UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
Commission File Number 1-8857
MAXXAM GROUP INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-1310680
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
5847 SAN FELIPE, SUITE 2600 77057
HOUSTON, TEXAS (Zip Code)
(Address of Principal
Executive Offices)
Registrant's telephone number, including area code: (713) 975-7600
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Number of shares of common stock outstanding at November 3, 1997: 100
Registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the
reduced disclosure format.
<PAGE>
MAXXAM GROUP INC.
INDEX
PART I. - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet at September 30, 1997 and
December 31, 1996 3
Consolidated Statement of Operations for the three
and nine months ended September 30, 1997 and 1996 4
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1997 and 1996 5
Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature S-1
<PAGE>
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 79,847 $ 72,418
Marketable securities 32,970 31,423
Receivables:
Trade 13,440 18,850
Other 2,219 2,542
Inventories 69,146 69,307
Prepaid expenses and other current assets 5,849 5,474
------------- -------------
Total current assets 203,471 200,014
Timber and timberlands, net of accumulated
depletion of $234,198 and $221,063,
respectively 321,060 324,986
Property, plant and equipment, net of accumulated
depreciation of $83,006 and $76,753,
respectively 102,307 102,029
Deferred financing costs, net 22,197 24,249
Deferred income taxes 49,725 55,047
Restricted cash 28,818 29,967
Other assets 9,766 6,455
------------- -------------
$ 737,344 $ 742,747
============= =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 4,629 $ 3,928
Accrued interest 8,991 24,899
Accrued compensation and related benefits 11,210 10,033
Deferred income taxes 10,173 10,173
Other accrued liabilities 3,671 3,335
Long-term debt, current maturities 19,428 16,258
------------- -------------
Total current liabilities 58,102 68,626
Long-term debt, less current maturities 757,090 759,769
Other noncurrent liabilities 27,757 26,387
------------- -------------
Total liabilities 842,949 854,782
------------- -------------
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 (186,892) (193,322)
------------- -------------
Total stockholder's deficit (105,605) (112,035)
------------- -------------
$ 737,344 $ 742,747
============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales:
Lumber and logs $ 65,720 $ 62,717 $ 196,125 $ 183,913
Other 7,091 5,756 20,349 15,667
------------- ------------- ------------- -------------
72,811 68,473 216,474 199,580
------------- ------------- ------------- -------------
Operating expenses:
Cost of goods sold (exclusive
of depletion and
depreciation) 39,855 40,122 119,957 114,617
Selling, general and
administrative expenses 3,577 4,114 10,673 11,344
Depletion and depreciation 6,566 7,053 20,219 21,008
------------- ------------- ------------- -------------
49,998 51,289 150,849 146,969
------------- ------------- ------------- -------------
Operating income 22,813 17,184 65,625 52,611
Other income (expense):
Investment, interest and
other income 3,473 2,329 8,686 8,377
Interest expense (19,742) (19,396) (58,907) (58,388)
------------- ------------- ------------- -------------
Income before income taxes 6,544 117 15,404 2,600
Credit (provision) in lieu of
income taxes (2,480) (152) (5,974) 1,398
------------- ------------- ------------- -------------
Net income (loss) $ 4,064 $ (35) $ 9,430 $ 3,998
============= ============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,430 $ 3,998
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion and depreciation 20,219 21,008
Amortization of deferred financing
costs and discounts on long-term
debt 11,785 10,815
Net sales of marketable securities 3,260 8,351
Net gains on marketable securities (4,807) (3,635)
Increase (decrease) in cash resulting from
changes in:
Receivables 5,753 11,478
Inventories, net of depletion 200 1,588
Prepaid expenses and other assets (3,686) 1,188
Accounts payable 519 1,270
Accrued interest (15,908) (16,137)
Other liabilities 2,403 (8,729)
Accrued and deferred income taxes 5,802 (428)
Other 162 (28)
------------- -------------
Net cash provided by operating
activities 35,132 30,739
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,692) (8,986)
Net proceeds from sale of assets 96 110
------------- -------------
Net cash used for investing
activities (9,596) (8,876)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions, repurchases of and principal
payments on long-term debt (16,256) (14,151)
Dividends paid (3,000) (3,900)
Restricted cash withdrawals, net 1,149 914
------------- -------------
Net cash used for financing
activities (18,107) (17,137)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,429 4,726
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 72,418 48,396
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 79,847 $ 53,122
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 63,315 $ 63,710
Tax allocation payments to MAXXAM Inc. $ 172 $ 167
Income taxes paid (refunded) $ 167 $ (1,549)
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Timber and timberlands acquired subject to
long-term debt $ 7,014 $ --
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
MAXXAM GROUP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. GENERAL
The information contained in the following notes to the
consolidated financial statements is condensed from that which would appear
in the annual consolidated financial statements; accordingly, the
consolidated financial statements included herein should be reviewed in
conjunction with the consolidated financial statements and related notes
thereto contained in the Annual Report on Form 10-K filed by MAXXAM Group
Inc. with the Securities and Exchange Commission for the fiscal year ended
December 31, 1996 (the "Form 10-K"). Any capitalized terms used but not
defined in these Condensed Notes to Consolidated Financial Statements have
the same meaning given to them in the Form 10-K. All references to the
"Company" include MAXXAM Group Inc. and its subsidiary companies unless
otherwise noted or the context indicates otherwise. Accounting
measurements at interim dates inherently involve greater reliance on
estimates than at year end. The results of operations for the interim
periods presented are not necessarily indicative of the results to be
expected for the entire year.
The consolidated financial statements as of and for the periods
ended September 30, 1997 and September 30, 1996 included herein are
unaudited; however, they include all adjustments of a normal recurring
nature which, in the opinion of management, are necessary to present fairly
the consolidated financial position of the Company at September 30, 1997,
the consolidated results of operations for the three and nine months ended
September 30, 1997 and 1996 and consolidated cash flows for the nine months
ended September 30, 1997 and 1996. The Company is a wholly owned
subsidiary of MGHI which in turn is a wholly owned subsidiary of MAXXAM.
Its principal operating subsidiaries are Pacific Lumber and Britt.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Lumber $ 44,394 $ 49,829
Logs 24,752 19,478
------------- -------------
$ 69,146 $ 69,307
============= =============
</TABLE>
3. RESTRICTED CASH
Restricted cash represents the amount held by the Trustee under
the indenture governing the Timber Notes of the Company's indirect wholly
owned subsidiary, Scotia Pacific. In addition, cash and cash equivalents
include $7,318 and $17,600 at September 30, 1997 and December 31, 1996,
respectively, which is restricted for debt service payments on the Timber
Notes.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized
Notes due July 20, 2015 $ 319,965 $ 336,130
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 113,906 104,173
Pacific Lumber Credit Agreement 7,014 --
Other 633 724
------------- -------------
776,518 776,027
Less: current maturities (19,428) (16,258)
------------- -------------
$ 757,090 $ 759,769
============= =============
</TABLE>
On October 9, 1997, the Pacific Lumber Credit Agreement was
amended to, among other things, extend the date on which it expires to May
31, 2000.
5. 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, increase its 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.
Regulatory actions and lawsuits are commenced from time to time
seeking to have certain species listed as threatened or endangered under
the ESA and/or the CESA and, in certain instances, to designate critical
habitat for such species. In May 1996, the USFWS published the Final
Designation of critical habitat for the marbled murrelet, a coastal
seabird, 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 timberlands. In order to mitigate the impact of the
Final Designation, particularly with respect to timberlands occupied by the
marbled murrelet, Pacific Lumber attempted to develop 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 the Takings Litigation alleging that certain portions of
their timberlands had been "taken" and are seeking just compensation.
Pursuant to the Headwaters Agreement entered into by Pacific Lumber,
MAXXAM, the United States and California on September 28, 1996 and
described in Note 6 below, the Takings Litigation has been stayed at the
request of the parties.
On April 25, 1997, the NMFS announced the listing of the coho
salmon as threatened under the ESA in northern California, including lands
owned by Pacific Lumber. On October 1, 1997, the Environmental Protection
Information Center, Inc. ("EPIC"), the Sierra Club and others notified
Pacific Lumber, NMFS and other regulatory agencies of their intent to file
suit against these parties to enjoin an alleged take of the coho salmon
within six watersheds on Pacific Lumber's timberlands. It is impossible
for the Company to determine the potential adverse effect of the Final
Designation, the listing of the coho salmon and/or any related litigation 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 the affected timberlands, 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. See Note 6
below for information regarding Pacific Lumber's recent submission of a
revised draft Multi-Species HCP pursuant to the Headwaters Agreement.
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.
Timber companies must submit an SYP demonstrating that the average annual
harvest over any rolling ten-year period will not exceed the LTSY harvest
level and that their 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
which was revised and re-submitted in September 1997. As revised, 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 10% less than
that proposed for the first decade. The SYP, when approved, will be valid
for ten years. Thereafter, revised SYPs are to 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
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 impact the sustained yield regulations will have on its
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. 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 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 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.
6. HEADWATERS AGREEMENT
On September 28, 1996, 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 (collectively, 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 from the United States
and California having an aggregate fair market value of $300 million, and
(b) approximately 7,755 acres of adjacent timberlands (the "Elk River
Timberlands") to be acquired by the United States and California 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.
Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands, (b) approval of an SYP (see Note 5) and a Multi-Species HCP
(covering the Resulting Pacific Lumber Timber Property and the timberlands
to be acquired and retained by the United States and California) 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.
As part of the Headwaters Agreement, the Pacific Lumber Parties
agreed to not enter the Headwaters Forest or the Elk Head Springs 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 closing conditions to their respective satisfaction. On March
11, 1997, the Pacific Lumber Parties agreed to amend the Headwaters
Agreement to extend to February 17, 1998 the period of time during which
these closing conditions must be met. No written amendment has been
executed, but the Pacific Lumber Parties have continued to observe the
Moratorium. The extension is subject to the achievement of certain
milestones toward completion of the Headwaters Agreement, including
satisfaction of the Pacific Lumber Parties with the progress of the United
States and California in providing the required consideration.
The U.S. House and Senate have each passed an appropriations bill
which contains authorization for the expenditure of $250 million of federal
funds toward consummation of the Headwaters Agreement (the "Interior
Appropriations Bill"); however, it is unclear whether President Clinton
will sign the bill. The federal funding is to remain available until March
1, 1999 and is subject to several conditions, including: (a) contribution
by the State of California of its $130 million portion of funding for the
Headwaters Agreement, (b) approval by the State of California of an SYP
covering the Resulting Pacific Lumber Timber Property, (c) dismissal of the
Takings Litigation, (d) issuance by the United States of the Permit, (e)
completion of an appraisal of the lands and interests being acquired by the
United States (the "Appraisal"), (f) completion of an environmental impact
statement with respect to the Multi-Species HCP, and (g) adequate provision
having been made for access to the Headwaters Timberlands. Except for
acquisition of lands necessary for roadway access to the Headwaters
Timberlands, the Interior Appropriations Bill requires specific
Congressional authorization of acquisitions that enlarge the Headwaters
Timberlands by over five acres. The Interior Appropriations Bill also
provides that the acquisition of the Headwaters Timberlands may not be
completed prior to the earlier of (a) 180 days after enactment (extended by
one day for every day beyond 120 days that the Appraisal is not submitted
to Congress), or (b) enactment of any separate authorizing legislation
modifying the Interior Appropriations Bill.
Pacific Lumber submitted a revised draft of the Multi-Species HCP
to the USFWS, NMFS and other agencies in September 1997. The Pacific
Lumber Parties and regulatory agencies have had ongoing discussions
regarding the environmental restrictions to be contained in the Multi-
Species HCP, but significant differences remain between what is being
requested by the regulatory agencies and what the Pacific Lumber Parties
are willing to accept. The Interior Appropriations Bill requires that the
regulatory agencies report to Congress regarding (a) the scientific and
legal standards and criteria under the ESA used to develop the Multi-
Species HCP and the Permit, and (b) should application for the Permit be
denied, the precise substantive rationale for such denial. The Pacific
Lumber Parties believe that this Congressionally-supervised process may
assist the regulatory authorities and the Pacific Lumber Parties to reach
an acceptable Multi-Species HCP, but no assurances can be made in this
regard.
Although California has not enacted legislation providing funds
for its portion of the acquisition contemplated by the Headwaters
Agreement, representatives of the State of California continue to indicate
that they are considering various methods of furnishing the required
consideration.
The parties to the Headwaters Agreement are working to satisfy
the closing conditions; however, there can be no assurance that the
Headwaters Agreement will be consummated.
MAXXAM GROUP INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the response to
Part I, Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any
capitalized terms used but not defined in this Item have the same meaning
given to them in the Form 10-K.
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements appear in several places in this Form
10-Q. 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 section and the Company's Form 10-K identify 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.
RESULTS OF OPERATIONS
The Company and its principal operating subsidiaries, Pacific
Lumber and Britt, are engaged in forest products operations. The Company's
business is seasonal in that the Company generally experiences lower first
quarter sales due largely to the general decline in construction-related
activity during the winter months. Accordingly, the Company's results for
any one quarter are not necessarily indicative of results to be expected
for the full year. The following table presents selected operational and
financial information for the three and nine months ended September 30,
1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
(IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES)
<S> <C> <C> <C> <C>
Shipments:
Lumber: (1)
Redwood upper grades 12.7 12.8 39.0 36.1
Redwood common
grades 53.9 57.1 178.7 175.2
Douglas-fir upper
grades 3.3 2.8 8.3 7.8
Douglas-fir common
grades 22.5 18.8 59.0 56.7
Other 4.6 5.5 13.4 15.8
------------- ------------- ------------- -------------
Total lumber 97.0 97.0 298.4 291.6
============= ============= ============= =============
Logs (2) 4.0 4.5 10.6 16.1
============= ============= ============= =============
Wood chips (3) 63.6 55.8 185.9 157.2
============= ============= ============= =============
Average sales price:
Lumber: (4)
Redwood upper grades $ 1,537 $ 1,368 $ 1,427 $ 1,382
Redwood common
grades 546 518 533 509
Douglas-fir upper
grades 1,243 1,108 1,205 1,138
Douglas-fir common
grades 443 489 473 435
Logs (4) 426 478 412 498
Wood chips (5) 73 74 75 76
Net sales:
Lumber, net of discount $ 64.1 $ 60.5 $ 191.8 $ 175.9
Logs 1.7 2.2 4.4 8.0
Wood chips 4.7 4.1 13.9 11.9
Cogeneration power 1.2 1.1 3.4 2.4
Other 1.1 .6 3.0 1.4
------------- ------------- ------------- -------------
Total net sales $ 72.8 $ 68.5 $ 216.5 $ 199.6
============= ============= ============= =============
Operating income $ 22.8 $ 17.2 $ 65.6 $ 52.6
============= ============= ============= =============
Operating cash flow (6) $ 29.4 $ 24.2 $ 85.8 $ 73.6
============= ============= ============= =============
Income before income taxes $ 6.5 $ .1 $ 15.4 $ 2.6
============= ============= ============= =============
Net income $ 4.1 $ -- $ 9.4 $ 4.0
============= ============= ============= =============
<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 the quarter ended September 30, 1997 increased from
the comparable prior year quarter due to higher average realized prices for
common and upper grade redwood lumber, partially offset by lower average
realized prices for common grade Douglas-fir lumber. Overall, the volume
of lumber shipments in the 1997 third quarter was substantially unchanged
from the 1996 third quarter as an increase in shipments of common grade
Douglas-fir lumber offset a decrease in shipments of common grade redwood
lumber. Net sales for the nine months ended September 30, 1997 increased
from the comparable prior year period principally due to higher average
realized prices and shipments for most categories of redwood and Douglas-
fir lumber.
Operating income and income before income taxes
Operating income and income before income taxes for the three and
nine months ended September 30, 1997 increased from the comparable prior
year periods, principally due to the increase in net sales discussed above.
Credit (provision) in lieu of income taxes
The credit in lieu of income taxes for the nine months ended
September 30, 1996 includes a benefit of $2.6 million relating to the
refund of taxes previously paid in connection with a settlement of certain
federal income tax matters in June 1996.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
The Pacific Lumber Credit Agreement and the indentures governing
the Timber Notes and the Pacific Lumber Senior Notes contain various
covenants which, among other things, limit the ability of Pacific Lumber
and Scotia Pacific to incur additional indebtedness and liens, to engage in
transactions with affiliates, to pay dividends and to make investments. As
of September 30, 1997, under the most restrictive of these covenants,
approximately $14.2 million of dividends could be paid by Pacific Lumber to
the Company.
As of September 30, 1997, $38.3 million of borrowings was
available under the Pacific Lumber Credit Agreement, of which $5.3 million
was available for letters of credit and $23.0 million for timberland
acquisitions. As of September 30, 1997, $7.0 million of borrowings and
$14.7 million in letters of credit were outstanding. On October 9, 1997,
the Pacific Lumber Credit Agreement was amended to, among other things,
extend the date on which it expires to May 31, 2000.
The indenture governing the MGI Notes, among other things,
restricts the ability of the Company to incur additional indebtedness,
engage in transactions with affiliates, pay dividends and make investments.
During the nine months ended September 30, 1997, the Company paid dividends
of $3.0 million. As of September 30, 1997, under the most restrictive of
these covenants, $2.5 million of dividends could be paid by the Company.
As of September 30, 1997, the Company had consolidated long-term
debt of $728.3 million (net of current maturities and restricted cash
deposited in the Liquidity Account) as compared to $729.8 million at
December 31, 1996. The change in debt was primarily due to $7.0 million of
borrowings under the Pacific Lumber Credit Agreement and $9.7 million in
accretion of discount on the MGI Discount Notes offset by $16.2 million in
principal payments on the Timber Notes. The Company and its subsidiaries
anticipate that cash flow from operations, together with existing cash,
cash equivalents, 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 cash from
operations and 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, increased
competition from other lumber producers or alternative building products
and general economic conditions.
TRENDS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See above for cautionary information with respect to
such forward-looking statements.
Pacific Lumber's operations are subject to a variety of
California and federal laws, regulations and judicial and administrative
interpretations 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, increase 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 have a material adverse effect on the
Company. See Part II. Item 1. "Legal Proceedings" and Note 5 to the
Condensed Consolidated Financial Statements for further information
regarding regulatory and legal proceedings affecting the Company's
operations. See also Note 6 to the Condensed Consolidated Financial
Statements for information concerning the status of the Headwaters
Agreement.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Form 10-K for information
concerning material legal proceedings with respect to the Company. The
following material developments have occurred with respect to such legal
proceedings since the date of the Form 10-K. Any capitalized or italicized
terms used but not defined in this Item have the same meaning given to them
in the Form 10-K.
On October 1, 1997, the Environmental Protection Information
Center, Inc. ("EPIC"), the Sierra Club and others notified Pacific Lumber,
NMFS and other regulatory agencies of their intent to file suit against
these parties to enjoin an alleged take of the coho salmon within six
watersheds on Pacific Lumber's timberlands.
With respect to the Marbled Murrelet action described under
"Timber Harvesting Litigation" in the Form 10-K, on April 18, 1997, the
U.S. Ninth Circuit Court of Appeals reversed the trial court's decision
which had preliminarily enjoined eight already-approved THPs to the extent
they rely on the Federal Owl Plan. On June 18, 1997, the court granted the
defendants' motions for summary judgment disposing of the remaining issues
in this case in favor of the defendants.
With respect to the Takings Litigation described under "Timber
Harvesting Litigation" in the Form 10-K, the parties have asked the court
to extend the stay of each action until November 14, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
4.1 Second Amendment, dated October 9, 1997, to the Pacific
Lumber Credit Agreement (incorporated herein by reference to
Exhibit 4.1 to Pacific Lumber's Quarterly Report on Form 10-
Q for the quarter ended September 30, 1997, File No. 1-9204)
27 Financial Data Schedule
B. REPORTS ON FORM 8-K:
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized, who has signed this report on
behalf of the Registrant and as the principal accounting officer of the
Registrant.
MAXXAM GROUP INC.
Date: November 5, 1997 By: /S/ GARY L. CLARK
Gary L. Clark
Vice President
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<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 79,847
<SECURITIES> 32,970
<RECEIVABLES> 13,440
<ALLOWANCES> 0
<INVENTORY> 69,146
<CURRENT-ASSETS> 203,471
<PP&E> 185,313
<DEPRECIATION> 83,006
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0
0
<COMMON> 0
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<SALES> 216,474
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<TOTAL-COSTS> 119,957
<OTHER-EXPENSES> 30,892
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,907
<INCOME-PRETAX> 15,404
<INCOME-TAX> 5,974
<INCOME-CONTINUING> 9,430
<DISCONTINUED> 0
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