and seeking just compensation. See Item 3. "Legal Proceedings--
Pacific Lumber Litigation" for a description of the Takings Litigation.
Pursuant to an agreement entered into by the Company, MAXXAM, the United
States and the State of California on September 28, 1996 (the "Headwaters
Agreement") and described below under "--Headwaters Agreement," the Takings
Litigation has been stayed at the request of the parties.
It is impossible for the Company to determine the potential
adverse effect of the Final Designation on the Company's consolidated
financial position, results of operations or liquidity until such time as
various regulatory and legal issues are resolved; however, if Pacific
Lumber is unable to harvest, or is severely limited in harvesting, on
timberlands designated as critical habitat for the marbled murrelet, such
effect could be materially adverse to Pacific Lumber and in turn the
Company. If Pacific Lumber is unable to harvest or is severely limited in
harvesting, it intends to seek just compensation from the appropriate
governmental agencies on the grounds that such restrictions constitute a
governmental taking. There continue to be other regulatory actions and
lawsuits seeking to have other species listed as threatened or endangered
under the ESA and/or the CESA and to designate critical habitat for such
species. For example, the National Marine Fisheries Service has announced
that by April 25, 1997 it will make a final determination whether to list
the coho salmon under the ESA in northern California, including,
potentially, lands owned by Pacific Lumber. It is uncertain what impact,
if any, such listings and/or designations of critical habitat would have on
the consolidated financial position, results of operations or liquidity of
Pacific Lumber, and in turn the Company.
In 1994, the BOF adopted certain regulations regarding compliance
with long-term sustained yield ("LTSY") objectives. These regulations
require that timber companies project timber growth and harvest on their
timberlands over a 100-year planning period and establish a LTSY harvest
level that takes into account environmental and economic considerations.
The sustained yield plan ("SYP") must demonstrate that the average annual
harvest over any rolling ten-year period will not exceed the LTSY harvest
level and that Pacific Lumber's projected timber inventory is capable of
sustaining the LTSY harvest level in the last decade of the 100-year
planning period. On December 17, 1996, Pacific Lumber submitted a proposed
SYP to the CDF. The proposed SYP sets forth an LTSY harvest level
substantially the same as Pacific Lumber's average annual timber harvest
over the last six years. The proposed SYP also indicates that Pacific
Lumber's average annual timber harvest during the first decade of the SYP
would approximate the LTSY harvest level. During the second decade of the
proposed SYP, Pacific Lumber's average annual timber harvest would be
approximately 8% less than that proposed for the first decade. The SYP,
when approved, will be valid for ten years. Thereafter, revised SYPs will
be prepared every decade that will address the LTSY harvest level based
upon reassessment of changes in the resource base and protection of public
resources.
The proposed SYP assumes that the transactions contemplated by
the Headwaters Agreement will be consummated and that the Multi-Species HCP
(as defined below under "--Headwaters Agreement") will permit Pacific
Lumber to harvest its timberlands (including over the next two decades a
substantial portion of its old growth timberlands not transferred pursuant
to the Headwaters Agreement) to achieve maximum sustained yield. The SYP
is subject to review and approval by the CDF, and there can be no assurance
that the SYP will be approved in its proposed form. Until the SYP is
reviewed and approved, Pacific Lumber is unable to predict the impact that
these regulations will have on its future timber harvesting practices. It
is possible that the results of the review and approval process could
require Pacific Lumber to reduce its timber harvest in future years from
the harvest levels set forth in the proposed SYP. Pacific Lumber believes
it would be able to mitigate the effect of any required reduction in
harvest level by acquisitions of additional timberlands (and making
corresponding amendments to the SYP); however, there can be no assurance
that Pacific Lumber would be able to do so and the amount of such
acquisitions would be limited by Pacific Lumber's available financial
resources. The Company is unable to predict the ultimate impact the
sustained yield regulations will have on its future financial position,
results of operations or liquidity.
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 other timber harvesting
operations, and Pacific Lumber expects that such groups and individuals
will continue to file such objections. In addition, lawsuits are pending or
threatened which seek to prevent Pacific Lumber from implementing certain
of its approved THPs or which challenge other operations by Pacific Lumber.
These challenges have severely restricted Pacific Lumber's ability to
harvest old growth timber on its property. To date, challenges with
respect to Pacific Lumber's THPs relating to young growth timber and to its
other operations 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 timber harvesting and other
operations 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, they have not had a material adverse effect on Pacific Lumber's
consolidated financial position, results of operations or liquidity.
Nevertheless, it is 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 Pacific Lumber, and in turn
the Company.
In early 1997, the Environmental Protection Agency ("EPA")
entered into a consent decree agreeing to establish limits on
sedimentation, temperature and other factors (i.e. non-point source total
maximum daily loadings, "TMDL") under the Federal Clean Water Act for
seventeen northern California rivers and certain of their tributaries,
including rivers within Pacific Lumber's timberlands. The TMDL scheme will
be primarily aimed at protecting fish habitat. It is impossible to predict
the ultimate impact this consent decree will have on the consolidated
financial position, results of operations or liquidity of Pacific
Lumber, and in turn the Company.
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 northern spotted owl management
plan (the "Federal Owl Plan"). The Federal Owl Plan, as amended from time
to time, is currently applicable through 1999 and the USFWS expressed its
agreement that operations consistent with the Federal Owl Plan would not
result in the taking of any owls. Pacific Lumber has also developed a
Spotted Owl Resource Plan (the "State Owl Plan"), and the California
Department of Fish and Game has expressed its agreement that operations
consistent with the State Owl Plan would not result in the taking of any
owls. By incorporating the Federal Owl Plan or the State Owl Plan into
each THP filed with the CDF, Pacific Lumber is able to expedite the
approval time with respect to its THPs. The plaintiffs in the Marbled
Murrelet action have requested and received injunctive relief with respect
to certain THPs involving the Federal Owl Plan. See Item 3. "Legal
Proceedings--Timber Harvesting Litigation." 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 or impact on
the Company.
Laws, regulations and related judicial and administrative
interpretations 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. It is impossible to predict the content of
any such 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 impossible, however, to assess the
effect of such matters on the Company's consolidated financial position,
operating results or liquidity.
HEADWATERS AGREEMENT
On September 28, 1996, Pacific Lumber (on behalf of itself, its
subsidiaries and affiliates) and MAXXAM (collectively, "the Pacific Lumber
Parties") entered into the Headwaters Agreement with the United States and
California. The Headwaters Agreement provides the framework for the
acquisition by the United States and California of certain timberlands of
Pacific Lumber.
The Headwaters Agreement requires the parties to use their
respective best, good faith efforts to achieve certain items (the
"Specified Items"). The Specified Items include the transfer to the United
States and California of approximately 5,600 acres of Pacific Lumber's
timberlands commonly referred to as the Headwaters Forest and the Elk Head
Springs Forest and related buffer zones (respectively, the "Headwaters
Forest" and the "Elk Head Forest" and, collectively, the "Headwaters
Timberlands"). A substantial portion of the Headwaters Timberlands
consists of virgin old growth timberlands. Approximately 4,900 of these
acres are owned by Salmon Creek. The remaining acreage is owned by Scotia
Pacific (Pacific Lumber having harvesting rights on a portion of the
acreage).
The Headwaters Timberlands would be transferred in exchange for
(a) property and other consideration (possibly including cash) from both
the United States and California having an aggregate fair market value of
$300 million and (b) 7,755 acres of adjacent timberlands to be acquired by
the United States and California from a third party (the "Elk River
Timberlands"). The United States and California would also acquire and
retain an additional 1,900 acres of timberlands from such third party. An
additional Specified Item is the expedited development and submission by
Pacific Lumber and processing by the United States of an incidental take
permit ("Permit") to be based upon a habitat conservation plan for
multiple species ("Multi-Species HCP") covering (a) the timberlands and
timber harvesting rights which Pacific Lumber will own after consummation
of the Headwaters Agreement (the "Resulting Pacific Lumber Timber
Property") and (b) the Headwaters Timberlands and the 1,900 acres of Elk
River Timberlands retained by the United States and California (both as
conserved habitat). The agreement also requires expedited processing by
California of an SYP covering the Resulting Pacific Lumber Timber Property.
The Headwaters Agreement contains various provisions regarding the
processing of the Multi-Species HCP, the Permit and the SYP. The Specified
Items also require, among other things, dismissal with prejudice at closing
of the Takings Litigation pending against the United States and California.
See Item 3. "Legal Proceedings--Timber Harvesting Litigation." Pursuant to
the Headwaters Agreement, the parties have stayed the Takings Litigation,
subject to certain rights of the parties to terminate the stay.
The Headwaters Agreement also requires the United States and/or
California to provide to Pacific Lumber a list of property interests owned
or controlled by the United States and/or California meeting certain
conditions, including that they have a good faith estimated fair market
value equal to or in excess of $300 million. On December 5, 1996, the
United States and California each furnished a list of properties for
Pacific Lumber's review and approval. Neither list was accompanied by the
requisite background information, although both lists did indicate that
additional information would be made available. The list of United States
properties consisted of oil and gas interests in Kern County, California,
approximately 3,000 acres of young growth timberlands in Humboldt,
Mendocino and Trinity Counties in California, and surplus acreage next to a
federal office building in Laguna Niguel, California.
In February 1997, after full and careful consideration, Pacific
Lumber notified California that its Presented Properties were not
acceptable due to, among other things, various physical problems and
encumbrances on the properties, certain properties having been withdrawn
by the state and public opposition to the transfer of some of the
properties. Pacific Lumber also advised California that it should proceed
with the steps necessary to assure that California can provide cash for its
portion of the consideration to be paid to Pacific Lumber. There have been
ongoing discussions between the Pacific Lumber Parties and the United
States regarding the properties or other consideration to be furnished by
the United States.
As part of the Headwaters Agreement, the Pacific Lumber Parties
agreed to not enter the Headwaters Forest or the Elk Head Forest to conduct
logging operations, including salvage logging (the "Moratorium"). The
Moratorium was to terminate if by July 28, 1997 the parties had not
achieved the Specified Items to their respective satisfaction. On March
11, 1997, the Pacific Lumber Parties agreed to amend the Headwaters
Agreement to extend the period of time during which these closing
conditions must be met to February 17, 1998. The extension is, however,
subject to the achievement of certain milestones toward completion of the
Headwaters Agreement. The parties have agreed to execute an amendment to
the Headwaters Agreement evidencing these modifications.
Closing of the Headwaters Agreement is subject to various
conditions, including (a) completion of the Specified Items, (b) approval
of a Multi-Species HCP and SYP and issuance of the Permit, each in form and
substance satisfactory to Pacific Lumber, (c) the issuance by the Internal
Revenue Service and the California Franchise Tax Board of closing
agreements in form and substance sought by and satisfactory to the Pacific
Lumber Parties, (d) the absence of a judicial decision in any litigation
brought by third parties that any party reasonably believes will
significantly delay or impair the transactions described in the Headwaters
Agreement, and (e) approval by the boards of directors of the applicable
Pacific Lumber Parties. The Headwaters Agreement also provides that the
parties will cooperate and act in good faith to preserve diligently the
Headwaters Agreement, the Multi-Species HCP, the Permit and the SYP against
third party challenge. The parties to the Headwaters Agreement are working
to satisfy these conditions; however, there can be no assurance that the
Headwaters Agreement will be consummated.
ITEM 2. PROPERTIES
A description of the Company's properties is included under Item
1 above.
ITEM 3. LEGAL PROCEEDINGS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.
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, 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.
On September 15, 1995, an action entitled Marbled Murrelet, et
al. v. Bruce Babbitt, et al. (No. C-95-3261) (the "Marbled Murrelet
action") was filed in the U.S. District Court for the Northern District of
California. This action relates to, among other things, exemptions for
forest health which Pacific Lumber and its subsidiaries had previously
filed covering their entire timberlands. These exemptions allow Pacific
Lumber to harvest dead, dying or diseased trees ("exempt harvesting
operations"). 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 exempt harvesting operations will contribute to the
destruction of habitat for the marbled murrelet and the northern spotted
owl. After the U.S. Ninth Circuit Court of Appeals reversed a preliminary
injunction granted by the trial court enjoining the exempt harvesting
operations, the plaintiffs asked for leave to amend their pleadings. On
April 3, 1996, the trial court granted a preliminary injunction preventing
harvesting on eight already-approved THPs to the extent that they rely on
the Federal Owl Plan. In addition to appealing the preliminary injunction,
Pacific Lumber has obtained regulatory reapproval of seven of the eight
enjoined THPs without reliance on the Federal Owl Plan and has, to date,
confirmed with the trial court that six of those THPs are no longer subject
to the preliminary injunction. On November 4, 1996, the U.S. Ninth
Circuit Court of Appeals heard oral arguments concerning Pacific Lumber's
appeal but has not yet rendered a decision on this matter. In January
1997, the trial court dismissed plaintiffs' claims that Pacific Lumber had
and was causing "takes" of the marbled murrelet and northern spotted owl.
On November 15, 1996, an action entitled Redway Forest Defense,
et al. v. CDF, et al. (No. 96CP0856; the "Redway action") was filed against
Pacific Lumber and others in the Superior Court of Humboldt County,
California. This action seeks to overturn the CDF's approval of THP 96-036
which permits harvesting of approximately 63 acres of primarily old growth
timber. The action alleges, among other things, violations of CEQA
relating primarily to salmon fisheries.
The Company does not believe the matters described above will
have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity. See "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.
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 the Environmental Protection Information Center ("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. In February 1995, the
Court 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. Upon appeal, the U.S. Ninth Circuit Court of
Appeals affirmed the District Court's decision. Pacific Lumber
subsequently appealed the matter to the U.S. Supreme Court, but on February
19, 1997, the U.S. Supreme Court ruled that it would not consider Pacific
Lumber's appeal. In March 1997, Pacific Lumber paid approximately $1.4
million in legal fees which the trial court had awarded to the plaintiffs.
On April 22, 1996, Salmon Creek filed a lawsuit entitled Salmon
Creek Corporation v. California State Board of Forestry, et al. (No.
96CS01057) in the Superior Court of Sacramento County. This action seeks
to overturn the BOF's decision denying approval of a THP for approximately
8 acres of virgin old growth timber in the Headwaters Forest. Salmon Creek
seeks a court order requiring approval of the THP so that it may harvest in
accordance with the THP. Salmon Creek also seeks constitutional "just
compensation" damages to the extent that its old growth timber within and
surrounding the THP has been "taken" by reason of this regulatory denial
and previous actions of governmental authorities. In addition, on May 7,
1996, Pacific Lumber, Scotia Pacific and Salmon Creek filed a lawsuit
entitled The Pacific Lumber Company, et al. v. The United States of America
(No. 96-257L) in the United States Court of Federal Claims. The suit
alleges that the federal government has "taken" over 3,800 acres of Pacific
Lumber's old growth timberlands (including the Headwaters Forest) through
its application of the ESA. Pacific Lumber, Scotia Pacific and Salmon
Creek seek constitutional "just compensation" damages for the taking of
these timberlands by the federal government's actions. The Court in each
of these actions (collectively, the "Takings Litigation") has granted the
parties' agreed motions to stay the actions pursuant to the Headwaters
Agreement. These actions would be dismissed if the Headwaters Agreement is
consummated. See Item 1. "Business--Headwaters Agreement" for a
description of the Headwaters Agreement.
ZERO COUPON NOTE LITIGATION
In April 1989, an action was filed against the Company, MAXXAM,
MAXXAM Properties Inc., a wholly owned subsidiary of the Company ("MPI"),
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.
(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. and
the two cases were consolidated (under case No. 10785; collectively, the
"Zero Coupon Note actions"). The Zero Coupon Note actions relate to a Put
and Call Agreement entered into 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 MAXXAM's common stock 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 a 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. (the "Martel action") was filed in the U.S. District Court
for the Northern District of California (No. C950322) 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. The suit alleges that defendants made false
statements and claims in violation of the Federal False Claims Act in
connection with United Savings Association of Texas ("USAT"). Plaintiff
alleges, among other things, that defendants used the federally insured
assets of 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. The Company's
alleged portion of such damages has not been specified. Plaintiff seeks,
among other things, that the Court impose a constructive trust upon the
fruits of the alleged improper use of USAT funds. In August 1996, the
Court transferred this matter to the U.S. District Court for the Southern
District of Texas in which court the Federal Deposit Insurance Corporation
has brought another action arising out of the USAT matter. The parties are
awaiting a ruling or hearing on defendants' motion to dismiss. The Company
believes this matter should not have a material adverse effect on the
Company's consolidated financial position, results of operations or
liquidity.
OTHER LITIGATION MATTERS
The Company is involved in other claims, lawsuits and other
proceedings. While uncertainties are inherent in the final outcome of such
matters and it is presently impossible to determine the actual costs that
ultimately may be incurred, management believes that the resolution of such
uncertainties and the incurrence of such costs should not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
All of the Company's common stock is owned by MGHI. 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 $3.9 million and $4.8 million in 1996 and
1995, respectively. As of December 31, 1996, approximately $0.5 million of
dividends could be paid by the Company. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition and Investing and Financing Activities" and Note 5 to
the Consolidated Financial Statements appearing in Item 8.
The Company's 11-1/4% Senior Secured Notes due 2003 (the "MGI
Senior Notes") and the Company's 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 a pledge of
27,938,250 shares of common stock of Kaiser Aluminum Corporation ("Kaiser")
owned by MGHI. 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
BACKGROUND
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.
The Company engages in forest products operations through its
principal operating subsidiaries, Pacific Lumber and Britt. The Company's
business is seasonal in that the forest products business generally
experiences lower first quarter sales due largely to the general decline in
construction-related activity during the winter months. The following
should be read in conjunction with the Company's Consolidated Financial
Statements and the Notes thereto appearing in Item 8.
Old growth trees constitute Pacific Lumber's principal source of
upper grade redwood lumber. Due to the severe restrictions on Pacific
Lumber's ability to harvest virgin old growth timber on its property,
Pacific Lumber's supply of upper grade lumber has decreased in some premium
product categories. Furthermore, logging costs have increased primarily
due to the harvest of smaller diameter logs and compliance with
environmental regulations relating to the harvesting of timber and
litigation costs incurred in connection with certain THPs filed by Pacific
Lumber. Pacific Lumber has been able to lessen the impact of these factors
by augmenting its production facilities to increase its recovery of upper
grade lumber from smaller diameter logs and by increasing production
capacity for manufactured upper grade lumber products through its end and
edge glue facility (which was expanded during 1994). At this facility,
knot-free pieces of lumber are assembled into wider or longer pieces. 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 also increased shipments of air seasoned, primed and specialty
cut lumber which are examples of value-added products. Additionally,
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, and installation of a lumber remanufacturing facility at its
Fortuna lumber mill. However, unless Pacific Lumber is able to sustain
the harvest level of old growth trees, Pacific Lumber expects that its
production of premium upper grade lumber products will decline and that its
manufactured lumber products will constitute a higher percentage of its
shipments of upper grade lumber products. See also "--Trends" and Item 1.
"Business--Pacific Lumber--Regulatory and Environmental Factors."
RESULTS OF OPERATIONS
The following table presents selected operational and financial
information for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
(In millions of dollars,
except shipments and prices)
<S> <C> <C> <C>
Shipments:
Lumber: (1)
Redwood upper grades 49.7 46.5 52.9
Redwood common grades 229.6 216.7 218.4
Douglas-fir upper grades 10.6 7.4 8.6
Douglas-fir common grades 74.9 64.6 54.2
Other 17.2 11.4 12.1
------------- ------------- -------------
Total lumber 382.0 346.6 346.2
============= ============= =============
Logs (2) 20.1 12.6 17.7
============= ============= =============
Wood chips (3) 208.9 214.0 210.3
============= ============= =============
Average sales price:
Lumber: (4)
Redwood upper grades $ 1,380 $ 1,495 $ 1,443
Redwood common grades 511 477 460
Douglas-fir upper grades 1,154 1,301 1,420
Douglas-fir common grades 439 392 444
Logs (4) 477 440 615
Wood chips (5) 76 102 83
Net sales:
Lumber, net of discount $ 234.1 $ 211.3 $ 216.5
Logs 9.6 5.6 10.9
Wood chips 15.8 21.7 17.4
Cogeneration power 3.3 2.5 3.5
Other 1.8 1.5 1.3
------------- ------------- -------------
Total net sales $ 264.6 $ 242.6 $ 249.6
============= ============= =============
Operating income $ 72.0 $ 73.2 $ 77.8
============= ============= =============
Operating cash flow (6) $ 100.2 $ 99.6 $ 103.8
============= ============= =============
Income before income taxes and $ 4.9 $ 4.7 $ 14.8
extraordinary item ============= ============= =============
Net income $ 5.6 $ 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>
Net sales
Net sales for 1996 increased compared to 1995 principally due to
higher lumber shipments in all categories and higher average realized
prices for common grade lumber. Partially offsetting these improvements
were lower average realized prices for upper grade redwood lumber and wood
chips. Shipments of fencing and other value-added common lumber products
from the Company's new remanufacturing facility were a contributing factor
in the improved redwood common lumber realizations.
Net sales for 1995 decreased compared to 1994. Decreased
shipments of upper grade redwood lumber, lower average realized prices for
common 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, increased sales of wood chips and higher
average realized prices for both common and upper grades of redwood lumber.
Operating income
Operating income, after excluding from 1995 cost of sales a $1.5
million settlement of business interruption insurance claims related to an
April 1992 earthquake, increased in 1996 due to the increase in net sales
discussed above. Increases in costs of goods sold reflect both the impact
of additional manufacturing costs attributable to the increased shipments
of manufactured lumber products, higher shipments of lower margin lumber
and the increasing cost of regulatory compliance for the Company's timber
harvesting operations.
Operating income for 1995 decreased compared to 1994. This
decrease was primarily due to lower sales of lumber and logs and the higher
cost of lumber sales, partially offset by higher average realized prices on
wood chips. Cost of lumber sales for 1995 was unfavorably impacted by
higher purchases of logs from third parties, partially offset by improved
sawmill productivity.
Income before income taxes and extraordinary item
Income before income taxes for 1996 was basically flat as
compared to 1995. 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 1996 includes a benefit of
$2.3 million relating to the refund of taxes previously paid in connection
with a settlement of certain federal income tax matters in 1996. 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 8 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
FINANCING ACTIVITIES AND LIQUIDITY
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.
Parent Company. 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. 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. 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. Moreover, Pacific Lumber is dependent upon Scotia Pacific for a
substantial portion of its log requirements.
The indentures governing the Pacific Lumber Senior Notes, the
Timber Notes (the "Timber Note Indenture") and Pacific Lumber's revolving
credit agreement (the "Pacific Lumber Credit Agreement") contain various
covenants which, among other things, limit the ability to incur additional
indebtedness and liens, to engage in transactions with affiliates, to pay
dividends and to make investments. 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.
The Company is dependent upon its existing cash resources and
dividends from Pacific Lumber and Britt to meet its financial and debt
service obligations as they become due. The Company expects that Pacific
Lumber will provide a major portion of its future operating cash flow.
During the years ended December 31, 1996, 1995 and 1994, Pacific Lumber
paid an aggregate of $20.5 million, $22.0 million and $24.5 million of
dividends, respectively. As of December 31, 1996, under the most
restrictive of these covenants, approximately $17.2 million of dividends
could be paid by Pacific Lumber. Additionally, Britt paid dividends of
$6.0 million, $6.0 million and $1.8 million, for the years ended December
31, 1996, 1995 and 1994, respectively, and as of December 31,1996, Britt
could pay approximately $4.1 million of dividends.
As of December 31, 1996, the indebtedness of the subsidiaries
reflected on the Company's Consolidated Balance Sheet was $571.9 million,
of which $235.0 million was attributable to the Pacific Lumber Senior Notes
and $336.1 million was attributable to the Timber Notes. 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. In the event Scotia Pacific's cash flows are not
sufficient to generate distributable funds to Pacific Lumber, Pacific
Lumber would effectively be precluded from distributing funds to the
Company, and the Company's ability to pay interest on the MGI Notes and its
other indebtedness would also be materially impaired.
As of December 31, 1996, the Company (excluding Pacific Lumber
and its subsidiary companies) had cash and marketable securities of
approximately $77.8 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 and
liens, to engage in transactions with affiliates, to pay dividends and to
make investments. As of December 31, 1996, under the most restrictive of
these covenants, approximately $0.5 million of dividends could be paid by
the Company, all which was paid in March 1997. The Company paid dividends
of $3.9 million and $4.8 million in 1996 and 1995, respectively. The
Company did not pay any dividends in 1994. Except for a portion of
possible proceeds from the Headwaters Agreement, the Company does not
expect to pay a significant amount of cash dividends over the next several
years.
Pacific Lumber. During the years ended December 31, 1996, 1995
and 1994, Pacific Lumber's operating income before depletion and
depreciation ("operating cash flow") amounted to $93.9 million, $90.5
million and $95.9 million, respectively, which exceeded interest expense in
respect of all of its indebtedness in those years by $39.5 million, $35.0
million and $39.8 million, respectively. Pacific Lumber is dependent upon
Scotia Pacific for the logs from which it generates a substantial portion
of its operating cash flow. The Company believes that Pacific Lumber's
level of operating cash flow and available sources of financing will enable
it to meet its working capital and capital expenditure requirements for the
next year. With respect to long-term liquidity, the Company believes that
Pacific Lumber's ability to generate sufficient levels of cash from
operations, and its ability to obtain both short and long-term financing
should provide sufficient funds to meet its working capital and capital
expenditure requirements.
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. 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, once Scotia Pacific's debt service, operating and capital
expenditure requirements have been met, substantially all of Scotia
Pacific's available cash is periodically distributed to Pacific Lumber.
Scotia Pacific paid $76.9 million, $59.0 million and $88.9 million of
dividends to Pacific Lumber during the years ended December 31, 1996, 1995
and 1994, respectively.
Borrowings under the Pacific Lumber Credit Agreement, which
expires on May 31, 1999, are secured by Pacific Lumber's trade receivables
and inventories, with interest currently computed at the bank's reference
rate plus 1-1/4% or the bank's offshore rate plus 2-1/4%. The Pacific
Lumber 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 acquisitions 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, 1996, $47.0 million of borrowings was available under the
Pacific Lumber Credit Agreement, of which $4.7 million was available for
letters of credit and $30.0 million was restricted to timberland
acquisitions. No borrowings were outstanding as of December 31, 1996, and
letters of credit outstanding amounted to $10.3 million. The Pacific
Lumber Credit Agreement contains covenants substantially similar to those
contained in the indenture governing the Pacific Lumber Senior Notes.
Consolidated. As of December 31, 1996, the Company had
consolidated working capital of $131.4 million and long-term debt of $729.8
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 $124.2 million and $732.9 million, respectively, at December
31, 1995. The decrease in long-term debt was primarily due to principal
payments on the Timber Notes. The Company and its subsidiaries anticipate
that cash 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 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
governmental regulation affecting timber harvesting practices (see "--
Trends" below), increased competition from other lumber producers or
alternative building products and general economic conditions.
INVESTING ACTIVITIES
Capital expenditures during 1994 - 1996 were made to improve
production efficiency, reduce operating costs and, to a lesser degree,
acquire additional timberlands. The Company's consolidated capital
expenditures were $15.2 million, $9.9 million and $11.3 million for the
years ended December 31, 1996, 1995 and 1994, respectively. Capital
expenditures for 1997, excluding expenditures for timberlands, are expected
to be $12.0 million and are estimated to be between $10.0 million and $15.0
million per year for the 1998 - 1999 period. Pacific Lumber may purchase
additional timberlands from time to time as appropriate opportunities
arise, and such purchases could exceed the historically modest levels of
such acquisitions.
TRENDS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.
The Company's forest products operations are primarily conducted
by Pacific Lumber. Pacific Lumber'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.
Moreover, these laws and regulations are modified from time to time and are
subject to judicial and administrative interpretation. Compliance with
such laws, regulations and judicial and administrative interpretations,
together with the cost of litigation incurred in connection with certain
timber harvesting operations of Pacific Lumber, have increased the cost of
logging operations. Pacific Lumber is subject to certain pending matters
which could have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity. There can be no
assurance that these pending matters or future governmental regulations,
legislation or judicial or administrative decisions would not materially
and adversely affect the Company. See Item 1. "Business--Regulatory and
Environmental Factors"; Item 3. "Legal Proceedings--Timber Harvesting
Litigation" and Notes 8 and 9 to the Consolidated Financial Statements for
further information regarding regulatory and environmental factors affecting
the Company's operations. See also Item 1. "Business--Headwaters Agreement"
for the recent agreement to extend the Headwaters Agreement to February 17,
1998.
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.
ITEM 8. FINANCIAL STATEMENT 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 Group Holdings Inc.) and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, cash flows and
stockholder's deficit for each of the three years in the period ended
December 31, 1996. 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, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, 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.
ARTHUR ANDERSEN LLP
San Francisco, California
January 24, 1997
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 72,418 $ 48,396
Marketable securities 31,423 36,568
Receivables:
Trade 18,850 20,576
Other 2,542 1,624
Inventories 69,307 77,904
Prepaid expenses and other current assets 5,474 7,101
------------- -------------
Total current assets 200,014 192,169
Timber and timberlands, net of accumulated
depletion of $221,063 and $204,856,
respectively 324,986 337,390
Property, plant and equipment, net of accumulated
depreciation of $76,753 and $67,732,
respectively 102,029 100,142
Deferred financing costs, net 24,249 27,288
Deferred income taxes 55,047 58,485
Restricted cash 29,967 31,367
Other assets 6,455 5,542
------------- -------------
$ 742,747 $ 752,383
============= =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 3,928 $ 4,166
Accrued interest 24,899 25,354
Accrued compensation and related benefits 10,033 9,611
Deferred income taxes 10,173 10,244
Other accrued liabilities 3,335 4,435
Long-term debt, current maturities 16,258 14,195
------------- -------------
Total current liabilities 68,626 68,005
Long-term debt, less current maturities 759,769 764,310
Other noncurrent liabilities 26,387 33,813
------------- -------------
Total liabilities 854,782 866,128
------------- -------------
Contingencies
Stockholder's deficit:
Common stock, $.08-1/3 par value; 1,000 -- --
shares authorized; 100 shares issued
Additional capital 81,287 81,287
Accumulated deficit (193,322) (195,032)
------------- -------------
Total stockholder's deficit (112,035) (113,745)
------------- -------------
$ 742,747 $ 752,383
============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net sales:
Lumber and logs $ 243,726 $ 216,898 $ 227,430
Other 20,858 25,694 22,199
------------- ------------- -------------
264,584 242,592 249,629
------------- ------------- -------------
Operating expenses:
Cost of goods sold (exclusive of
depletion and depreciation) 148,522 127,124 129,598
Selling, general and administrative
expenses 15,853 15,884 16,250
Depletion and depreciation 28,176 26,405 25,946
------------- ------------- -------------
192,551 169,413 171,794
------------- ------------- -------------
Operating income 72,033 73,179 77,835
Other income (expense):
Investment, interest and other
income 10,942 9,393 14,367
Interest expense (78,045) (77,824) (77,383)
------------- ------------- -------------
Income before income taxes and
extraordinary item 4,930 4,748 14,819
Credit (provision) in lieu of income
taxes 680 (1,211) 3,616
------------- ------------- -------------
Income before extraordinary item 5,610 3,537 18,435
Extraordinary item:
Loss on litigation settlement, net
of related credit in lieu of
income taxes of $6,312 -- -- (14,866)
------------- ------------- -------------
Net income $ 5,610 $ 3,537 $ 3,569
============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,610 $ 3,537 $ 3,569
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depletion and depreciation 28,176 26,405 25,946
Amortization of deferred
financing costs and
discounts on long-term
debt 14,714 13,328 12,127
Net (purchases) sales of
marketable securities 10,298 (19,533) 5,321
Net losses (gains) on
marketable securities (5,153) (4,175) (1,669)
Increase (decrease) in cash
resulting from changes in:
Inventories, net of depletion 6,011 (7,695) 3,634
Accounts payable (238) 463 832
Receivables 1,284 5,778 (7,660)
Prepaids and other assets 714 (3,384) (528)
Accrued and deferred income
taxes (925) 2,303 (3,815)
Other liabilities (4,288) 7,734 (2,283)
Accrued interest (455) (411) (451)
Other 5 1,020 (86)
------------- ------------- -------------
Net cash provided by
operating activities 55,753 25,370 34,937
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of note receivable from
affiliate -- 2,500 --
Net proceeds from sale of assets 122 18 1,149
Capital expenditures (15,200) (9,852) (11,322)
------------- ------------- -------------
Net cash used for
investing activities (15,078) (7,334) (10,173)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions, repurchase of and
principal payments on long-term
debt (14,153) (14,300) (13,237)
Net borrowings (payments) under
revolving credit agreements -- -- (2,900)
Incurrence of financing costs -- (150) (213)
Restricted cash withdrawals, net 1,400 1,035 1,160
Dividends paid (3,900) (4,800) --
------------- ------------- -------------
Net cash used for
financing activities (16,653) (18,215) (15,190)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 24,022 (179) 9,574
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 48,396 48,575 39,001
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 72,418 $ 48,396 $ 48,575
============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Common
Stock
($.08-1/3 Additional Accumulated
Par) Capital Deficit Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1994 $ -- $ 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)
Net income -- -- 5,610 5,610
Dividend -- -- (3,900) (3,900)
------------- ------------- ------------- -------------
Balance, December 31, 1996 $ -- $ 81,287 $ (193,322) $ (112,035)
============= ============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
MAXXAM GROUP INC. AND SUBSIDIARIES
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
MAXXAM Group Inc. ("MGI") and its subsidiaries, collectively referred to
herein as the "Company." MGI is a wholly owned subsidiary of MAXXAM Group
Holdings Inc. ("MGHI") which 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 is engaged in forest products operations conducted
through its wholly owned subsidiaries, The Pacific Lumber Company ("Pacific
Lumber") and Britt Lumber Co., Inc. ("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 are obtained from
Pacific Lumber. Housing, construction and remodeling are the principal
markets for the Company's lumber products. Export sales generally
constitute less than 6% of forest product sales. A significant portion of
forest product sales are made to third parties located west of the
Mississippi River.
USE OF ESTIMATES AND ASSUMPTIONS
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
Company's consolidated financial position, results of operations or
liquidity.
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. 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, 1996 were: 1996 - net unrealized holding losses
of $902 and net realized gains of $5,287; 1995 - net unrealized holding
gains of $1,666 and net realized gains of $2,509; and 1994 - net unrealized
holding losses of $1,094 and net realized gains of $2,763.
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 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 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, 1996, 1995 and 1994 includes
interest of approximately $2,865, $2,560 and $2,638, respectively,
attributable to an investment rate agreement (at 7.95% per annum) with the
financial institution which holds the Liquidity Account.
At December 31, 1996 and 1995, cash and cash equivalents include
$17,600 and $19,742, 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 equivalents and restricted cash
approximate fair value. Marketable securities are carried at fair value
which is determined based on quoted market prices. As of December 31, 1996
and 1995, the estimated fair value of long-term debt, including current
maturities, was $747,991 and $772,841, respectively. 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 together with the MGI Senior Notes, the "MGI Notes"),
and on the current rates offered for borrowings similar to the other debt.
Some of the Company's publicly traded debt issues 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.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
Lumber $ 49,829 $ 59,563
Logs 19,478 18,341
------------- -------------
$ 69,307 $ 77,904
============= =============
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as
follows:
<TABLE>
<CAPTION>
Estimated December 31,
---------------------------
Useful Lives 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Logging roads, land and improvements 15 years $ 11,541 $ 7,929
Buildings 33 years 34,877 29,661
Machinery and equipment 5 - 15 years 132,364 129,764
Construction in progress -- 520
------------- -------------
178,782 167,874
Less: accumulated depreciation (76,753) (67,732)
------------- -------------
$ 102,029 $ 100,142
============= =============
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1995
and 1994 was $ 9,382 , $9,663 and $9,269, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized
Notes due through July 20, 2015 $ 336,130 $ 350,233
10-1/2% Pacific Lumber Senior Notes due March
1, 2003 235,000 235,000
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 104,173 92,498
Other 724 774
------------- -------------
776,027 778,505
Less: current maturities (16,258) (14,195)
------------- -------------
$ 759,769 $ 764,310
============= =============
</TABLE>
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 $165,970 of the Company's
consolidated balance at December 31, 1996), (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) 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. On January 21, 1997, Scotia Pacific
paid $8,712 of principal on the Timber Notes. 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.
The Pacific Lumber Senior Notes are unsecured and are senior indebtedness
of Pacific Lumber; however, they are effectively subordinated to the Timber
Notes. The indenture governing the Pacific Lumber Senior Notes contains
various covenants which, among other things, limit Pacific Lumber's ability
to incur additional indebtedness and liens, to engage in transactions with
affiliates, to make investments and to pay dividends.
Pacific Lumber has a revolving credit agreement with a bank (as
amended and restated, the "Pacific Lumber Credit Agreement") which expires
on May 31, 1999. Borrowings under the Pacific Lumber Credit Agreement are
secured by Pacific Lumber's trade receivables and inventories, with
interest currently computed at the bank's reference rate plus 1-1/4% or the
bank's offshore rate plus 2-1/4%. The Pacific Lumber 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, 1996, $46,992 of borrowings was
available under the Pacific Lumber Credit Agreement, of which $4,732 was
available for letters of credit and $30,000 was restricted to timberland
acquisitions. No borrowings were outstanding as of December 31, 1996, and
letters of credit outstanding amounted to $10,268. The Pacific Lumber
Credit Agreement contains covenants substantially similar to those
contained in the indenture governing the Pacific Lumber Senior Notes.
As of December 31, 1996, under the most restrictive covenants
contained in the indentures governing the Pacific Lumber Senior Notes, the
Timber Notes and the Pacific Lumber Credit Agreement, Pacific Lumber could
pay approximately $17,200 of dividends.
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. The MGI Notes are secured by the Company's pledge of 100%
of the common stock of Pacific Lumber, Britt and MAXXAM Properties Inc.
("MPI"), a wholly owned subsidiary of the Company, and by MGHI's pledge of
27,938,250 shares of Kaiser Aluminum Corporation ("Kaiser") common stock.
The indenture governing the MGI Notes, among other things, restricts the
ability of the Company to incur additional indebtedness and liens, engage
in transactions with affiliates, pay dividends and make investments. As of
December 31, 1996, under the most restrictive of these covenants,
approximately $500 of dividends could be paid by the Company. The MGI
Notes are senior indebtedness of the Company; however, they are effectively
subordinated 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 $21,547 and $33,222 at December 31,
1996 and 1995, 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.
Maturities
Scheduled maturities of long-term debt for the five years
following December 31, 1996, using the Scheduled Amortization for the
Timber Notes, are: $16,258 in 1997, $19,430 in 1998, $21,745 in 1999,
$24,065 in 2000, $24,827 in 2001 and $691,249 thereafter. Maturities for
1997 through 2001 are principally attributable to the Timber Notes.
Restricted Net Assets of Subsidiaries
At December 31, 1996, 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, 1996, all of the assets
of Pacific Lumber and its subsidiaries are subject to such restrictions.
5. CREDIT (PROVISION) IN LIEU OF INCOME TAXES
Income taxes are determined using an asset and liability approach
which 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 Company and its subsidiaries are members of MAXXAM's consolidated
return group for federal income tax purposes.
Pursuant to a tax allocation agreement between MAXXAM, Pacific
Lumber, Scotia Pacific and Salmon Creek Corporation ("Salmon Creek"), a
wholly owned subsidiary of Pacific Lumber, (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, (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 before
income taxes and extraordinary item consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal credit (provision) in
lieu of income taxes $ (159) $ (167) $ --
State and local (9) (35) (55)
------------- ------------- -------------
(168) (202) (55)
------------- ------------- -------------
Deferred:
Federal credit (provision) in lieu
of income taxes 363 (33) 2,366
State and local 485 (976) 1,305
------------- ------------- -------------
848 (1,009) 3,671
------------- ------------- -------------
$ 680 $ (1,211) $ 3,616
============= ============= =============
</TABLE>
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 before income taxes and extraordinary item is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Income before income taxes and
extraordinary item $ 4,930 $ 4,748 $ 14,819
============= ============= =============
Amount of federal income tax based upon
the statutory rate $ (1,726) $ (1,662) $ (5,187)
Revision of prior years' tax estimates
and other changes in valuation
allowances 3,372 907 7,739
Expenses for which no federal tax
benefit is available (493) -- --
State and local taxes, net of federal
tax effect (573) (657) 812
Other 100 201 252
------------- ------------- -------------
$ 680 $ (1,211) $ 3,616
============= ============= =============
</TABLE>
Revision of prior years' tax estimates and other changes in
valuation allowances as shown in the table above include amounts for the
reversal of reserves which the Company no longer believes are necessary,
other changes in prior year tax estimates and changes in valuation
allowances with respect to deferred income tax assets. Generally, the
reversal of reserves relates to the expiration of the relevant statute of
limitations with respect to certain income tax returns or the resolution of
specific income tax matters with the relevant tax authorities. For the
years ended December 31, 1996, 1995 and 1994, the reversal of reserves
which the Company believes are no longer necessary resulted in a credit to
the income tax provision of $3,203, $127 and $7,048, respectively.
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 10). 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.
The components of the Company's net deferred income tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
Deferred income tax assets:
Loss and credit carryforwards $ 79,411 $ 83,705
Timber and timberlands 28,992 32,528
Other liabilities and other 22,934 19,846
Valuation allowances (51,049) (51,595)
------------- -------------
Total deferred income tax assets, net 80,288 84,484
------------- -------------
Deferred income tax liabilities:
Property, plant and equipment (17,458) (16,560)
Inventories (15,091) (16,068)
Other (2,865) (3,615)
------------- -------------
Total deferred income tax liabilities (35,414) (36,243)
------------- -------------
Net deferred income tax assets $ 44,874 $ 48,241
============= =============
</TABLE
The valuation allowances listed above relate to loss and credit
carryforwards. As of December 31, 1996, approximately $28,992 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, 1996 is $28,362 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
$41,206 and $43,731 at December 31, 1996 and 1995, 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, 1996, under the terms of the respective tax allocation
agreements. The utilization of certain of these attributes is subject to
limitations.
</TABLE>
<TABLE>
<CAPTION>
Expiring
Through
-------------
<S> <C> <C>
Regular Tax Attribute Carryforwards:
Net operating losses $ 215,651 2011
Net capital losses 4,201 1998
Minimum tax credit 379 Indefinite
Alternative Minimum Tax Attribute
Carryforwards:
Net operating losses $ 174,948 2011
</TABLE>
6. EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
Pacific Lumber 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,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Service cost - benefits earned during
the year $ 1,903 $ 1,483 $ 1,643
Interest cost on projected benefit
obligation 1,682 1,693 1,263
Actual loss (gain) on plan assets (2,762) (3,900) 10
Net amortization and deferral 1,448 2,460 (859)
------------- ------------- -------------
Net periodic pension cost $ 2,271 $ 1,736 $ 2,057
============= ============= =============
</TABLE>
The following table sets forth the funded status and amounts
recognized in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
Actuarial present value of accumulated plan
benefits:
Vested benefit obligation $ 18,506 $ 16,910
Non-vested benefit obligation 1,371 1,214
------------- -------------
Total accumulated benefit obligation $ 19,877 $ 18,124
============= =============
Projected benefit obligation $ 23,582 $ 21,841
Plan assets at fair value, primarily equity and (21,800) (18,363)
debt securities ------------- -------------
Projected benefit obligation in excess of plan 1,782 3,478
assets
Unrecognized net transition asset 18 24
Unrecognized net gain (loss) 2,855 (27)
Unrecognized prior service cost (39) (45)
------------- -------------
Accrued pension liability $ 4,616 $ 3,430
============= =============
</TABLE>
The assumptions used in accounting for the defined benefit plan
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Rate of increase in compensation levels 5.0% 5.0% 5.0%
Discount rate 7.5% 7.25% 8.5%
Expected long-term rate of return on 8.0% 8.0% 8.0%
assets
</TABLE>
POSTRETIREMENT MEDICAL BENEFITS
Pacific Lumber has an unfunded defined benefit plan for certain
postretirement medical 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 expected costs of
postretirement medical benefits are accrued over the period the employees
provide services to the date of their full eligibility for such benefits.
A summary of the components of net periodic postretirement
medical benefit cost is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Service cost - medical benefits earned
during the year $ 332 $ 228 $ 216
Interest cost on accumulated postretirement
medical benefit obligation 415 317 294
Net amortization and deferral -- (53) (7)
------------- ------------- -------------
Net periodic postretirement medical benefit
cost $ 747 $ 492 $ 503
============= ============= =============
</TABLE>
The postretirement medical benefit liability recognized in the
Company's Consolidated Balance Sheet is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
Retirees $ 1,182 $ 634
Actives eligible for benefits 905 726
Actives not eligible for benefits 3,818 3,317
------------- -------------
Accumulated postretirement medical benefit
obligation 5,905 4,677
Unrecognized net gain (loss) (86) 553
------------- -------------
Postretirement medical benefit liability $ 5,819 $ 5,230
============= =============
</TABLE>
The annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 10.5% for 1997 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 medical
benefit obligation as of December 31, 1996 by approximately $810 and the
aggregate of the service and interest cost components of net periodic
postretirement medical benefit cost by approximately $130.
The discount rates used in determining the accumulated
postretirement medical benefit obligation were 7.5% and 7.25% at December
31, 1996 and 1995, respectively.
EMPLOYEE SAVINGS PLAN
Pacific Lumber's employees are 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.
The cost to the Company of this plan was $1,388, $1,281 and $1,215 for the
years ended December 31, 1996, 1995 and 1994, respectively.
WORKERS' COMPENSATION BENEFITS
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 $8,000 and $8,900 at December 31, 1996 and 1995, respectively.
Workers' compensation expenses amounted to $3,080, $3,579 and $4,069 for
the years ended December 31, 1996, 1995 and 1994, respectively.
7. 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 $2,680,
$1,994 and $2,254 for the years ended December 31, 1996, 1995 and 1994,
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 10, Pacific Lumber paid approximately $3,185 to a law firm in which
a director of Pacific Lumber is also a partner.
8. CONTINGENCIES
Pacific Lumber'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.
Moreover, these laws and regulations are modified from time to time and are
subject to judicial and administrative interpretation. Compliance with such
laws, regulations and judicial and administrative interpretations, together
with the cost of litigation incurred in connection with certain timber
harvesting operations of Pacific Lumber, have increased the cost of logging
operations. Pacific Lumber is subject to certain pending matters described
below which could have a material adverse effect on the consolidated
financial position, results of operations or liquidity of Pacific Lumber,
and in turn the Company. There can be no assurance that certain pending or
future governmental regulations, legislation, judicial or administrative
decisions or California ballot initiatives will not have a material adverse
effect on the Company.
In May 1996, the United States Fish and Wildlife Service ("USFWS")
published its final designation of critical habitat for the marbled
murrelet (the "Final Designation"), which designated over four million
acres as critical habitat for the marbled murrelet. Although nearly all of
the designated habitat is public land, approximately 33,000 acres of
Pacific Lumber's timberlands are included in the Final Designation, the
substantial portion of such acreage being young growth timber. In order to
mitigate the impact of the Final Designation, particularly with respect to
timberlands occupied by the marbled murrelet, Pacific Lumber over the last
few years has attempted to develop a habitat conservation plan for the
marbled murrelet (the "Murrelet HCP"). Due to, among other things, the
unfavorable response of the USFWS to Pacific Lumber's initial Murrelet HCP
efforts, Pacific Lumber and its subsidiaries filed two actions (the
"Takings Litigation") alleging that certain portions of their timberlands
have been "taken" and seeking just compensation. Pursuant to an agreement
entered into by Pacific Lumber, MAXXAM, the United States and California on
September 28, 1996 (the "Headwaters Agreement") described in Note 9 below,
the Takings Litigation has been stayed at the request of the parties.
It is impossible for the Company to determine the potential
adverse effect of the Final Designation on the Company's consolidated
financial position, results of operations or liquidity until such time as
various regulatory and legal issues are resolved; however, if Pacific
Lumber is unable to harvest, or is severely limited in harvesting, on
timberlands designated as critical habitat for the marbled murrelet, such
effect could be materially adverse to Pacific Lumber, and in turn the
Company. If Pacific Lumber is unable to harvest or is severely limited in
harvesting, it intends to seek just compensation from the appropriate
governmental agencies on the grounds that such restrictions constitute a
governmental taking. There continue to be other regulatory actions and
lawsuits seeking to have other species listed as threatened or endangered
under the federal Endangered Species Act ("ESA") and/or the California
Endangered Species Act ("CESA") and to designate critical habitat for such
species. For example, the National Marine Fisheries Service has announced
that by April 25, 1997 it will make a final determination concerning
whether to list the coho salmon under the ESA in northern California,
including, potentially, lands owned by Pacific Lumber. It is uncertain
what impact, if any, such listings and/or designations of critical habitat
would have on the consolidated financial position, results of operations or
liquidity of Pacific Lumber, and in turn the Company.
In 1994, the California Board of Forestry ("BOF") adopted certain
regulations regarding compliance with long-term sustained yield ("LTSY")
objectives. These regulations require that timber companies project timber
growth and harvest on their timberlands over a 100-year planning period and
establish a LTSY harvest level that takes into account environmental and
economic considerations. The sustained yield plan ("SYP") must demonstrate
that the average annual harvest over any rolling ten-year period will not
exceed the LTSY harvest level and that Pacific Lumber's projected timber
inventory is capable of sustaining the LTSY harvest level in the last
decade of the 100-year planning period. On December 17, 1996, Pacific
Lumber submitted a proposed SYP to the California Department of Forestry
("CDF"). The proposed SYP sets forth an LTSY harvest level substantially
the same as Pacific Lumber's average annual timber harvest over the last
six years. The proposed SYP also indicates that Pacific Lumber's average
annual timber harvest during the first decade of the SYP would approximate
the LTSY harvest level. During the second decade of the proposed SYP,
Pacific Lumber's average annual timber harvest would be approximately 8%
less than that proposed for the first decade. The SYP, when approved, will
be valid for ten years. Thereafter, revised SYPs will be prepared every
decade that will address the LTSY harvest level based upon reassessment of
changes in the resource base and protection of public resources.
The proposed SYP assumes that the transactions contemplated by
the Headwaters Agreement (see Note 9) will be consummated and that the
Multi-Species HCP (as defined in Note 9) will permit Pacific Lumber to
harvest its timberlands (including over the next two decades a substantial
portion of its old growth timberlands not transferred pursuant to the
Headwaters Agreement) to achieve maximum sustained yield. The SYP is
subject to review and approval by the CDF, and there can be no assurance
that the SYP will be approved in its proposed form. Until the SYP is
reviewed and approved, the Company is unable to predict the impact that
these regulations will have on Pacific Lumber's future timber harvesting
practices. It is possible that the results of the review and approval
process could require Pacific Lumber to reduce its timber harvest in future
years from the harvest levels set forth in the proposed SYP. The Company
believes Pacific Lumber would be able to mitigate the effect of any
required reduction in harvest level by acquisitions of additional
timberlands and making corresponding amendments to the SYP; however, there
can be no assurance that Pacific Lumber would be able to do so and the
amount of such acquisitions would be limited by Pacific Lumber's available
financial resources. The Company is unable to predict the ultimate impact
the sustained yield regulations will have on its future financial position,
results of operations or liquidity.
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 timber harvesting plans ("THPs") and
other timber harvesting operations, and Pacific Lumber expects that such
groups and individuals will continue to file such objections. In addition,
lawsuits are pending or threatened which seek to prevent Pacific Lumber
from implementing certain of its approved THPs or which challenge other
operations by Pacific Lumber. These challenges have severely restricted
Pacific Lumber's ability to harvest old growth timber on its property. To
date, challenges with respect to Pacific Lumber's THPs relating to young
growth timber and to its other operations 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
timber harvesting and other operations 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, they have not had a material
adverse effect on Pacific Lumber's consolidated financial position, results
of operations or liquidity. Nevertheless, it is 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
Pacific Lumber, and in turn the Company.
The Company is also involved in various claims, lawsuits and
proceedings. 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. HEADWATERS AGREEMENT
On September 28, 1996, Pacific Lumber (on behalf of itself, its
subsidiaries and affiliates) and MAXXAM (collectively, the "Pacific Lumber
Parties " ) entered into the Headwaters Agreement with the United States
and California. The Headwaters Agreement provides the framework for the
acquisition by the United States and California of approximately 5,600
acres of Pacific Lumber's timberlands commonly referred to as the
Headwaters Forest and the Elk Head Springs Forest (the "Headwaters
Timberlands"). A substantial portion of the Headwaters Timberlands
consists of virgin old growth timberlands. The Headwaters Timberlands
would be transferred in exchange for (a) property and other consideration
(possibly including cash) from the United States and California having an
aggregate fair market value of $300 million and (b) approximately 7,755
acres of adjacent timberlands to be acquired by the United States and
California (the "Elk River Timberlands") from a third party. The United
States and California would also acquire and retain an additional 1,900
acres of timberlands from such third party.
The Headwaters Agreement also provides, among other things, for
the expedited processing by the United States of an incidental take permit
("Permit") to be based upon a habitat conservation plan for multiple
species ("Multi-Species HCP") covering (a) the timberlands and timber
harvesting rights which Pacific Lumber will own after consummation of the
Headwaters Agreement (the "Resulting Pacific Lumber Timber Property") and
(b) the Headwaters Timberlands and the 1,900 acres of Elk River Timberlands
retained by the United States and California (both as conserved habitat).
The agreement also requires expedited processing by California of an SYP
covering the Resulting Pacific Lumber Timber Property.
On December 5, 1996, the United States and California each
furnished a list of properties consisting of oil and gas interests,
timberlands and a variety of other real estate properties for Pacific
Lumber's review and approval. There have been ongoing discussions between
the Pacific Lumber Parties and the United States regarding the properties
and other consideration to be furnished by the United States.
Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands from a third party, (b) approval of an SYP and a Multi-Species
HCP and issuance of a Permit, each in form and substance satisfactory to
Pacific Lumber, (c) the issuance by the Internal Revenue Service and the
California Franchise Tax Board of closing agreements in form and substance
sought by and satisfactory to the Pacific Lumber Parties, (d) the absence
of a judicial decision in any litigation brought by third parties that any
party reasonably believes will significantly delay or impair the
transactions described in the Headwaters Agreement, and (e) the dismissal
with prejudice at closing of the Takings Litigation. The parties to the
Headwaters Agreement are working to satisfy these conditions; however,
there can be no assurance that the Headwaters Agreement will be
consummated.
10. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental information on non-cash
investing and financing activities:
Net margin borrowings (payments) for
marketable securities $ -- $ (6,648) $ 5,628
Timber and timberlands acquired
subject to loan from seller -- 615 910
Supplemental disclosure of cash flow
information:
Interest paid, net of capitalized
interest $ 63,785 $ 64,907 $ 65,707
Income taxes paid (refunded) (2,900) (5,190) 1,170
Tax allocation payments to MAXXAM 188 -- 397
</TABLE>
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 Pacific Lumber recorded reductions in cost of sales of
$1,527 resulting from business interruption insurance reimbursements for
higher operating costs and the related loss of revenues resulting from the
April 1992 earthquake.
Extraordinary Item Related to Litigation Settlement
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.
11. QUARTERLY FINANCIAL INFORMATION (Unaudited)
Summary quarterly financial information for the years ended
December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1996:
Net sales $ 59,804 $ 71,303 $ 68,473 $ 65,004
Operating income 16,417 19,010 17,184 19,422
Net income (loss) 124 3,909 (35) 1,612
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
</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
(A) INDEX TO FINANCIAL STATEMENTS PAGE
----
1. FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):
Report of Independent Public Accountants 25
Consolidated balance sheet at December 31, 1996 and 1995 26
Consolidated statement of operations for the years ended
December 31, 1996, 1995 and 1994 27
Consolidated statement of cash flows for the years ended
December 31, 1996, 1995 and 1994 28
Consolidated statement of stockholder's deficit for the
years ended December 31, 1996, 1995 and 1994 29
Notes to consolidated financial statements 30
2. FINANCIAL STATEMENT SCHEDULES:
Schedule I - Condensed financial information of
Registrant at December 31, 1996 and 1995 and for the
years ended December 31, 1996, 1995 and 1994 47
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
There were no reports on Form 8-K during the fourth quarter of
1996. However, on March 12, 1997, the Company filed a Current Report on
Form 8-K (under Item 5), dated March 11, 1997, concerning an agreement to
amend the Headwaters Agreement to extend the period of time during which
the closing conditions must be met to February 17, 1998.
(C) EXHIBITS
Reference is made to the Index of Exhibits immediately preceding
the exhibits hereto (beginning on page 52), which index is incorporated
herein by reference.
MAXXAM GROUP INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET (UNCONSOLIDATED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 45,611 $ 21,862
Marketable securities 31,423 36,568
Other current assets 102 2,867
------------- -------------
Total current assets 77,136 61,297
Investments in and advances from subsidiaries -- 141
Deferred income taxes 21,947 17,671
Deferred financing costs and other assets 4,260 4,905
------------- -------------
$ 103,343 $ 84,014
============= =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable and other accrued
liabilities $ 866 $ 573
Accrued interest 4,688 4,688
------------- -------------
Total current liabilities 5,554 5,261
Long-term debt 204,173 192,498
Advances from and investments in subsidiaries 5,351 --
Other liabilities 300 --
------------- -------------
Total liabilities 215,378 197,759
------------- -------------
Stockholder's deficit:
Common stock, $.08-1/3 par value; 1,000
shares authorized; 100 shares issued -- --
Additional capital 81,287 81,287
Accumulated deficit (193,322) (195,032)
------------- -------------
Total stockholder's deficit (112,035) (113,745)
------------- -------------
$ 103,343 $ 84,014
============= =============
<FN>
See notes to consolidated financial statements and accompanying notes.
</TABLE>
MAXXAM GROUP INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS (UNCONSOLIDATED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Investment, interest and other income
(expense) $ 1,961 $ 1,341 $ (2,159)
Interest expense (23,573) (22,341) (21,180)
General and administrative expenses (826) (370) (598)
Equity in earnings of subsidiaries 16,514 16,170 18,790
------------- ------------- -------------
Loss before income taxes (5,924) (5,200) (5,147)
Credit in lieu of income taxes 11,534 8,737 8,716
------------- ------------- -------------
Net income $ 5,610 $ 3,537 $ 3,569
============= ============= =============
<FN>
See notes to consolidated financial statements and accompanying notes.
</TABLE>
MAXXAM GROUP INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,610 $ 3,537 $ 3,569
Adjustments to reconcile net income
to net cash used for operating
activities:
Amortization of deferred
financing costs and
discounts on long-term
debt 12,320 11,059 9,930
Equity in earnings of
subsidiaries (16,514) (16,170) (18,790)
Net sales (purchases) of
marketable securities 10,246 (20,011) (1,808)
Net gains on marketable
securities (5,101) (3,697) (731)
Increase (decrease) in cash
resulting from changes in:
Receivables (3,505) 171 90
Accrued and deferred income
taxes (1,519) (5,237) (8,518)
Accrued interest and other
liabilities 4,104 330 (911)
Accounts payable -- -- (53)
Other -- (16) 232
------------- ------------- -------------
Net cash provided by
(used for) operating
activities 5,641 (30,034) (16,990)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net advances from subsidiaries 22,008 33,112 41,112
------------- ------------- -------------
Net cash provided by
investing activities 22,008 33,112 41,112
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions of long-term debt -- (630) --
Dividends paid (3,900) (4,800) --
------------- ------------- -------------
Net cash used for
financing activities (3,900) (5,430) --
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 23,749 (2,352) 24,122
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 21,862 24,214 92
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 45,611 $ 21,862 $ 24,214
============= ============= =============
<FN>
See notes to consolidated financial statements and accompanying notes.
</TABLE>
MAXXAM GROUP INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO FINANCIAL STATEMENTS
A. DEFERRED INCOME TAXES
The deferred income tax assets and liabilities reported in the
accompanying unconsolidated balance sheet are determined by computing such
amounts on a consolidated basis, 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, and then reducing such
consolidated amounts by the amounts recorded by the Company's subsidiaries,
but excluding Salmon Creek, pursuant to their respective tax allocation
agreements with MAXXAM. The Company's net deferred income tax assets
relate primarily to loss and credit carryforwards and to the excess of the
tax basis over financial statement basis with respect to timber and
timberlands. The Company has concluded that it is more likely than not
that these net deferred income tax assets will be realized based in part
upon the estimated values of the underlying assets which are in excess of
their tax basis.
B. LONG-TERM DEBT
The MGI Notes are secured by the Company's pledge of 100% of the
common stock of Pacific Lumber, Britt and MPI and by MGHI's pledge of
27,938,250 shares of Kaiser's common stock.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
11-1/4% MGI Senior Secured Notes due August 1, 2003 $ 100,000 $ 100,000
12-1/4% MGI Senior Secured Discount Notes due 104,173 92,498
August 1, 2003, net of discount ------------- -------------
$ 204,173 $ 192,498
============= =============
</TABLE>
C. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental information on non-cash
investing and financing activities:
Net margin borrowings (payments) for
marketable securities $ -- $ (6,648) $ 5,628
Supplemental disclosure of cash flow
information:
Interest paid $ 11,253 $ 11,250 $ 11,156
Tax allocation refunds from MAXXAM 7,127 3,500 198
Income taxes refunded 3,121 -- --
</TABLE>
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, 1997 By: /S/ PAUL N. SCHWARTZ
Paul N. Schwartz
Vice President, Chief Financial
Officer and Director
Date: March 28, 1997 By: /S/ GARY L. CLARK
Gary L. Clark
Vice President
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, 1997 By: /S/ CHARLES E. HURWITZ
Charles E. Hurwitz
Chairman of the Board, President
and Chief Executive Officer and
Director
Date: March 28, 1997 By: /S/ PAUL N. SCHWARTZ
Paul N. Schwartz
Vice President, Chief Financial
Officer and Director
(Principal Financial Officer)
Date: March 28, 1997 By: /S/ JOHN A. CAMPBELL
John A. Campbell
Vice President and Director
Date: March 28, 1997 By: /S/ JOHN T. LA DUC
John T. La Duc
Vice President and Director
Date: March 28, 1997 By: /S/ ANTHONY R. PIERNO
Anthony R. Pierno
Vice President, General Counsel
and Director
Date: March 28, 1997 By: /S/ WILLIAM S. RIEGEL
William S. Riegel
Vice President and Director
Date: March 28, 1997 By: /S/ GARY L. CLARK
Gary L. Clark
Vice President
(Principal Accounting Officer)
MAXXAM GROUP INC
INDEX OF EXHIBITS
Exhibit
Number Description
-------- ----------------------------------------------------
3.1 Certificate of Incorporation of MAXXAM Group Inc.
(the "Company" or "MGI") (incorporated herein by
reference to Exhibit 3.1E to the Company's
definitive proxy statement dated October 24, 1984)
3.2 Certificate of Amendment of Certificate of
Incorporation of the Company dated as of September
28, 1988 (incorporated herein by reference to
Exhibit 3(b) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1988)
3.3 Certificate of Amendment of Certificate of
Incorporation of the Company dated as of June 1,
1989 (incorporated herein by reference to Exhibit
3(c) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1989)
3.4 By-laws of the Company (incorporated herein by
reference to Exhibit 3.2 to the Company's Current
Report on Form 8-K dated July 10, 1986)
4.1 Indenture between the Company and Shawmut Bank,
N.A., Trustee, regarding the Company's 12-3/4%
Senior Secured Discount Notes due 2003 and 11-1/4%
Senior Secured Notes due 2003 (incorporated herein
by reference to Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1993)
4.2 Indenture between The Pacific Lumber Company
("Pacific Lumber") and 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 (the
"Pacific Lumber Credit Agreement;" 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 First Amendment, dated February 10, 1997, to the
Pacific Lumber Credit Agreement (incorporated herein
by reference to Exhibit 4.4 to the Annual Report on
Form 10-K of The Pacific Lumber Company for the
fiscal year ended December 31, 1996; File No. 1-
9204)
4.7 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)
10.24 Agreement dated September 28, 1996 among MAXXAM
Inc., The Pacific Lumber Company (on behalf of
itself, its subsidiaries and its affiliates), the
United States of America and the State of California
(incorporated herein by reference to Exhibit 10.1 to
MAXXAM Inc.'s Form 8-K dated September 28, 1996;
File No. 1-3924)
*27 Financial Data Schedule
*99.1 The consolidated financial statements and notes
thereto of Kaiser Aluminum Corporation for the
fiscal year ended December 31, 1996
*99.2 The consolidated financial statements and notes
thereto of The Pacific Lumber Company for the fiscal
year ended December 31, 1996
- ---------------
* 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 72,418
<SECURITIES> 31,423
<RECEIVABLES> 18,850
<ALLOWANCES> 0
<INVENTORY> 69,307
<CURRENT-ASSETS> 200,014
<PP&E> 178,782
<DEPRECIATION> 76,753
<TOTAL-ASSETS> 742,747
<CURRENT-LIABILITIES> 68,626
<BONDS> 776,027
0
0
<COMMON> 0
<OTHER-SE> (112,035)
<TOTAL-LIABILITY-AND-EQUITY> 742,747
<SALES> 264,584
<TOTAL-REVENUES> 264,584
<CGS> 148,522
<TOTAL-COSTS> 148,522
<OTHER-EXPENSES> 44,029
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,045
<INCOME-PRETAX> 4,930
<INCOME-TAX> (680)
<INCOME-CONTINUING> 5,610
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,610
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
20 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
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, 1996
and 1995, and the related statements of consolidated income (loss) and cash
flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 14, 1997
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 21
Kaiser Aluminum Corporation and Subsidiary Companies
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------
(In millions of dollars, except share amounts) 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 81.3 $ 21.9
Receivables:
Trade, less allowance for doubtful receivables of $4.7 in 1996 and
$5.0 in 1995 177.9 222.9
Other 74.5 85.7
Inventories 562.2 525.7
Prepaid expenses and other current assets 127.8 76.6
-------- --------
Total current assets 1,023.7 932.8
Investments in and advances to unconsolidated affiliates 168.4 178.2
Property, plant, and equipment-net 1,168.7 1,109.6
Deferred income taxes 264.5 269.1
Other assets 308.7 323.5
-------- --------
Total $2,934.0 $2,813.2
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 189.7 $ 184.5
Accrued interest 35.6 32.0
Accrued salaries, wages, and related expenses 95.4 105.3
Accrued postretirement medical benefit obligation-current portion 50.1 46.8
Other accrued liabilities 132.7 129.4
Payable to affiliates 97.0 94.2
Long-term debt-current portion 8.9 8.9
-------- --------
Total current liabilities 609.4 601.1
Long-term liabilities 458.1 548.5
Accrued postretirement medical benefit obligation 722.5 734.0
Long-term debt 953.0 749.2
Minority interests 121.7 122.7
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.05, authorized 20,000,000 shares;
PRIDES Convertible, par value $.05, issued and outstanding,
8,673,850 in 1996 and 1995 .4 .4
Common stock, par value $.01, authorized 100,000,000 shares; issued and
outstanding, 71,646,789 and 71,638,514 in 1996 and 1995 .7 .7
Additional capital 531.1 530.3
Accumulated deficit (460.1) (459.9)
Additional minimum pension liability (2.8) (13.8)
-------- --------
Total stockholders' equity 69.3 57.7
-------- --------
Total $2,934.0 $2,813.2
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
22 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
Statements of Consolidated Income (Loss)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
(In millions of dollars, except share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $2,190.5 $2,237.8 $1,781.5
-------- -------- --------
Costs and expenses:
Cost of products sold 1,869.1 1,798.4 1,625.5
Depreciation 96.0 94.3 95.4
Selling, administrative, research and development, and general 127.6 134.5 116.8
-------- -------- --------
Total costs and expenses 2,092.7 2,027.2 1,837.7
-------- -------- --------
Operating income (loss): 97.8 210.6 (56.2)
Other income (expense):
Interest expense (93.4) (93.9) (88.6)
Other-net (2.7) (14.1) (7.3)
-------- -------- --------
Income (loss) before income taxes, minority interests and extraordinary loss 1.7 102.6 (152.1)
Credit (provision) for income taxes 9.3 (37.2) 53.8
Minority interests (2.8) (5.1) (3.1)
-------- -------- --------
Income (loss) before extraordinary loss 8.2 60.3 (101.4)
Extraordinary loss on early extinguishment of debt, net
of tax benefit of $2.9 (5.4)
-------- -------- --------
Net income (loss) 8.2 60.3 (106.8)
Dividends on preferred stock (8.4) (17.6) (20.1)
-------- -------- --------
Net income (loss) available to common shareholders $ (0.2) $ 42.7 $ (126.9)
======== ======== ========
Earnings (loss) per common and common equivalent share:
Primary:
Income (loss) before extraordinary loss $ .00 $ .69 $ (2.09)
Extraordinary loss (.09)
-------- -------- --------
Net income (loss) $ .00 $ .69 $ (2.18)
======== ======== ========
Fully diluted $ .72
========
Weighted average common and common equivalent shares outstanding (000):
Primary 71,644 62,264 58,139
======== ======== ========
Fully diluted 71,809
========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 23
Kaiser Aluminum Corporation and Subsidiary Companies
Statements of Consolidated Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
(In millions of dollars) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 8.2 $ 60.3 $ (106.8)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation 96.0 94.3 95.4
Amortization of excess investment over equity in unconsolidated
affiliates 11.6 11.4 11.6
Amortization of deferred financing costs and net discount on
long-term debt 5.6 5.4 6.2
Undistributed equity in (income) losses of unconsolidated
affiliates 3.0 (19.2) 1.9
Minority interests 2.8 5.1 3.1
Decrease (increase) in receivables 51.8 (109.7) 36.4
Increase in inventories (36.5) (57.7) (41.1)
(Increase) decrease in prepaid expenses and other assets (39.5) 82.9 (60.6)
Increase in accounts payable 5.2 32.4 25.8
Increase (decrease) in accrued interest 3.6 (.6) 9.3
(Decrease) increase in payable to affiliates and accrued
liabilities (62.9) 10.6 50.8
Decrease in accrued and deferred income taxes (36.5) (7.4) (68.8)
Other 9.5 10.9 14.7
-------- -------- --------
Net cash provided by (used for) operating activities 21.9 118.7 (22.1)
-------- -------- --------
Cash flows from investing activities:
Additions to property, plant, and equipment (160.3) (79.4) (70.0)
Investments in unconsolidated affiliates (1.2) (9.0)
Other 17.2 8.6 4.1
-------- -------- --------
Net cash used for investing activities (144.3) (79.8) (65.9)
-------- -------- --------
Cash flows from financing activities:
Borrowings (repayments) under revolving credit facility, net (13.1) 6.4 (181.3)
Borrowings of long-term debt 225.9 223.6
Repayments of long-term debt (9.0) (11.8) (9.0)
Incurrence of financing costs (6.2) (.8) (19.2)
Dividends paid (10.5) (20.8) (14.8)
Capital stock issued 1.2 100.1
Redemption of minority interests' preference stock (5.3) (8.8) (8.5)
-------- -------- --------
Net cash provided by (used for) financing activities 181.8 (34.6) 90.9
-------- -------- --------
Net increase in cash and cash equivalents during the year 59.4 4.3 2.9
Cash and cash equivalents at beginning of year 21.9 17.6 14.7
-------- -------- --------
Cash and cash equivalents at end of year $ 81.3 $ 21.9 $ 17.6
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 84.2 $ 88.8 $ 73.1
Income taxes paid 22.7 35.7 16.0
Tax allocation payments to (from) MAXXAM Inc. 1.1 (3.9)
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
24 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
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 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 amounts 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.
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,
--------------------
1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Finished fabricated products $ 113.5 $ 91.5
Primary aluminum and work in process 200.3 195.9
Bauxite and alumina 110.2 119.6
Operating supplies and repair and maintenance parts 138.2 118.7
------- -------
$ 562.2 $ 525.7
======= =======
</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 of land improvements, buildings, and machinery and
equipment are 8 to 25 years, 15 to 45 years, and 10 to 22 years, respectively.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 25
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
STOCK-BASED COMPENSATION
The Company applies the intrinsic value method to account for a stock-based
compensation plan whereby compensation cost is recognized only to the extent
that the quoted market price of the stock at the measurement date exceeds the
amount an employee must pay to acquire the stock. No compensation cost has been
recognized for this plan as no stock options were granted in 1996 or 1995 and
as the stock options granted in 1994 were at the market price (see Note 6).
OTHER INCOME (EXPENSE)
Other expense in 1996, 1995, and 1994 includes $3.1, $17.8, and $16.5 of
pre-tax charges related principally to establishing additional: (i) litigation
reserves for asbestos claims, net of estimated aggregate insurance recoveries,
and (ii) environmental reserves for potential soil and ground water 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. Such amortization is included in
interest expense.
FOREIGN CURRENCY
The Company uses the United States dollar as the functional currency for its
foreign operations.
DERIVATIVE FINANCIAL INSTRUMENTS
Hedging transactions using derivative financial instruments are primarily
designed to mitigate KACC's exposure to changes in prices for certain of the
products which KACC sells and consumes and, to a lesser extent, to mitigate
KACC's exposure to changes in foreign currency exchange rates. KACC does not
utilize derivative financial instruments for trading or other speculative
purposes. KACC's derivative activities are initiated within guidelines
established by management and approved by KACC's and the Company's boards of
directors. Hedging transactions are executed centrally on behalf of all of
KACC's business segments to minimize transactions costs, monitor consolidated
net exposures and allow for increased responsiveness to changes in market
factors.
Most of KACC's hedging activities involve the use of option contracts (which
establish a maximum and/or minimum amount to be paid or received) and forward
sales contracts (which effectively fix or lock-in the amount KACC will pay or
receive). Option contracts typically require the payment of an up-front premium
in return for the right to receive the amount (if any) by which the price at
the settlement date exceeds the strike price. Any interim fluctuations in
prices prior to the settlement date are deferred until the settlement date of
the underlying hedged transaction, at which point they are reflected in net
sales or cost of sales (as applicable) together with the related premium cost.
Forward sales contracts do not require an up-front payment and are settled by
the receipt or payment of the amount by which the price at the settlement date
varies from the contract price. No accounting recognition is accorded to
interim fluctuations in prices of forward sales contracts.
KACC has established margin accounts and credit limits with certain
counterparties related to open forward sales and option contracts. When
unrealized gains or losses are in excess of such credit limits, KACC is
entitled to receive advances from the counterparties on open positions or is
required to make margin deposits to counterparties, as the case may be. At
December 31, 1996, KACC had received $13.0 of margin advances from
counterparties. At December 31, 1995, KACC had neither received nor made any
margin deposits. Management considers credit risk related to possible failure
of the counterparties to perform their obligations pursuant to the derivative
contracts to be minimal.
26 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
Deferred gains or losses as of December 31, 1996, are included in Prepaid
expenses and other current assets and Other accrued liabilities (See Note 9).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of its outstanding indebtedness to be
$1,006.9 and $806.3 at December 31, 1996, and 1995, respectively, based on
quoted market prices for KACC's 97/8% Senior Notes due 2002 (the "97/8% Notes")
and 123/4% Senior Subordinated Notes due 2003 (the "123/4% Notes"), the
issuance price of the 107/8% Notes (as defined in Note 4), and the discounted
future cash flows for all other indebtedness, using the current rate for debt
of similar maturities and terms. The Company believes that the carrying amount
of other financial instruments is a reasonable estimate of their fair value,
unless otherwise noted.
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Primary--Earnings (loss) per common and common equivalent share are computed by
deducting preferred stock dividends from net income (loss) in order to
determine net income (loss) available to common shareholders. This amount is
then divided by the weighted average number of common and common equivalent
shares outstanding during the period. The weighted average number of common and
common equivalent shares outstanding for the year ended December 31, 1996,
excludes the impact of outstanding stock options since they were antidilutive.
The impact of outstanding stock options on weighted average number of common
and common equivalent shares on the other periods presented was immaterial.
Fully Diluted--The Company's 8.255% PRIDES, Convertible Preferred Stock
("PRIDES") were excluded from the calculation of the weighted average number of
common and common equivalent shares outstanding for all periods presented
because they were antidilutive. For the year ended December 31, 1995, dividends
of $9.2 attributable to the Company's Mandatory Conversion Premium Dividend
Preferred Stock (the "Series A Shares") which were exchanged for approximately
13.1 million shares of the Company's Common Stock and certain cash payments on
September 19, 1995, have not been deducted from net income and the weighted
average number of common and common equivalent shares outstanding have been
adjusted to reflect the shares of common stock issued in the exchange as if
they had been outstanding for the entire period. As a result of the conversion
of the Series A Shares, fully diluted earnings per share for the 1995 periods
are presented even though the results are 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
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, 1996 and 1995, KACC's net receivables from these affiliates
were not material.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 27
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
SUMMARY OF COMBINED FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 450.3 $ 429.0
Long-term assets (primarily property, plant, and equipment, net) 364.7 370.1
------- -------
Total assets $ 815.0 $ 799.1
======= =======
Current liabilities $ 116.9 $ 125.4
Long-term liabilities (primarily long-term debt) 386.7 367.4
Stockholders' equity 311.4 306.3
------- -------
Total liabilities and stockholders' equity $ 815.0 $ 799.1
======= =======
</TABLE>
SUMMARY OF COMBINED OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 660.5 $ 685.9 $ 489.8
Costs and expenses (631.5) (618.7) (494.8)
Provision for income taxes (8.7) (18.7) (6.3)
------- ------- -------
Net income (loss) $ 20.3 $ 48.5 $ (11.3)
======= ======= =======
Company's equity in income (loss) $ 8.8 $ 19.2 $ (1.9)
======= ======= =======
Dividends received $ 11.8
=======
</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, 1996, KACC's investment in its
unconsolidated affiliates exceeded its equity in their net assets by
approximately $42.0 which amount will be fully amortized over the next four
years.
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
$281.6, $284.4, and $219.7 in the years ended December 31, 1996, 1995, and
1994, respectively.
3. PROPERTY, PLANT, AND EQUIPMENT
The major classes of property, plant, and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 157.5 $ 151.8
Buildings 216.0 198.5
Machinery and equipment 1,441.1 1,337.6
Construction in progress 84.7 59.6
-------- --------
1,899.3 1,747.5
Accumulated depreciation 730.6 637.9
-------- --------
Property, plant, and equipment, net $1,168.7 $1,109.6
======== ========
</TABLE>
28 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
4. LONG-TERM DEBT
Long-term debt and its maturity schedule are as follows:
<TABLE>
<CAPTION> December 31,
2002 ----------------
and 1996 1995
1997 1998 1999 2000 2001 After Total Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Credit Agreement $ 13.1
9-7/8% Senior Notes due 2002, net $224.0 $224.0 223.8
10-7/8% Senior Notes due 2006, net 225.9 225.9
Alpart CARIFA Loan - Series A, due 2008
(variable rates) 38.0 38.0 38.0
Alpart CARIFA Loan - Series B, due 2007 (8.25%) 22.0 22.0 22.0
12-3/4% Senior Subordinated Notes due 2003 400.0 400.0 400.0
Other borrowings (fixed and variable rates) $ 8.9 $ 9.1 $ .4 $ .4 $ .4 32.8 52.0 61.2
------ ------ ------ ------ ------ ------ ------ ------
Total $ 8.9 $ 9.1 $ .4 $ .4 $ .4 $942.7 961.9 758.1
====== ====== ====== ====== ====== ======
Less current portion 8.9 8.9
------ ------
Long-term debt $953.0 $749.2
====== ======
</TABLE>
CREDIT AGREEMENT
In February 1994, the Company and KACC entered into a credit agreement (as
amended, the "Credit Agreement") which provides a $325.0 five-year secured,
revolving line of credit. 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. As of December 31, 1996, $269.7
(of which $71.9 could have been used for letters of credit) was available to
KACC under the Credit Agreement. The Credit Agreement is unconditionally
guaranteed by the Company and by certain significant subsidiaries of KACC.
Interest on outstanding balances will bear a premium (which varies based on the
results of a financial test) over either a base rate or LIBOR at the Company's
option.
1996 ISSUANCES
During the fourth quarter of 1996, KACC sold a total of $225.0 principal amount
of two separate series of 10 7/8% Senior Notes due 2006 (the "10 7/8% Notes")
in separate transactions. A net premium of $.9 was realized from the issuance
of the 10 7/8% Notes. The 10 7/8% Notes rank pari passu in right and priority
of payment with the indebtedness under the Credit Agreement and the 9 7/8%
Notes and are guaranteed on a senior, unsecured basis by certain of KACC's
subsidiaries.
LOAN COVENANTS AND RESTRICTIONS
The Credit Agreement requires KACC to comply with 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. The Credit Agreement is secured by, among other
things, (i) mortgages on KACC's major domestic plants (excluding KACC's
Gramercy alumina plant and Nevada Micromill); (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.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 29
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
The obligations of KACC with respect to its 9 7/8% Notes, its 10 7/8% Notes and
its 12 3/4% Notes are guaranteed, jointly and severally, by certain
subsidiaries of KACC. The indentures governing the 9 7/8% Notes, the 10 7/8%
Notes and the 12 3/4% Notes (collectively, the "Indentures") restrict, among
other things, KACC's ability, to incur debt, undertake transactions with
affiliates, and pay dividends. Further, the Indentures provide that KACC must
offer to purchase the 9 7/8% Notes, the 10 7/8% Notes and the 12 3/4% Notes,
respectively, upon the occurrence of a Change of Control (as defined therein),
and the Credit Agreement provides that the occurrence of a Change in Control
(as defined therein) shall constitute an Event of Default thereunder.
Under the most restrictive of the covenants in the Indentures and the Credit
Agreement, neither the Company nor KACC currently is permitted to pay dividends
on its common stock.
In December 1991, Alpart entered into a loan agreement with the Caribbean Basin
Projects Financing Authority ("CARIFA"). Pursuant to the loan agreement,
Alpart must remain a qualified recipient for Caribbean Basin Initiative funds
as defined in applicable laws. Alpart has also 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).
RESTRICTED NET ASSETS OF SUBSIDIARIES
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 $56.1 and $24.0 at December 31, 1996 and 1995, respectively.
CAPITALIZED INTEREST
Interest capitalized in 1996, 1995, and 1994 was $4.9, $2.8, and $2.7,
respectively.
EXTRAORDINARY ITEM
The Company recorded a pre-tax extraordinary loss of $5.4 (net of $2.9 of
deferred income taxes provided at a rate which approximates the federal
statutory rate) in the first quarter of 1994 when the Company entered into the
Credit Agreement, as a result of the write-off of unamortized deferred
financing costs related to the previous credit agreement.
5. INCOME TAXES
Income (loss) before income taxes, minority interests and extraordinary loss by
geographic area is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ (45.8) $ (55.9) $ (168.4)
Foreign 47.5 158.5 16.3
-------- -------- --------
Total $ 1.7 $ 102.6 $ (152.1)
======== ======== ========
</TABLE>
Income taxes are classified as either domestic or foreign, based on whether
payment is made or due to the United States or a foreign country. Certain
income classified as foreign is also subject to domestic income taxes.
30 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
The credit (provision) for income taxes on income (loss) before income taxes,
minority interests and extraordinary loss consists of:
<TABLE>
<CAPTION>
Federal Foreign State Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 Current $ (1.6) $(21.8) $ (.1) $(23.5)
Deferred 8.6 7.6 16.6 32.8
------ ------ ------ ------
Total $ 7.0 $(14.2) $ 16.5 $ 9.3
====== ====== ====== ======
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) $ .0 $ 53.8
====== ====== ====== ======
</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.
A reconciliation between the credit (provision) for income taxes and the amount
computed by applying the federal statutory income tax rate to income (loss)
before income taxes, minority interest and extraordinary loss is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount of federal income tax credit (provision)
based on the statutory rate $ (.6) $(35.9) $53.2
Revision of prior years' tax estimates and other
changes in valuation allowances 10.0 1.5 .2
Percentage depletion 3.9 4.2 5.6
Foreign taxes, net of federal tax benefit (5.5) (5.4) (5.3)
Other 1.5 (1.6) .1
------ ------ -----
Credit (provision) for income taxes $ 9.3 $(37.2) $53.8
====== ====== =====
</TABLE>
Included in revision of prior years' tax estimates and other changes in
valuation allowances for 1996 shown above is $9.8 related to the resolution of
certain income tax matters in the fourth quarter of 1996.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 31
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
The components of the Company's net deferred income tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Postretirement benefits other than pensions $ 290.5 $ 289.9
Loss and credit carryforwards 135.1 156.1
Other liabilities 157.6 163.8
Other 86.7 66.2
Valuation allowances (127.2) (128.5)
------- -------
Total deferred income tax assets-net 542.7 547.5
------- -------
Deferred income tax liabilities:
Property, plant, and equipment (160.9) (179.8)
Other (72.6) (75.9)
------- -------
Total deferred income tax liabilities (233.5) (255.7)
------- -------
Net deferred income tax assets $ 309.2 $ 291.8
======= =======
</TABLE>
The principal component of the Company's net deferred income tax asset is the
tax benefit, net of certain valuation allowances, associated with the accrued
liability 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 that 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.
A substantial portion of the valuation allowances provided by the Company
relates to loss and credit carryforwards. To determine the proper amount of
valuation allowances with respect to these carryforwards, the Company evaluated
all appropriate factors, 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 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.
As of December 31, 1996 and 1995, $69.7 and $53.5, 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 liabilities listed
above are included on the Consolidated Balance Sheets in the captions entitled
Other accrued liabilities and Long-term liabilities.
The Company and its subsidiaries file consolidated federal income tax returns.
For the period from October 28, 1988 through June 30, 1993, the Company and its
subsidiaries were included in the consolidated federal income tax returns of
MAXXAM. Payments or refunds for periods ended prior to July 1, 1993, may still
be required by or payable to the Company or KACC pursuant to their respective
tax allocation agreements with MAXXAM due to the final resolution of audits,
amended returns, and related matters. However, the Credit Agreement prohibits
the payment by KACC to MAXXAM of any amounts due under KACC's tax allocation
agreement with MAXXAM (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
32 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
Allocation Agreement. The respective tax allocation agreements of the Company
and KACC with MAXXAM terminated pursuant to their terms, effective for taxable
periods beginning after June 30, 1993.
The following table presents the Company's tax attributes for federal income
tax purposes as of December 31, 1996. 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 $ 36.0 2010
General business tax credits 23.1 2010
Foreign tax credits 68.5 2001
Alternative minimum tax credits 19.9 Indefinite
Alternative minimum tax attribute carryforwards:
Net operating losses $ 26.6 2010
Foreign tax credits 72.2 2001
</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,
------------------------
1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation:
Vested employees $ 737.7 $ 753.0
Nonvested employees 38.5 28.7
------- -------
Accumulated benefit obligation 776.2 781.7
Additional amounts related to projected salary increases 40.0 34.2
------- -------
Projected benefit obligation 816.2 815.9
Plan assets (principally common stocks and fixed income
obligations) at fair value (662.0) (592.3)
------- -------
Plan assets less than projected benefit obligation 154.2 223.6
Unrecognized net losses (13.6) (54.7)
Unrecognized net obligations (.4) (.5)
Unrecognized prior-service cost (26.9) (28.2)
Adjustment required to recognize minimum liability 13.7 49.8
------- -------
Accrued pension obligation included in the Consolidated
Balance Sheets (principally in Long-term liabilities) $ 127.0 $ 190.0
======= =======
</TABLE>
(1) Includes plans with assets exceeding accumulated benefits by
approximately $.3 and $.1 in 1996 and 1995, respectively.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 33
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
As required by Statement of Financial Accounting Standards No. 87, Employers'
Accounting for Pensions, the Company recorded an after-tax credit (charge) to
equity of $11.0 and $(4.7) at December 31, 1996 and 1995, respectively, for the
deficit (excess) of the minimum liability over the unrecognized net obligation
and prior-service cost. These amounts were recorded net of the related income
tax (provision) credit of $(6.5) and $2.8 as of December 31, 1996 and 1995,
respectively, which approximated the federal and state statutory rates.
The components of net periodic pension cost are:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 12.9 $ 10.0 $ 11.2
Interest cost on projected benefit obligation 60.0 59.8 57.3
Return on assets:
Actual gain (89.8) (112.2) (.8)
Deferred gain (loss) 34.8 64.6 (53.0)
Net amortization and deferral 5.5 4.2 4.1
------- ------- -------
Net periodic pension cost $ 23.4 $ 26.4 $ 18.8
======= ======= =======
</TABLE>
Assumptions used to value obligations at year-end, and to determine the net
periodic pension cost in the subsequent year are:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.75% 7.5% 8.5%
Expected long-term rate of return on assets 9.5% 9.5% 9.5%
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.
The Company has not funded the liability for these benefits, which are expected
to be paid out of cash generated by operations. The Company reserves the right,
subject to applicable collective bargaining agreements, to amend or terminate
these benefits.
In 1995, the Company adopted the Kaiser Aluminum Medicare Program ("KAMP").
KAMP is mandatory for all salaried retirees over 65 and for United Steelworkers
of America ("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, Pennsylvania, Rhode Island, and
Washington.
34 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
The Company's accrued postretirement benefit obligation is composed of the
following:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 498.7 $ 557.6
Active employees eligible for postretirement benefits 36.7 30.7
Active employees not eligible for postretirement benefits 67.4 61.1
------- -------
Accumulated postretirement benefit obligation 602.8 649.4
Unrecognized net gains 71.3 20.5
Unrecognized gains related to prior-service costs 98.5 110.9
------- -------
Accrued postretirement benefit obligation $ 772.6 $ 780.8
======= =======
</TABLE>
The components of net periodic postretirement benefit cost are:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 3.8 $ 4.5 $ 8.2
Interest cost 46.9 52.3 56.9
Amortization of prior service cost (12.4) (8.9) (3.2)
------- ------- -------
Net periodic postretirement benefit cost $ 38.3 $ 47.9 $ 61.9
======= ======= =======
</TABLE>
The 1997 annual assumed rates of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) for non-HMO are 8.0% and 6.0% for
retirees under 65 and over 65, respectively, and 5.5% for HMO at all ages.
Non-HMO rates are assumed to decrease gradually to 5.5% in 2004 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, 1996, by approximately $60.4 and the aggregate of
the service and interest cost components of net periodic postretirement benefit
cost for 1996 by approximately $6.1. The weighted average discount rate used to
determine the accumulated postretirement benefit obligation at December 31,
1996 and 1995, was 7.75% and 7.5%, respectively.
POSTEMPLOYMENT BENEFITS
The Company provides certain benefits to former or inactive employees after
employment but before retirement.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 35
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
INCENTIVE PLANS
In 1993, the Company adopted the Kaiser 1993 Omnibus Stock Incentive Plan (the
"1993 Incentive Plan"). A total of 2,500,000 shares of the Company's Common
Stock were reserved for awards or for payment of rights granted under the 1993
Incentive Plan, of which 572,254 shares were available to be awarded at
December 31, 1996. During 1994, under the 1993 Incentive Plan, 102,564
restricted shares, which are now fully vested, were distributed to two Company
executives. Compensation expense recognized during 1996, 1995 and 1994
associated with the 1993 Incentive Plan and a prior long-term incentive plan
(the "LTIP") was approximately $.7, $1.4 and $2.2, respectively.
In 1994, the Compensation Committee of the Board of Directors approved the
award of "nonqualified stock options" to certain members of management. These
options generally vest at the rate of 25% per year. Information relating to
nonqualified stock option activity is shown below. The weighted average price
per share is shown parenthetically.
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year ($10.32, $9.85
and $7.55) 926,085 1,119,680 664,400
Granted ($12.75) 494,800
Exercised ($8.99, $7.32 and $7.25) (8,275) (155,500) (6,920)
Expired or forfeited ($10.45, $8.88 and $7.46) (27,415) (38,095) (32,600)
-------- ---------- ---------
Outstanding at end of year ($10.33, $10.32 and $9.85) 890,395 926,085 1,119,680
======== ========== =========
Exercisable at end of year ($10.47, $10.73 and $7.57) 436,195 211,755 120,180
======== ========== =========
</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 annual plans and over rolling three-year periods.
KACC also has a defined contribution plan for salaried employees. The Company's
expense for these plans was $(2.1), $11.9 and $6.1 for the years ended December
31, 1996, 1995, and 1994, respectively.
36 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
7. STOCKHOLDERS' EQUITY AND MINORITY INTERESTS
Changes in stockholders' equity and minority interests were:
<TABLE>
<CAPTION>
Minority Interests Stockholders' Equity
---------------------- ---------------------------------------------------------
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, 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 interests 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 interests 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)
Net Income 8.2
Redeemable preference stock:
Accretion 3.1
Stock redemption (5.3)
Common stock issued upon redemption
and conversion of preferred stock .1
Dividends on preferred stock (8.4)
Minority interests 1.2
Incentive plan accretion .7
Reduction of minimum pension
liability 11.0
------ ------ ------ ------ ------ ------- ------
BALANCE, DECEMBER 31, 1996 $ 27.5 $ 94.2 $ .4 $ .7 $531.1 $(460.1) $ (2.8)
====== ====== ====== ====== ====== ======= ======
</TABLE>
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 37
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
REDEEMABLE PREFERENCE STOCK
In 1985, KACC issued its Cumulative (1985 Series A) Preference Stock and its
Cumulative (1985 Series B) Preference Stock (together, the "Redeemable
Preference Stock") each of which has a par value of $1 per share and a
liquidation and redemption value of $50 per share plus accrued dividends, if
any. No additional Redeemable Preference Stock is expected to be issued.
Holders of the Redeemable Preference Stock are entitled to an annual cash
dividend of $5 per share, or an amount based on a formula tied to KACC's
pre-tax income from aluminum operations, when and as declared by the Board of
Directors.
The carrying values of the Redeemable Preference Stock are increased each year
to recognize accretion between the fair value (at which the Redeemable
Preference Stock was originally issued) and the redemption value. Changes in
Redeemable Preference Stock are shown below.
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares:
Beginning of year 737,363 912,167 1,081,548
Redeemed (102,679) (174,804) (169,381)
--------- -------- ---------
End of year 634,684 737,363 912,167
========= ======== =========
</TABLE>
Redemption fund agreements require KACC to make annual payments by March 31 of
the subsequent year based on a formula tied to consolidated net income until
the redemption funds are sufficient to redeem all of the Redeemable Preference
Stock. On an annual basis, the minimum payment is $4.3 and the maximum payment
is $7.3. KACC also has certain additional repurchase requirements which are,
among other things, based upon profitability tests.
The Redeemable Preference 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 Redeemable
Preference Stock restricts the ability of KACC to redeem or pay dividends on
common stock if KACC is in default on any dividends payable on Redeemable
Preference Stock.
PREFERENCE STOCK
KACC has four series of $100 par value Cumulative Convertible Preference Stock
("$100 Preference Stock") with annual dividend requirements of between 4 1/8%
and 4 3/4%. KACC has the option to redeem the $100 Preference Stock at par
value plus accrued dividends. KACC does not intend to issue any additional
shares of the $100 Preference Stock.
The $100 Preference Stock can be exchanged for per share cash amounts between
$69 - $80. KACC records the $100 Preference Stock at their exchange amounts for
financial statement presentation and the Company includes such amounts in
minority interests. At December 31, 1996, and 1995, outstanding shares of $100
Preference Stock were 21,630 and 22,214, respectively.
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
38 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
Common Stock and (ii) $2.8 in cash in satisfaction of all accrued and unpaid
dividends up to and including the day immediately prior to the redemption date
and 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. 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 the Company's Common
Stock and together with 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 by the Company 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.
At any time and from time to time after December 31, 1996, the Company may
redeem any or all of the outstanding shares of PRIDES. The number of shares of
the Company's Common Stock a holder will receive upon redemption will vary
depending on a formula and the market price of the Company's Common Stock from
time to time, but in no event will be less than .8333 of a share of Common
Stock, subject to adjustment in certain events. At any time prior to December
31, 1997, 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 value of the shares received by a holder will vary depending on the market
price of the Company's Common Stock.
PLEDGED SHARES
At December 31, 1996, 27,938,250 shares of the Company's Common Stock (the
"Pledged Shares") beneficially owned by MAXXAM Group Holdings Inc. ("MGHI"), a
wholly owned subsidiary of MAXXAM, were pledged as security for debt of MAXXAM
Group Inc. ("MGI"), a wholly owned subsidiary of MGHI, 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
(collectively the "MGI Secured Debt"). Additionally, up to 16,055,000 of the
Pledged Shares are to be pledged by MGHI as security for $130.0 principal
amount of 12% Senior Secured Notes due 2003 issued in December 1996 by MGHI, if
any of the Pledged Shares are released as security for the MGI Secured Debt by
reason of an early retirement of such indebtedness (other than by a
refinancing).
PROPOSED RECAPITALIZATION
On February 5, 1996, the Company announced that it filed with the Securities
and Exchange Commission ("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 have: (i) provided
for two classes of
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 39
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
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) redesignated 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)
changed 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. Although approved by the Company's stockholders, the proposed
recapitalization was not implemented and was ultimately abandoned as a result
of an unfavorable court ruling in a suit that had challenged the plan. The
decision to abandon the proposed recapitalization does not preclude a
recapitalization from being proposed to the Company's stockholders in the
future.
8. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
KACC has a variety of 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, 1996, is
$94.4, of which approximately $12.0 is due in each of 2000 and 2001 with the
balance being due thereafter. KACC's share of payments, including operating
costs and certain other expenses under the agreements, has ranged between
$110.0-$120.0 over the past three years. KACC also has agreements to supply
alumina to and to purchase aluminum from Anglesey.
Minimum rental commitments under operating leases at December 31, 1996, are as
follows: years ending December 31, 1997- $23.2; 1998-$25.8; 1999-$30.7;
2000-$27.6; 2001-$27.2; thereafter-$160.3. The future minimum rentals
receivable under noncancelable subleases was $46.7 at December 31, 1996.
Rental expenses were $29.6, $29.0, and $26.8, for the years ended December 31,
1996, 1995, and 1994, 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, 1996, 1995,
and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 38.9 $ 40.1 $ 40.9
Additional amounts 3.2 3.3 2.8
Less expenditures (8.8) (4.5) (3.6)
------- ------- -------
Balance at end of period $ 33.3 $ 38.9 $ 40.1
======= ======= =======
</TABLE>
40 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(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 1997 through 2001 and
an aggregate of approximately $6.0 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 $24.0 and that,
subject to further regulatory review and approval, 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, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of claims at beginning of period 59,700 25,200 23,400
Claims received 21,100 41,700 14,300
Claims settled or dismissed (9,700) (7,200) (12,500)
------- ------- --------
Number of claims at end of period 71,100 59,700 25,200
======= ======= ========
</TABLE>
A substantial portion of the asbestos-related claims that were filed and served
on KACC during 1995 and 1996 were filed in Texas. KACC has been advised by its
counsel that, although there can be no assurance, the increase in pending
claims may have been attributable in part to tort reform legislation in Texas.
Although asbestos-related claims are currently exempt from certain aspects of
the Texas tort reform legislation, management has been advised that efforts to
remove the asbestos-related exemption in the tort reform legislation relating
to the doctrine of forum non conveniens, as well as other developments in the
legislative and legal environment in Texas, may be responsible for the
accelerated pace of new claims experienced in late 1995 and its continuance in
1996, albeit at a somewhat reduced rate.
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 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
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 41
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
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 estimated
asbestos-related cost accrual of $136.7, before consideration of insurance
recoveries, is included primarily in Long-term liabilities at December 31,
1996. 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 estimates that annual future cash payments in
connection with such litigation will be approximately $8.0 to $17.0 for each of
the years 1997 through 2001, and an aggregate of approximately $80.0
thereafter.
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 LLP
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 $109.8, determined on the same basis as the asbestos-related cost accrual,
is recorded primarily in Other assets at December 31, 1996.
Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative progress, and costs incurred in
order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from the
Company's underlying assumptions. 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
At December 31, 1996, the net unrealized gain on KACC's position in aluminum
forward sales and option contracts, (based on an average price of $1,610 per
ton ($.73 per pound) of primary aluminum), natural gas and fuel oil forward
purchase and option contracts, and forward foreign exchange contracts, was
approximately $10.5. However, increases in the price of primary aluminum during
January 1997 caused KACC's net hedging position at January 31, 1997, to change
to an unrealized loss of approximately $2.2. Any gains or losses on the
derivative contracts utilized in KACC's hedging activities are offset by losses
or gains, respectively, on the transactions being hedged.
42 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
ALUMINA AND ALUMINUM
The Company's earnings are sensitive to changes in the prices of alumina,
primary aluminum and fabricated aluminum products, and also depend to a
significant degree upon the volume and mix of all products sold. Primary
aluminum prices have historically been subject to significant cyclical price
fluctuations. Alumina prices as well as fabricated aluminum product prices
(which vary considerably among products) are significantly influenced by
changes in the price of primary aluminum but generally lag behind primary
aluminum price changes by up to three months. During the period January 1, 1993
through December 31, 1996, the Average Midwest United States transaction price
for primary aluminum has ranged from approximately $.50 to $1.00 per pound.
From time to time in the ordinary course of business, KACC enters into hedging
transactions to provide price risk management in respect of the net exposure of
earnings resulting from (i) anticipated sales of alumina, primary aluminum and
fabricated aluminum products, less (ii) expected purchases of certain items,
such as aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with
the market price of primary aluminum. Forward sales contracts are used by KACC
to effectively lock-in or fix the price that KACC will receive for its
shipments. KACC also uses option contracts (i) to establish a minimum price for
its product shipments, (ii) to establish a "collar" or range of price for
KACC's anticipated sales, and/or (iii) to permit KACC to realize possible
upside price movements. As of December 31, 1996, KACC had sold forward, at
fixed prices, approximately 70,000 and 93,600 tons of primary aluminum with
respect to 1997 and 1998, respectively. As of December 31, 1996, KACC had also
purchased put options to establish a minimum price for approximately 202,700
and 52,000 tons with respect to 1997 and 1998, respectively, and had entered
into option contracts that established a price range for an additional 165,600
tons with respect to 1998. During January 1997, the Company entered into
additional option contracts that establish a price range for 51,500, 60,000 and
51,000 tons with respect to 1997, 1998 and 1999, respectively. During January
1997 KACC also sold forward, at fixed prices, an additional 24,000 tons with
respect to 1999.
As of December 31, 1996, KACC had sold forward approximately 90% of the alumina
available to it in excess of its projected internal smelting requirements for
1997 and 1998. Virtually all of such 1997 and 1998 sales were made at prices
indexed to future prices of primary aluminum.
ENERGY
KACC is exposed to energy price risk from fluctuating prices for fuel oil and
natural gas consumed in the production process. Accordingly, KACC from time to
time in the ordinary course of business enters into hedging transactions with
major suppliers of energy and energy related financial instruments. As of
December 31, 1996, KACC had a combination of fixed price purchase and option
contracts for the purchase of approximately 40,000 MMBtu of natural gas per day
during the first and second quarter of 1997, and for 25,000 MMBtu of natural
gas per day for the period July 1997 through December 1998. At December 31,
1996, KACC also held option contracts for an average of 152,000 barrels of fuel
oil per month for 1997 and 174,000 barrels of fuel oil per month for 1998.
FOREIGN CURRENCY
KACC enters into forward exchange contracts to hedge material cash commitments
to foreign subsidiaries or affiliates. At December 31, 1996, KACC had net
forward foreign exchange contracts totaling approximately $81.6 for the
purchase of 110.0 Australian dollars from January 1997 through June 1998, in
respect of its commitments for 1997 and 1998 expenditures denominated in
Australian dollars.
10. SEGMENT AND GEOGRAPHICAL AREA INFORMATION
The Company's operations are located in many foreign countries, including
Australia, Canada, the People's Republic of China, Ghana, Jamaica, and the
United Kingdom. Foreign operations in general may be more vulnerable than
domestic operations due to a variety of political and other risks. Sales and
transfers among geographic areas are made on a basis intended to reflect the
market value of products.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 43
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
The aggregate foreign currency gain included in determining net income was $5.3
for the year ended December 31, 1995, and was immaterial in 1996 and 1994.
No single customer accounted for sales in excess of 10% of total revenue in
1996 and 1995. Sales of more than 10% of total revenue to a single customer
were $58.2 of bauxite and alumina and $147.7 of aluminum processing for the
year ended December 31, 1994, respectively.
Export sales were less than 10% of total revenue during the years ended
December 31, 1996, 1995, and 1994, respectively.
Geographical area information relative to operations is summarized as follows:
<TABLE>
<CAPTION>
Year Ended Other
December 31, Domestic Caribbean Africa Foreign Eliminations Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales to unaffiliated
customers 1996 $1,610.0 $ 201.8 $ 198.3 $ 180.4 $2,190.5
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
Sales and transfers among 1996 $ 116.9 $ 206.0 $(322.9)
geographic areas 1995 79.6 191.5 (271.1)
1994 98.7 139.4 (238.1)
Equity in income (losses) of 1996 $ .3 $ 8.5 $ 8.8
unconsolidated affiliates 1995 (.2) 19.4 19.2
1994 .2 (2.1) (1.9)
Operating income (loss) 1996 $ 4.4 $ 1.6 $ 27.8 $ 64.0 $ 97.8
1995 32.0 9.8 83.5 85.3 210.6
1994 (128.8) 9.9 18.3 44.4 (56.2)
Investment in and advances to 1996 $ .5 $ 25.3 $ 142.6 $ 168.4
unconsolidated affiliates 1995 1.2 27.1 149.9 178.2
Identifiable assets 1996 $2,136.7 $ 391.2 $ 194.7 $ 211.4 $2,934.0
1995 2,017.9 381.9 196.5 216.9 2,813.2
</TABLE>
44 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
Financial information by industry segment at December 31, 1996 and 1995, and
for the years ended December 31, 1996, 1995, and 1994, 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 1996 $ 508.0 $1,682.5 $2,190.5
1995 514.2 1,723.6 2,237.8
1994 432.5 1,349.0 1,781.5
Intersegment sales 1996 $ 181.6 $ 181.6
1995 159.7 159.7
1994 146.8 146.8
Equity in income (losses) of unconsolidated
affiliates 1996 $ 1.7 $ 6.7 $ .4 $ 8.8
1995 3.6 15.8 (.2) 19.2
1994 (4.7) 2.6 .2 (1.9)
Operating income (loss) 1996 $ 1.1 $ 156.5 $ (59.8) $ 97.8
1995 54.0 238.9 (82.3) 210.6
1994 19.8 (8.4) (67.6) (56.2)
Depreciation 1996 $ 31.2 $ 61.7 $ 3.1 $ 96.0
1995 31.1 60.4 2.8 94.3
1994 33.5 59.1 2.8 95.4
Capital expenditures 1996 $ 29.9 $ 126.9 $ 4.7 $ 161.5
1995 27.3 53.0 8.1 88.4
1994 28.9 39.9 1.2 70.0
Investment in and advances to unconsolidated
affiliates 1996 $ 121.3 $ 46.6 $ .5 $ 168.4
1995 129.9 47.1 1.2 178.2
Identifiable assets 1996 $ 784.6 $1,408.5 $ 740.9 $2,934.0
1995 746.0 1,341.2 726.0 2,813.2
</TABLE>
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 45
Kaiser Aluminum Corporation and Subsidiary Companies
Five-Year Financial Data--Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
(In millions of dollars, except share amounts) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 81.3 $ 21.9 $ 17.6 $ 14.7 $ 19.1
Receivables 252.4 308.6 199.2 234.7 270.0
Inventories 562.2 525.7 468.0 426.9 439.9
Prepaid expenses and other current assets 127.8 76.6 158.0 60.7 37.0
-------- -------- --------- -------- --------
Total current assets 1,023.7 932.8 842.8 737.0 766.0
Investments in and advances to
unconsolidated affiliates 168.4 178.2 169.7 183.2 150.1
Property, plant, and equipment-net 1,168.7 1,109.6 1,133.2 1,163.7 1,066.8
Deferred income taxes 264.5 269.1 271.2 210.8
Other assets 308.7 323.5 281.2 233.2 189.7
-------- -------- --------- -------- --------
Total $2,934.0 $2,813.2 $2,698.1 $2,527.9 $2,172.6
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accruals $453.4 $451.2 $439.3 $339.7 $351.4
Accrued postretirement medical benefit
obligation-current portion 50.1 46.8 47.0 47.6
Payable to affiliates 97.0 94.2 85.3 62.4 78.4
Long-term debt-current portion 8.9 8.9 11.5 8.7 25.9
-------- -------- --------- -------- --------
Total current liabilities 609.4 601.1 583.1 458.4 455.7
Long-term liabilities 458.1 548.5 495.5 501.8 281.7
Accrued postretirement medical benefit
obligation 722.5 734.0 734.9 713.1
Long-term debt 953.0 749.2 751.1 720.2 765.1
Minority interests 121.7 122.7 116.2 105.0 104.9
Stockholders' equity:
Preferred stock .4 .4 .6 .2
Common stock .7 .7 .6 .6 .6
Additional capital 531.1 530.3 527.8 425.9 288.5
Retained earnings (accumulated deficit) (460.1) (459.9) (502.6) (375.7) 282.8
Additional minimum pension liability (2.8) (13.8) (9.1) (21.6) (6.7)
-------- -------- --------- -------- --------
Total stockholders' equity 69.3 57.7 17.3 29.4 565.2
-------- -------- --------- -------- --------
Total $2,934.0 $2,813.2 $2,698.1 $2,527.9 $2,172.6
======== ======== ======== ======== ========
Debt-to-capital ratio(1) 81.2 78.1 82.4 81.3 54.1
</TABLE>
(1) Total of long-term debt--current portion and long-term debt (collectively
"total debt") as a ratio of total debt, deferred income tax liabilities,
minority interests, and stockholders' equity.
46 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
Five-Year Financial Data--Statements of Consolidated Income (Loss)
<TABLE>
<CAPTION>
Year Ended December 31,
(In millions of dollars, except share amounts) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $2,190.5 $2,237.8 $ 1,781.5 $1,719.1 $1,909.1
-------- -------- --------- -------- --------
Costs and expenses:
Cost of products sold 1,869.1 1,798.4 1,625.5 1,587.7 1,619.3
Depreciation 96.0 94.3 95.4 97.1 80.3
Selling, administrative, research and
development, and general 127.6 134.5 116.8 121.9 119.6
Restructuring of operations 35.8
-------- -------- --------- -------- --------
Total costs and expenses 2,092.7 2,027.2 1,837.7 1,842.5 1,819.2
-------- -------- --------- -------- --------
Operating income (loss) 97.8 210.6 (56.2) (123.4) 89.9
Other income (expense):
Interest expense (93.4) (93.9) (88.6) (84.2) (78.7)
Other-net (2.7) (14.1) (7.3) (.9) 20.9
-------- -------- --------- -------- --------
Income (loss) before income taxes, minority
interests, extraordinary loss, and
cumulative effect of changes in
accounting principles 1.7 102.6 (152.1) (208.5) 32.1
Credit (provision) for income taxes 9.3 (37.2) 53.8 86.9 (5.3)
Minority interests (2.8) (5.1) (3.1) (1.5) .1
-------- -------- --------- -------- --------
Income (loss) before extraordinary loss and
cumulative effect of changes in accounting
principles 8.2 60.3 (101.4) (123.1) 26.9
Extraordinary loss on early extinguishment
of debt, net of tax benefit of $2.9 and
$11.2 for 1994 and 1993, respectively (5.4) (21.8)
Cumulative effect of changes in accounting
principles, net of tax benefit of $237.7 (507.3)
-------- -------- --------- -------- --------
Net income (loss) $ 8.2 $ 60.3 $ (106.8) $ (652.2) $ 26.9
======== ======== ========= ======== ========
Per common and common equivalent share:
Net income (loss):
Primary $ .00 $ .69 $ (2.18) $ (11.47) $ .47
Fully diluted .72
Dividends declared .20
</TABLE>
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 47
Kaiser Aluminum Corporation and Subsidiary Companies
Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------
(In millions of dollars, except share amounts) March 31 June 30 September 30 December 31
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Net Sales $ 531.1 $ 567.6 $ 553.4 $ 538.4
Operating income 40.3 36.6 10.5 10.4
Net Income (loss) 9.9 8.2 (6.6) (3.3)(1)
Earnings (loss) per common and common equivalent shares:
Primary .11 .09 (.12) (.08)(1)
Common stock market price:
High 16 1/8 15 3/4 12 1/2 12
Low 12 10 7/8 9 3/4 10 1/8
1995
Net sales $ 513.0 $ 583.4 $ 550.3 $ 591.1
Operating income 32.6 63.6 53.2 61.2
Net income 3.5 23.3 12.5 21.0
Earnings (loss) per common and common equivalent share:
Primary (.03)(2) .31 .13 .26
Fully diluted .14
Common stock market price:
High 11 7/8 14 21 15 3/4
Low 10 1/8 10 1/2 13 7/8 10 3/4
</TABLE>
(1) Includes approximately $17.0 on an after tax basis resulting from
settlements of certain tax matters. Excluding these items, primary loss
per common and common equivalent share would have been approximately
$.32.
(2) After deduction of $5.3 of dividends on preferred stock from net income.
48 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
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, 1996 and 1995, 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, 1996. 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, 1996 and
1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 24, 1997
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,027 $ 26,480
Receivables:
Trade 18,080 19,688
Other 2,514 1,565
Inventories 65,690 75,580
Prepaid expenses and other current assets 5,329 6,933
------------- -------------
Total current assets 117,640 130,246
Timber and timberlands, net of accumulated depletion of $221,063 and $204,856,
respectively 324,986 337,390
Property, plant and equipment, net of accumulated depreciation of $73,772 and
$65,276, respectively 95,515 93,726
Deferred financing costs, net 20,003 22,397
Deferred income taxes 34,639 41,958
Restricted cash 29,967 31,367
Other assets 6,424 5,502
------------- -------------
$ 629,174 $ 662,586
============= =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 3,765 $ 3,898
Accrued compensation and related benefits 9,673 9,241
Accrued interest 20,211 20,666
Deferred income taxes 10,173 10,244
Other accrued liabilities 2,325 3,077
Long-term debt, current maturities 16,258 14,195
------------- -------------
Total current liabilities 62,405 61,321
Long-term debt, less current maturities 555,596 571,812
Other noncurrent liabilities 25,887 33,613
------------- -------------
Total liabilities 643,888 666,746
------------- -------------
Contingencies
Stockholder's deficit:
Common stock, $.01 par value, 100 shares authorized and issued -- --
Additional capital 157,520 157,520
Accumulated deficit (172,234) (161,680)
------------- -------------
Total stockholder's deficit (14,714) (4,160)
------------- -------------
$ 629,174 $ 662,586
============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net sales:
Lumber and logs $ 225,017 $ 197,320 $ 205,504
Other 19,832 24,619 21,875
------------- ------------- -------------
244,849 221,939 227,379
------------- ------------- -------------
Operating expenses:
Cost of goods sold (exclusive of depletion and depreciation) 136,335 116,445 116,316
Selling, general and administrative expenses 14,570 14,992 15,190
Depletion and depreciation 27,644 25,927 25,485
------------- ------------- -------------
178,549 157,364 156,991
------------- ------------- -------------
Operating income 66,300 64,575 70,388
Other income (expense):
Investment, interest and other income 4,209 3,928 12,022
Interest expense (54,456) (55,462) (56,067)
------------- ------------- -------------
Income before income taxes and extraordinary item 16,053 13,041 26,343
Provision in lieu of income taxes (6,107) (6,480) (1,429)
------------- ------------- -------------
Income before extraordinary item 9,946 6,561 24,914
Extraordinary item:
Loss on litigation settlement, net of related credit in lieu of
income taxes of $6,312 -- -- (14,866)
------------- ------------- -------------
Net income $ 9,946 $ 6,561 $ 10,048
============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,946 $ 6,561 $ 10,048
Adjustments to reconcile net income to net cash provided by
operating activities:
Depletion and depreciation 27,644 25,927 25,485
Net sales of marketable securities 52 478 6,619
Amortization of deferred financing costs 2,394 2,269 2,197
Net gains on marketable securities (52) (478) (984)
Net loss (gain) on asset dispositions 6 419 (830)
Increase (decrease) in cash resulting from changes in:
Accrued and deferred income taxes 7,135 7,572 1,627
Accounts payable (164) 589 949
Receivables 803 5,913 (8,742)
Other liabilities (8,046) 7,406 (2,027)
Inventories, net of depletion 7,304 (7,301) (1,608)
Prepaid expenses and other current assets 682 (3,273) (721)
Accrued interest (455) (443) (518)
Other (12) 423 706
------------- ------------- -------------
Net cash provided by operating activities 47,237 46,062 32,201
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets 115 13 1,119
Capital expenditures (14,552) (9,140) (10,962)
------------- ------------- -------------
Net cash used for investing activities (14,437) (9,127) (9,843)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (20,500) (22,000) (24,500)
Redemptions, repurchase of and principal payments on long-term
debt (14,153) (13,670) (13,235)
Incurrence of financing costs -- (150) (213)
Restricted cash deposits, net 1,400 1,035 1,160
------------- ------------- -------------
Net cash used for financing activities (33,253) (34,785) (36,788)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (453) 2,150 (14,430)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 26,480 24,330 38,760
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 26,027 $ 26,480 $ 24,330
============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL ACCUMULATED
($.01 PAR) CAPITAL DEFICIT TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1994 $ $ 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)
Net income -- -- 9,946 9,946
Dividends -- -- (20,500) (20,500)
------------- ------------- ------------- -------------
Balance, December 31, 1996 $ -- $ 157,520 $ (172,234) $ (14,714)
============= ============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
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 Group Holdings Inc. ("MGHI") which 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, 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. Housing, construction and remodeling are
the principal markets for the Company's lumber products. Export sales
generally constitute approximately 6% of the Company's sales. A
significant portion of the Company's sales are made to third parties
located west of the Mississippi River.
USE OF ESTIMATES AND ASSUMPTIONS
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
Company's consolidated financial position, results of operations or
liquidity.
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. 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 two years
ended December 31, 1995 were: 1995 - net realized gains of $478; and 1994
- - a decrease in net unrealized gains of $264 and net realized gains of
$1,248. Net realized and unrealized gains (losses) for the year ended
December 31, 1996 were not significant.
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 estimated term of the related borrowing.
Restricted Cash and Concentrations of Credit Risk
Restricted cash represents the amount 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, 1996, 1995 and 1994 includes
interest of approximately $2,865, $2,560 and $2,638, respectively,
attributable to an investment rate agreement (at 7.95% per annum) with the
financial institution which holds the Liquidity Account.
At December 31, 1996 and 1995, cash and cash equivalents include
$17,600 and $19,742, 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 equivalents and restricted cash
approximate fair value. Marketable securities are carried at fair value
which is determined based on quoted market prices. As of December 31, 1996
and 1995, the estimated fair value of long-term debt, including current
maturities, was $579,102 and $590,594, respectively. 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. Some of the Company's publicly traded debt issues 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.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
Lumber $ 46,882 $ 57,905
Logs 18,808 17,675
------------- -------------
$ 65,690 $ 75,580
============= =============
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ---------------------------
Useful Lives 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Machinery and equipment 5 - 15 years $ 123,909 $ 122,437
Buildings 33 years 34,285 29,079
Logging roads 15 years 11,093 7,486
------------- -------------
169,287 159,002
Less: accumulated depreciation (73,772) (65,276)
------------- -------------
$ 95,515 $ 93,726
============= =============
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1995
and 1994 was $8,850, $9,185 and $8,808, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized Notes due through
July 20, 2015 $ 336,130 $ 350,233
10-1/2% Pacific Lumber Senior Notes due March 1, 2003 235,000 235,000
Other 724 774
------------- -------------
571,854 586,007
Less: current maturities (16,258) (14,195)
------------- -------------
$ 555,596 $ 571,812
============= =============
</TABLE>
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 $165,970 of the Company's
consolidated balance at December 31, 1996), (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) 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.
Principal and interest on the Timber Notes are payable semi-
annually on January 20 and July 20. On January 21, 1997, Scotia Pacific
paid $8,712 of principal on the Timber Notes. 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 Senior Notes are unsecured and are senior
indebtedness of the Company; however, they are effectively subordinated to
the Timber Notes. The indenture governing the Senior Notes contains
various covenants which, among other things, limit the Company's ability to
incur additional indebtedness and liens, to engage in transactions with
affiliates, to make investments and to pay dividends.
The Company has a revolving credit agreement with a bank (as
amended and restated, the "Revolving Credit Agreement") which expires on
May 31, 1999. Borrowings under the Revolving Credit Agreement are secured
by the Company's trade receivables and inventories, with interest currently
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, 1996, $46,992 of borrowings was available under the
Revolving Credit Agreement, of which $4,732 was available for letters of
credit and $30,000 was restricted to timberland acquisitions. No
borrowings were outstanding as of December 31, 1996, and letters of credit
outstanding amounted to $10,268. The Revolving Credit Agreement contains
covenants substantially similar to those contained in the indenture
governing the Senior Notes.
As of December 31, 1996, under the most restrictive covenants
contained in the indentures governing the Senior Notes, the Timber Notes
and the Revolving Credit Agreement, the Company could pay approximately
$17,200 of dividends.
Scheduled maturities of long-term debt outstanding at December
31, 1996, using the Scheduled Amortization for the Timber Notes, are as
follows: years ending December 31, 1997 - $16,258; 1998 - $19,430; 1999 -
$21,745; 2000 - $24,065; 2001 - $24,827; thereafter - $465,529.
5. PROVISION IN LIEU OF INCOME TAXES
Income taxes are determined using an asset and liability approach
which 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 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 (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
connected 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.
The provision in lieu of income taxes on income before income
taxes and extraordinary item consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal credit (provision) in lieu of income taxes $ (189) $ (239) $ --
State and local (28) (61) (50)
------------- ------------- -------------
(217) (300) (50)
------------- ------------- -------------
Deferred:
Federal credit (provision) in lieu of income taxes (5,613) (4,755) (1,748)
State and local (277) (1,425) 369
------------- ------------- -------------
(5,890) (6,180) (1,379)
------------- ------------- -------------
$ (6,107) $ (6,480) $ (1,429)
============= ============= =============
</TABLE>
A reconciliation between the provision in lieu of income taxes
and the amount computed by applying the federal statutory income tax rate
to income before income taxes and extraordinary item is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Income before income taxes and extraordinary item $ 16,053 $ 13,041 $ 26,343
============= ============= =============
Amount of federal income tax based upon the statutory
rate $ (5,619) $ (4,564) $ (9,220)
Revision of prior years' tax estimates and other changes in
valuation allowances 981 (651) 7,148
State and local taxes, net of federal tax effect (1,080) (966) 207
Expenses for which no federal tax benefit is available (489) -- --
Other 100 (299) 436
------------- ------------- -------------
$ (6,107) $ (6,480) $ (1,429)
============= ============= =============
</TABLE>
Revision of prior years' tax estimates and other changes in
valuation allowances as shown in the table above include amounts for the
reversal of reserves which the Company no longer believes are necessary,
other changes in prior year tax estimates and changes in valuation
allowances with respect to deferred income tax assets. Generally, the
reversal of reserves relates to the expiration of the relevant statute of
limitations with respect to certain income tax returns or the resolution of
specific income tax matters with the relevant tax authorities. For the
years ended December 31, 1996, 1995 and 1994, the reversal of reserves
which the Company believes are no longer necessary resulted in a credit to
the income tax provision of $883, $127 and $7,048, respectively.
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 10). 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.
The components of the Company's net deferred income tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
Deferred income tax assets:
Timber and timberlands $ 28,992 $ 32,528
Loss and credit carryforwards 22,089 25,408
Other liabilities and other 8,468 10,344
Valuation allowances (1,884) (2,825)
------------- -------------
Total deferred income tax assets, net 57,665 65,455
------------- -------------
Deferred income tax liabilities:
Inventories (15,102) (16,056)
Property, plant and equipment (15,917) (15,023)
Other (2,180) (2,662)
------------- -------------
Total deferred income tax liabilities (33,199) (33,741)
------------- -------------
Net deferred income tax assets $ 24,466 $ 31,714
============= =============
</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 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
$22,586 and $28,199 at December 31, 1996 and 1995, 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, 1996.
<TABLE>
<CAPTION>
EXPIRING
THROUGH
-------------
<S> <C> <C>
Regular Tax Attribute Carryforwards:
Net operating losses $ 56,386 2011
Minimum tax credit 364 Indefinite
Alternative Minimum Tax Attribute
Carryforwards:
Net operating losses $ 9,608 2011
</TABLE>
6. EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
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,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 1,903 $ 1,483 $ 1,643
Interest cost on projected benefit obligation 1,682 1,693 1,263
Actual loss (gain) on plan assets (2,762) (3,900) 10
Net amortization and deferral 1,448 2,460 (859)
------------- ------------- -------------
Net periodic pension cost $ 2,271 $ 1,736 $ 2,057
============= ============= =============
</TABLE>
The following table sets forth the funded status and amounts
recognized in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation $ 18,506 $ 16,910
Non-vested benefit obligation 1,371 1,214
------------- -------------
Total accumulated benefit obligation $ 19,877 $ 18,124
============= =============
Projected benefit obligation $ 23,582 $ 21,841
Plan assets at fair value, primarily equity and debt securities (21,800) (18,363)
------------- -------------
Projected benefit obligation in excess of plan assets 1,782 3,478
Unrecognized net transition asset 18 24
Unrecognized net gain (loss) 2,855 (27)
Unrecognized prior service cost (39) (45)
------------- -------------
Accrued pension liability $ 4,616 $ 3,430
============= =============
</TABLE>
The assumptions used in accounting for the defined benefit plan
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Rate of increase in compensation levels 5.0% 5.0% 5.0%
Discount rate 7.5% 7.25% 8.5%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
</TABLE>
POSTRETIREMENT MEDICAL BENEFITS
The Company has an unfunded defined benefit plan for certain
postretirement medical 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 expected costs of postretirement
medical benefits are accrued over the period the employees provide services
to the date of their full eligibility for such benefits.
A summary of the components of net periodic postretirement
medical benefit cost is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Service cost - medical benefits earned during the year $ 332 $ 228 $ 216
Interest cost on accumulated postretirement medical benefit
obligation 415 317 294
Net amortization and deferral -- (53) (7)
------------- ------------- -------------
Net periodic postretirement medical benefit cost $ 747 $ 492 $ 503
============= ============= =============
</TABLE>
The postretirement medical benefit liability recognized in the
Company's Consolidated Balance Sheet is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
Retirees $ 1,182 $ 634
Actives eligible for benefits 905 726
Actives not eligible for benefits 3,818 3,317
------------- -------------
Accumulated postretirement medical benefit obligation 5,905 4,677
Unrecognized net gain (loss) (86) 553
------------- -------------
Postretirement medical benefit liability $ 5,819 $ 5,230
============= =============
</TABLE>
The annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 10.5% for 1997 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 medical
benefit obligation as of December 31, 1996 by approximately $810 and the
aggregate of the service and interest cost components of net periodic
postretirement medical benefit cost by approximately $130.
The discount rates used in determining the accumulated
postretirement medical benefit obligation were 7.5% and 7.25% at December
31, 1996 and 1995, respectively.
EMPLOYEE SAVINGS PLAN
The Company's employees are 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. The
cost to the Company of this plan was $1,388, $1,281 and $1,215 for the
years ended December 31, 1996, 1995 and 1994, respectively.
WORKERS' COMPENSATION BENEFITS
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
$8,000 and $8,900 at December 31, 1996 and 1995, respectively. Workers'
compensation expenses amounted to $2,925, $3,302 and $3,698 for the years
ended December 31, 1996, 1995 and 1994, 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 $1,552, $1,694, and
$1,744 for the years ended December 31, 1996, 1995, and 1994, 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.
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, 1996, 1995 and 1994 include revenues
of $14,710, $13,627 and $10,326, respectively, from Britt. The Company
recognized operating income of $6,784, $5,527 and $5,571 on these revenues
for the years ended December 31, 1996, 1995 and 1994, respectively. At
December 31, 1996 and 1995, receivables include $1,281 and $813,
respectively, related to these affiliate sales.
All of the Company's issued and outstanding common stock is
pledged as collateral for MGI's $100,000 11-1/4% Senior Secured Notes due
2003 and $125,720 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 10, the Company paid approximately $3,185 to a law firm in which a
director of the Company is also a partner.
8. CONTINGENCIES
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. Moreover, these
laws and regulations are modified from time to time and are subject to
judicial and administrative interpretation. Compliance with such laws,
regulations and judicial and administrative interpretations, together with
the cost of litigation incurred in connection with certain timber harvesting
operations of the Company, have increased the cost of logging operations.
The Company is subject to certain pending matters described below which
could have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity. There can be no assurance
that certain pending or future governmental regulations, legislation,
judicial or administrative decisions or California ballot initiatives will
not have a material adverse effect on the Company.
In May 1996, the United States Fish and Wildlife Service
("USFWS") published its final designation of critical habitat for the
marbled murrelet (the "Final Designation"), which designated over four
million acres as critical habitat for the marbled murrelet. Although nearly
all of the designated habitat is public land, approximately 33,000 acres of
the Company's timberlands are included in the Final Designation, the
substantial portion of such acreage being young growth timber. In order to
mitigate the impact of the Final Designation, particularly with respect to
timberlands occupied by the marbled murrelet, the Company over the last few
years has attempted to develop a habitat conservation plan for the marbled
murrelet (the "Murrelet HCP"). Due to, among other things, the unfavorable
response of the USFWS to the Company's initial Murrelet HCP efforts, the
Company and its subsidiaries filed two actions (the "Takings Litigation")
alleging that certain portions of their timberlands have been "taken" and
seeking just compensation. Pursuant to an agreement entered into by the
Company, MAXXAM, the United States and California on September 28, 1996
(the "Headwaters Agreement") described in Note 9 below, the Takings
Litigation has been stayed at the request of the parties.
It is impossible for the Company to determine the potential
adverse effect of the Final Designation on the Company's consolidated
financial position, results of operations or liquidity until such time as
various regulatory and legal issues are resolved; however, if the Company
is unable to harvest, or is severely limited in harvesting, on timberlands
designated as critical habitat for the marbled murrelet, such effect could
be materially adverse to the Company. If the Company is unable to harvest
or is severely limited in harvesting, it intends to seek just compensation
from the appropriate governmental agencies on the grounds that such
restrictions constitute a governmental taking. There continue to be other
regulatory actions and lawsuits seeking to have other species listed as
threatened or endangered under the federal Endangered Species Act ("ESA")
and/or the California Endangered Species Act ("CESA") and to designate
critical habitat for such species. For example, the National Marine
Fisheries Service has announced that by April 25, 1997 it will make a final
determination concerning whether to list the coho salmon under the ESA in
northern California, including, potentially, lands owned by the Company. It
is uncertain what impact, if any, such listings and/or designations of
critical habitat would 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 ("LTSY")
objectives. These regulations require that timber companies project timber
growth and harvest on their timberlands over a 100-year planning period and
establish a LTSY harvest level that takes into account environmental and
economic considerations. The sustained yield plan ("SYP") must demonstrate
that the average annual harvest over any rolling ten-year period will not
exceed the LTSY harvest level and that the Company's projected timber
inventory is capable of sustaining the LTSY harvest level in the last
decade of the 100-year planning period. On December 17, 1996, the Company
submitted a proposed SYP to the California Department of Forestry ("CDF").
The proposed SYP sets forth an LTSY harvest level substantially the same as
the Company's average annual timber harvest over the last six years. The
proposed SYP also indicates that the Company's average annual timber
harvest during the first decade of the SYP would approximate the LTSY
harvest level. During the second decade of the proposed SYP, the Company's
average annual timber harvest would be approximately 8% less than that
proposed for the first decade. The SYP, when approved, will be valid for
ten years. Thereafter, revised SYPs will be prepared every decade that will
address the LTSY harvest level based upon reassessment of changes in the
resource base and protection of public resources.
The proposed SYP assumes that the transactions contemplated by
the Headwaters Agreement (see Note 9) will be consummated and that the
Multi-Species HCP (as defined in Note 9) will permit the Company to harvest
its timberlands (including over the next two decades a substantial portion
of its old growth timberlands not transferred pursuant to the Headwaters
Agreement) to achieve maximum sustained yield. The SYP is subject to review
and approval by the CDF, and there can be no assurance that the SYP will be
approved in its proposed form. Until the SYP is reviewed and approved, the
Company is unable to predict the impact that these regulations will have on
its future timber harvesting practices. It is possible that the results of
the review and approval process could require the Company to reduce its
timber harvest in future years from the harvest levels set forth in the
proposed SYP. The Company believes it would be able to mitigate the effect
of any required reduction in harvest level by acquisitions of additional
timberlands and making corresponding amendments to the SYP; however, there
can be no assurance that the Company would be able to do so and the amount
of such acquisitions would be limited by the Company's available financial
resources. The Company is unable to predict the ultimate impact the
sustained yield regulations will have on its future financial position,
results of operations or liquidity.
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 the Company's timber harvesting plans ("THPs") and
other timber harvesting operations, and the Company expects that such
groups and individuals will continue to file such objections. In addition,
lawsuits are pending or threatened which seek to prevent the Company from
implementing certain of its approved THPs or which challenge other
operations by the Company. These challenges have severely restricted the
Company's ability to harvest old growth timber on its property. To date,
challenges with respect to the Company's THPs relating to young growth
timber and to its other operations 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 timber
harvesting and other operations 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, they have not had a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity. Nevertheless, it is impossible to predict the
future nature or degree of such challenges or their ultimate impact on the
Company's consolidated financial position, results of operations or
liquidity.
The Company is also involved in various claims, lawsuits and
proceedings. 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. HEADWATERS AGREEMENT
On September 28, 1996, the Company (on behalf of itself, its
subsidiaries and affiliates) and MAXXAM (collectively, the "Pacific Lumber
Parties") entered into the Headwaters Agreement with the United States and
California. The Headwaters Agreement provides the framework for the
acquisition by the United States and California of approximately 5,600
acres of the Company's timberlands commonly referred to as the Headwaters
Forest and the Elk Head Springs Forest (the "Headwaters Timberlands"). A
substantial portion of the Headwaters Timberlands consists of virgin old
growth timberlands. Approximately 4,900 of these acres are owned by Salmon
Creek and are part of the area commonly referred to as the "Headwaters
Forest." The remaining acreage is owned by Scotia Pacific (the Company
having harvesting rights on a portion of the acreage). The Headwaters
Timberlands would be transferred in exchange for (a) property and other
consideration (possibly including cash) from the United States and
California having an aggregate fair market value of $300 million and (b)
approximately 7,755 acres of adjacent timberlands to be acquired by the
United States and California ( the "Elk River Timberlands") from a third
party. The United States and California would also acquire and retain an
additional 1,900 acres of timberlands from such third party.
The Headwaters Agreement also provides, among other things, for
the expedited processing by the United States of an incidental take permit
("Permit") to be based upon a habitat conservation plan for multiple
species ("Multiple-Species HCP") covering (a) the timberlands and timber
harvesting rights which the Company will own after consummation of the
Headwaters Agreement (the "Resulting Pacific Lumber Timber Property") and
(b) the Headwaters Timberlands and the 1,900 acres of Elk River Timberlands
retained by the United States and California (both as conserved habitat).
The agreement also requires expedited processing by California of an SYP
covering such timberlands and timber harvesting rights.
On December 5, 1996, the United States and California each
furnished a list of properties consisting of oil and gas interests,
timberlands and a variety of other real estate properties for the Company's
review and approval. There have been ongoing discussions between the
Pacific Lumber Parties and the United States regarding the properties and
other consideration to be furnished by the United States.
Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands from a third party, (b) approval of an SYP and a Multi-Species
HCP and issuance of a Permit, each in form and substance satisfactory to
the Company, (c) the issuance by the Internal Revenue Service and the
California Franchise Tax Board of closing agreements in form and substance
sought by and satisfactory to the Pacific Lumber Parties, (d) the absence
of a judicial decision in any litigation brought by third parties that any
party reasonably believes will significantly delay or impair the
transactions described in the Headwaters Agreement, and (e) the dismissal
with prejudice at closing of the Takings Litigation. The parties to the
Headwaters Agreement are working to satisfy these conditions; however,
there can be no assurance that the Headwaters Agreement will be
consummated.
10. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION
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, the Company recorded reductions in cost of sales of
$1,527 resulting from business interruption insurance reimbursements for
higher operating costs and the related loss of revenues resulting from the
April 1992 earthquake.
Extraordinary Item Related to Litigation Settlement
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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
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1996 1995 1994
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<S> <C> <C> <C>
Supplemental information on 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 $ 52,517 $ 53,636 $ 54,388
Income taxes paid (refunded) 221 (5,190) 1,170
Tax allocation payments to MAXXAM 330 -- --
</TABLE>
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summary quarterly financial information for the years ended
December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
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<S> <C> <C> <C> <C>
1996:
Net sales $ 54,903 $ 65,299 $ 62,965 $ 61,682
Operating income 14,310 17,485 15,415 19,090
Net income 884 3,144 1,473 4,445
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
</TABLE>
