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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1994
Commission File Number 1-9204
THE PACIFIC LUMBER COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3318327
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
P. O. BOX 37
125 MAIN STREET
SCOTIA, CALIFORNIA 95565
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (707) 764-2222
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Number of shares of common stock outstanding at August 1, 1994: 100
Registrant meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
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<PAGE>
THE PACIFIC LUMBER COMPANY
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at June 30, 1994 and December 31,
1993 . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Operations for the three and six
months ended June 30, 1994 and 1993 . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows for the six months ended
June 30, 1994 and 1993 . . . . . . . . . . . . . . . . 5
Condensed Notes to Consolidated Financial Statements . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 12
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
--------------- ---------------
(Unaudited)
(In thousands of dollars)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 20,242 $ 38,760
Marketable securities . . . . . . . . . . . . . . . . . 6,596 5,635
Receivables:
Trade . . . . . . . . . . . . . . . . . . . . . . . 11,704 14,750
Other . . . . . . . . . . . . . . . . . . . . . . . 3,654 3,801
Inventories . . . . . . . . . . . . . . . . . . . . . . 70,951 66,241
Prepaid expenses and other current assets . . . . . . . 3,225 2,939
--------------- ---------------
Total current assets . . . . . . . . . . . . . 116,372 132,126
Timber and timberlands, net of depletion of $179,167 and
$171,007 at June 30, 1994 and December 31, 1993,
respectively . . . . . . . . . . . . . . . . . . . . . . 359,053 365,511
Property, plant and equipment, net of accumulated
depreciation of $52,575 and $48,703 at June 30, 1994 and
December 31, 1993, respectively . . . . . . . . . . . . 97,538 96,541
Deferred financing costs, net . . . . . . . . . . . . . . . . 25,688 26,500
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 54,126 52,066
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . 33,430 33,562
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 6,830 6,630
--------------- ---------------
$ 693,037 $ 712,936
=============== ===============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 7,548 $ 2,360
Accrued compensation and related benefits . . . . . . . 11,478 7,782
Accrued interest . . . . . . . . . . . . . . . . . . . . 21,258 21,627
Deferred income taxes . . . . . . . . . . . . . . . . . 14,132 14,132
Other accrued liabilities . . . . . . . . . . . . . . . 3,106 1,377
Long-term debt, current maturities . . . . . . . . . . . 13,366 13,191
--------------- ---------------
Total current liabilities . . . . . . . . . . 70,888 60,469
Long-term debt, less current maturities . . . . . . . . . . . 591,341 598,811
Other noncurrent liabilities . . . . . . . . . . . . . . . . 30,182 27,925
--------------- ---------------
Total liabilities . . . . . . . . . . . . . . 692,411 687,205
--------------- ---------------
Contingencies
Stockholder's equity:
Common stock, $.01 par value, 100 shares authorized and
issued . . . . . . . . . . . . . . . . . . . . . . - -
Additional capital . . . . . . . . . . . . . . . . . . . 157,520 157,520
Accumulated deficit . . . . . . . . . . . . . . . . . . (156,894) (131,789)
--------------- ---------------
Total stockholder's equity . . . . . . . . . . 626 25,731
--------------- ---------------
$ 693,037 $ 712,936
=============== ===============
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Net sales:
Lumber and logs . . . . . . . . . . . . . . . . . . $ 48,463 $ 47,683 $ 96,318 $ 89,280
Other . . . . . . . . . . . . . . . . . . . . . . . 6,657 3,938 9,618 7,910
------------ ------------ ------------ ------------
55,120 51,621 105,936 97,190
------------ ------------ ------------ ------------
Operating expenses:
Cost of goods sold (exclusive of depletion and
depreciation) . . . . . . . . . . . . . . . . . 26,735 27,362 55,447 49,696
Selling, general and administrative . . . . . . . . 3,695 4,445 7,670 7,994
Depletion and depreciation . . . . . . . . . . . . . 5,163 6,505 11,144 12,631
------------ ------------ ------------ ------------
35,593 38,312 74,261 70,321
------------ ------------ ------------ ------------
Operating income . . . . . . . . . . . . . . . . . . . . 19,527 13,309 31,675 26,869
Other income (expense):
Investment and other income . . . . . . . . . . . . 1,884 1,069 9,343 1,419
Interest expense . . . . . . . . . . . . . . . . . . (13,982) (14,476) (27,853) (30,410)
------------ ------------ ------------ ------------
Income (loss) before income taxes, extraordinary items
and cumulative effect of changes in accounting
principles . . . . . . . . . . . . . . . . . . . . . 7,429 (98) 13,165 (2,122)
Credit (provision) in lieu of income taxes . . . . . . . (3,049) 36 (5,404) 785
------------ ------------ ------------ ------------
Income (loss) before extraordinary items and cumulative
effect of changes in accounting principles . . . . . 4,380 (62) 7,761 (1,337)
Extraordinary items:
Loss on litigation settlement, net of related credit
in lieu of income taxes of $6,312 . . . . . . . (14,866) - (14,866) -
Loss on early extinguishment of debt, net of related
credit in lieu of income taxes of $5,566 . . . - - - (10,802)
Cumulative effect of changes in accounting principles:
Postretirement benefits other than pensions, net of
related credit in lieu of income taxes of
$1,566 . . . . . . . . . . . . . . . . . . . . - - - (2,348)
Accounting for income taxes . . . . . . . . . . . . - - - 4,973
------------ ------------ ------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $ (10,486) $ (62) $ (7,105) $ (9,514)
============ ============ ============ ============
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------------
1994 1993
----------------- ----------------
(In thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,105) $ (9,514)
Adjustments to reconcile net loss to net cash provided by (used
for) operating activities:
Depletion and depreciation . . . . . . . . . . . . . . . . 11,144 12,631
Amortization of deferred financing costs . . . . . . . . . 1,025 1,098
Extraordinary loss on early extinguishment of debt, net . . - 10,802
Incurrence of financing costs . . . . . . . . . . . . . . . - (27,254)
Cumulative effect of changes in accounting principles, net - (2,625)
Increase (decrease) in other liabilities . . . . . . . . . 6,530 (708)
Increase in accounts payable . . . . . . . . . . . . . . . 5,188 9,411
Decrease in receivables . . . . . . . . . . . . . . . . . . 3,193 12,972
Decrease (increase) in inventories, net of depletion . . . (3,541) 238
Increase in accrued and deferred income taxes . . . . . . . (908) (785)
Decrease in accrued interest . . . . . . . . . . . . . . . (369) (15,976)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (910) (540)
----------------- -----------------
Net cash provided by (used for) operating activities . 14,247 (10,250)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . (6,253) (6,149)
Net purchases of marketable securities . . . . . . . . . . . . . (367) (3,884)
----------------- -----------------
Net cash used for investing activities . . . . . . . . (6,620) (10,033)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . (18,000) (25,000)
Redemptions, repurchase of and principal payments on long-term
debt . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,145) (549,736)
Proceeds from issuance of long-term debt . . . . . . . . . . . . - 620,000
Restricted cash deposits . . . . . . . . . . . . . . . . . . . . - (35,000)
----------------- -----------------
Net cash provided by (used for) financing activities . (26,145) 10,264
----------------- -----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . (18,518) (10,019)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . 38,760 43,537
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . $ 20,242 $ 33,518
================= =================
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Timber and timberlands acquired subject to loan from seller . . $ 850 $ -
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest . . . . . . . . . . . $ 27,197 $ 45,288
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . - -
</TABLE>
<PAGE>
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. GENERAL
The information contained in the following notes to the
consolidated financial statements is condensed from that which would appear
in the annual consolidated financial statements; accordingly, the
consolidated financial statements included herein should be reviewed in
conjunction with the consolidated financial statements and related notes
thereto contained in the Annual Report on Form 10-K filed by The Pacific
Lumber Company with the Securities and Exchange Commission for the fiscal
year ended December 31, 1993 (the "Form 10-K"). All references to the
"Company" include The Pacific Lumber Company and its subsidiary companies
unless otherwise indicated or the context indicates otherwise. Accounting
measurements at interim dates inherently involve greater reliance on
estimates than at year end. The results of operations for the interim
periods presented are not necessarily indicative of the results to be
expected for the entire year.
The consolidated financial statements included herein are
unaudited; however, they include all adjustments of a normal recurring
nature which, in the opinion of management, are necessary to present fairly
the consolidated financial position of the Company at June 30, 1994, the
consolidated results of operations for the three and six months ended June
30, 1994 and 1993 and consolidated cash flows for the six months ended June
30, 1994 and 1993. Certain reclassifications of prior period information
have been made to conform to the current presentation. The Company is a
wholly owned indirect subsidiary of MAXXAM Group Inc. ("MGI") which is a
wholly owned subsidiary of MAXXAM Inc. ("MAXXAM").
2. CASH AND CASH EQUIVALENTS
At June 30, 1994 and December 31, 1993, cash and cash equivalents
includes $13,363 and $20,280, respectively, which is reserved for debt
service payments on the 7.95% Timber Collateralized Notes due 2015.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
------------- -------------
<S> <C> <C>
Lumber . . . . . . . . . . . . . . . . . . . $ 56,159 $ 50,906
Logs . . . . . . . . . . . . . . . . . . . . 14,792 15,335
------------- -------------
$ 70,951 $ 66,241
============= =============
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
------------- -------------
<S> <C> <C>
7.95% Timber Collateralized Notes due July
20, 2015 . . . . . . . . . . . . . . . . $ 368,857 $ 376,953
10-1/2% Senior Notes due March 1, 2003 . . . 235,000 235,000
Other . . . . . . . . . . . . . . . . . . . . 850 49
------------- -------------
604,707 612,002
Less: current maturities . . . . . . . . . . (13,366) (13,191)
------------- -------------
$ 591,341 $ 598,811
============= =============
</TABLE>
<PAGE>
5. INVESTMENT 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 and other income for the six months ended June
30, 1994.
6. LOSS ON LITIGATION SETTLEMENT AND CONTINGENCIES
On May 17, 1994, MAXXAM and the Company announced that an
agreement in principle had been reached to settle 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 pending approximately
$52,000 settlement, approximately $33,000 was paid by insurance carriers of
MAXXAM and the Company, approximately $14,800 was paid by the Company and
the balance was paid by other defendants and through the assignment of
certain claims. The settlement is subject to certain contingencies,
including a fairness hearing which will be held at a yet unspecified time.
The above described cash payments are being held in the registry of the
court pending satisfaction of these contingencies. In the second quarter
of 1994, the Company recorded an extraordinary loss of $14,866 related to
the settlement and associated costs, net of benefits for federal and state
income taxes of $6,312.
The Company's operations are subject to a variety of California
and, in some cases, federal laws and regulations dealing with timber
harvesting, endangered species, water quality and air and water pollution.
The Company does not expect that compliance with such existing laws and
regulations will have a material adverse effect on the Company's future
operating results. There can be no assurance, however, that future
legislation, governmental regulations or judicial or administrative
decisions would not adversely affect the Company or its ability to sell
lumber, logs or timber.
Various groups and individuals have filed objections with the
California Department of Forestry ("CDF") regarding the CDF's actions and
rulings with respect to certain of the Company's timber harvesting plans
("THPs"), and the Company expects that such groups and individuals will
continue to file objections to the Company's THPs. In addition, lawsuits
are pending which seek to prevent the Company from implementing certain of
its approved THPs. These challenges have severely restricted the Company's
ability to harvest virgin old growth redwood timber on its property during
the past few years, as well as substantial amounts of virgin Douglas-fir
timber which are located in virgin old growth redwood stands. No assurance
can be given as to the extent of such litigation in the future. The
Company believes that environmentally focused challenges to its THPs are
likely to occur in the future. Although such challenges have delayed or
prevented the Company from conducting a portion of its operations, to date
such challenges have not had a material adverse effect on the Company's
consolidated financial position or results of operations. It is, however,
impossible to predict the future nature or degree of such challenges or
their ultimate impact on the operating results or consolidated financial
position of the Company.
The Company is also involved in various claims, lawsuits and
proceedings relating to a wide variety of other matters. While there are
uncertainties inherent in the ultimate outcome of such matters and it is
impossible to presently determine the ultimate costs that may be incurred,
management believes the resolution of such uncertainties and the incurrence
of such costs should not have a material adverse effect on the Company's
consolidated financial position or results of operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the response to
Part I, Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any
capitalized terms used but not defined in this Item have the same meaning
given to them in the Form 10-K.
RESULTS OF OPERATIONS
The Company's business is highly seasonal in that the Company has
historically experienced lower first and fourth quarter sales due largely
to the general decline in construction related activity during the winter
months. Accordingly, the Company's results for any one quarter are not
necessarily indicative of results to be expected for the full year. The
following table presents selected operational and financial information for
the three and six months ended June 30, 1994 and 1993. The information
presented in the table is in millions of dollars except shipments and
prices.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -------------------------------
1994 1993 1994 1993
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Shipments:
Lumber(1):
Redwood upper grades . . . . . . . . 12.8 17.0 25.7 32.8
Redwood common grades . . . . . . . . 35.5 29.7 63.2 56.0
Douglas-fir upper grades . . . . . . 1.9 3.0 4.4 6.3
Douglas-fir common grades . . . . . . 16.5 12.7 31.9 27.5
-------------- -------------- -------------- --------------
Total lumber . . . . . . . . . . 66.7 62.4 125.2 122.6
============== ============== ============== ==============
Logs(2) . . . . . . . . . . . . . . . . . 7.0 5.2 16.9 7.0
============== ============== ============== ==============
Wood chips(3) . . . . . . . . . . . . . . 61.4 32.8 87.4 69.3
============== ============== ============== ==============
Average sales price:
Lumber(4):
Redwood upper grades . . . . . . . . $ 1,469 $ 1,270 $ 1,437 $ 1,242
Redwood common grades . . . . . . . . 471 525 470 506
Douglas-fir upper grades . . . . . . 1,373 1,224 1,391 1,167
Douglas-fir common grades . . . . . . 426 439 445 433
Logs(4) . . . . . . . . . . . . . . . . . 586 466 649 457
Wood chips(5) . . . . . . . . . . . . . . 89 79 86 80
Net sales:
Lumber, net of discount . . . . . . . . . $ 44.3 $ 45.3 $ 85.3 $ 86.1
Logs . . . . . . . . . . . . . . . . . . . 4.1 2.4 11.0 3.2
Wood chips . . . . . . . . . . . . . . . . 5.5 2.6 7.5 5.6
Cogeneration power . . . . . . . . . . . . .9 1.1 1.5 1.8
Other . . . . . . . . . . . . . . . . . . .3 .2 .6 .5
-------------- -------------- -------------- --------------
Total net sales . . . . . . . . $ 55.1 $ 51.6 $ 105.9 $ 97.2
============== ============== ============== ==============
Operating income . . . . . . . . . . . . . . . $ 19.6 $ 13.3 $ 31.7 $ 26.9
============== ============== ============== ==============
Income (loss) before income taxes, extraordinary
items and cumulative effect of changes in
accounting principles . . . . . . . . . . $ 7.5 $ (.1) $ 13.2 $ (2.1)
============== ============== ============== ==============
Net loss . . . . . . . . . . . . . . . . . . . $ (10.5) $ (.1) $ (7.1) $ (9.5)
============== ============== ============== ==============
Capital expenditures . . . . . . . . . . . . . $ 2.4 $ 4.4 $ 6.3 $ 6.1
============== ============== ============== ==============
<FN>
- - --------------------
(1) Lumber shipments are expressed in millions of board feet.
(2) Log shipments are expressed in millions of board feet, net Scribner scale.
(3) Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds.
(4) Dollars per thousand board feet.
(5) Dollars per bone dry unit.
</TABLE>
<PAGE>
Shipments
Lumber shipments for the second quarter of 1994 were 66.7 million
board feet, an increase of 7% from 62.4 million board feet for the second
quarter of 1993. This increase was principally due to a 19% increase in
redwood common lumber shipments, partially offset by a 25% decrease in
shipments of upper grade redwood lumber. Log shipments for the second
quarter of 1994 were 7.0 million feet (net Scribner scale), an increase
from 5.2 million feet for the second quarter of 1993.
Lumber shipments for the six months ended June 30, 1994 were
125.2 million board feet, an increase of 2% from 122.6 million board feet
for the six months ended June 30, 1993. This increase was principally due
to a 13% increase in redwood common lumber shipments, partially offset by a
22% decrease in shipments of upper grade redwood lumber. Log shipments for
the six months ended June 30, 1994 were 16.9 million feet (net Scribner
scale), an increase from 7.0 million feet for the six months ended June 30,
1993.
Old growth trees constitute the Company's principal source of
upper grade redwood lumber. Due to the severe restrictions on the
Company's ability to harvest virgin old growth timber on its property (see
"Trends" under Item 7 of the Form 10-K), the Company's supply of upper
grade lumber has decreased in some premium product categories. The Company
has been able to lessen the impact of these decreases by augmenting its
production facilities to increase its recovery of upper grade lumber from
smaller diameter logs and increasing the production of manufactured upper
grade lumber products through its end and edge glue facility (which is
currently being expanded). However, unless the Company is able to sustain
the harvest level of old growth trees it has experienced in recent years,
the Company expects that its supply of premium upper grade lumber products
will decrease from current levels and that its manufactured lumber products
will constitute a higher percentage of its shipments of upper grade lumber
products.
Net sales
Revenues from net sales of lumber and logs for the second quarter
of 1994 increased by approximately 2% from the second quarter of 1993.
This increase was principally due to increased shipments of redwood common
lumber, a 16% increase in the average realized price of upper grade redwood
lumber, a 26% increase in the average realized price of log sales and
increased log shipments, partially offset by decreased shipments of upper
grade redwood lumber and a 10% decrease in the average realized price of
redwood common lumber. The increase in other sales for the second quarter
of 1994 as compared to the second quarter of 1993 was attributable to
increased sales of wood chips.
Revenues from net sales of lumber and logs for the six months
ended June 30, 1994 increased by approximately 8% from the six months ended
June 30, 1993. This increase was principally due to a 16% increase in the
average realized price of upper grade redwood lumber, increased log
shipments, increased shipments of redwood common lumber and a 42% increase
in the average realized price of log sales, partially offset by decreased
shipments of upper grade redwood lumber and a 7% decrease in the average
realized price of redwood common lumber. The increase in other sales for
the six months ended June 30, 1994 as compared to the six months ended June
30, 1993 was attributable to increased sales of wood chips.
Operating income
Operating income for the second quarter of 1994 increased by
approximately 47% as compared to the second quarter of 1993. Operating
income for the six months ended June 30, 1994 increased by approximately
18% as compared to the six months ended June 30, 1993. These increases
were principally due to higher sales of logs and wood chips, improved
sawmill productivity and lower purchases of lumber
<PAGE>
and logs from third parties in 1994 compared to 1993. For the six months
ended June 30, 1993, cost of goods sold was reduced by $1.2 million for an
additional business interruption insurance claim as a result of the April
1992 earthquake.
The Company's cost of producing lumber products has continued to
increase as a result of compliance with evolving environmental regulations,
litigation associated with its timber harvesting plans and greater costs
attributable to processing larger numbers of smaller diameter logs and
producing manufactured products.
Income (loss) before income taxes, extraordinary items and
cumulative effect of changes in accounting principles
Income before income taxes, extraordinary items and cumulative
effect of changes in accounting principles increased for the second quarter
of 1994 and the six months ended June 30, 1994 as compared to the same
periods in 1993. These increases resulted from the increases in operating
income, higher investment, interest and other income and decreased interest
expense. Investment, interest and other income for the six months ended
June 30, 1994 includes the receipt of a franchise tax refund of $7.2
million (as described in Note 5 to the Condensed Notes to Consolidated
Financial Statements). Interest expense decreased due to lower interest
rates resulting from the refinancing of the Company's long-term debt in
March of 1993.
Extraordinary item -- loss on litigation settlement
The litigation settlement in the second quarter of 1994 (as
described in Note 6 to the Condensed Notes to Consolidated Financial
Statements) resulted in an extraordinary loss of $14.9 million, net of
related income taxes of $6.3 million. The extraordinary loss consists of
the Company's $14.8 million cash payment to the settlement fund, a $2.0
million accrual for additional contingent claims and $4.4 million of
related legal fees. See also "Merger Litigation" under Part II, Item 1 of
this Report.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
As of June 30, 1994, the Company had consolidated working capital
of $45.5 million and long-term debt of $557.9 million (net of current
maturities and restricted cash deposited in the Liquidity Account) as
compared to $71.7 million and $565.2 million, respectively, at December 31,
1993. The decrease in long-term debt was primarily due to principal
payments on the Timber Notes. The decline in working capital was primarily
due to the cash payment for the litigation settlement, the principal
payments on the Timber Notes, dividends and capital expenditures, partially
offset by improved cash flows from operations. The Company anticipates
that cash flows from operations, together with existing cash, marketable
securities and available sources of financing, will be sufficient to fund
the Company's working capital and capital expenditures requirements for the
foreseeable future; however, due to its highly leveraged condition, the
Company is more sensitive than less leveraged companies to factors
affecting its operations, including governmental regulation affecting its
timber harvesting practices, increased competition from other lumber
producers or alternative building products and general economic conditions.
As of June 30, 1994, $19.7 million of borrowings was available
under the Company's Revolving Credit Agreement, of which $4.7 million was
available for letters of credit. No borrowings were outstanding as of June
30, 1994, and letters of credit outstanding amounted to $10.3 million. In
May 1994, the Revolving Credit Agreement was amended to extend its maturity
date to May 31, 1997 and modify the dividend restriction existing at
December 31, 1993.
<PAGE>
The indentures governing the Senior Notes and the Timber Notes
and the Company's Revolving Credit Agreement contain various covenants
which, among other things, limit the payment of dividends and restrict
transactions between the Company and its affiliates. As of June 30, 1994,
under the most restrictive of these covenants, approximately $5.6 million
of dividends may be paid by the Company. On February 24, 1994, the Company
paid dividends of $5.7 million which represented the entire amount
permitted at December 31, 1993. The Company paid an additional $12.3
million of dividends in June 1994 as a result of the amendment to the
Revolving Credit Agreement, as discussed above, and the Company's operating
results for the four months ended April 30, 1994.
On July 20, 1994, SPHC repaid approximately $5.0 million of the
aggregate principal amount outstanding on the Timber Notes in accordance
with Scheduled Amortization.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Form 10-K and Part II, Item 1
of the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1994 (the "Form 10-Q") for information concerning material
legal proceedings with respect to the Company. The following material
developments have occurred with respect to such legal proceedings. Any
capitalized or italicized terms used but not defined in this Item have the
same meaning given to them in the Form 10-K and the Form 10-Q.
MERGER LITIGATION
With respect to the In re Ivan F. Boesky multidistrict securities
litigation matter, on May 17, 1994, the Company and MAXXAM announced that
an agreement in principle had been reached to settle 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. The settlement would resolve
the Fries State, Omicini, Thompson State, Russ, Fries Federal, Thompson
Federal, Boesky and American Red Cross actions described in the Form 10-K .
Of the pending approximately $52.0 million settlement, approximately $33.0
million was paid by insurance carriers of MAXXAM and the Company,
approximately $14.8 million was paid by the Company, and the balance was
paid by other defendants and through the assignment of certain claims. The
settlement is subject to certain contingencies, including a fairness
hearing which will be held at a yet unspecified time in the United States
District Court, Southern District of New York (notice of which hearing will
be furnished to claimants). The above described cash payments are being
held in the registry of the court pending satisfaction of these
contingencies.
Management believes the settlement of these claims is in the best
interest of the Company. See also Note 6 to the Condensed Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations -
- - - Extraordinary item -- loss on litigation settlement" in Part I of this
Report.
With respect to the Russ case, the Court has scheduled a status
conference for January 6, 1995, but has directed the parties to file
dismissal papers with the Court in the event that the above-described
Boesky settlement is approved and finalized prior to the next scheduled
status conference.
ENVIRONMENTAL LITIGATION
With respect to the Sierra Club, et al. v. State Board of
Forestry, et al. (No. 82371) action, on July 21, 1994, the California
Supreme Court issued its opinion affirming the decision of the Court of
Appeal and directing the Superior Court to issue an order compelling the
BOF to rescind its approval of the two THPs in question.
With respect to the Marbled Murrelet, et al. v. Bruce Babbitt, et
al.(No. C93-1400) action, the Court has rescheduled the trial date to
August 15, 1994.
With respect to the Lost Coast League v. The California
Department of Forestry, et al. (No. 94DR0046) action, after a trial on the
merits, on July 14, 1994, the Court issued its decision setting aside the
CDF's approval of the THP in question.
<PAGE>
With respect to the EPIC v. California Department of Forestry, et
al. (No. 94CP0317) action, following the Superior Court's denial of
plaintiff's application for a temporary restraining order, plaintiff sought
an emergency stay of harvesting from the Court of Appeal. On May 17, 1994,
the Court of Appeal denied plaintiff's request for an emergency stay of
harvesting in connection with the six THPs involved in this litigation.
On July 20, 1994, an action entitled EPIC v. California
Department of Forestry, et al. (No. 94DR0198) was filed in Superior Court
of Humboldt County against the CDF, SPHC and the Company. This action
relates to a THP for approximately 97 acres of residual old growth timber
("THP 94-187"), all of such acres containing timber of SPHC. Plaintiff
seeks to set aside the CDF's approval of THP 94-187 and to prevent
harvesting in accordance with the THP.
ITEM 5. OTHER INFORMATION
In Part I, Item 1, "Business--Regulatory and Environmental
Factors" of the Form 10-K, a bill is described which relates to
approximately 54,000 acres of the Company's timberlands. A similar bill
has been introduced in the U.S. Senate by Senator Barbara Boxer (D-CA).
Since these bills are subject to amendment, it is premature to assess the
ultimate content of these bills, the likelihood of any of the bills
passing, or the impact of either of these bills on the financial position
or results of operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
4.1 Second Amendment, dated as of May 26, 1994, to the
Company's Revolving Credit Agreement (incorporated
herein by reference to Exhibit 4.2 to the
Quarterly Report on Form 10-Q of MAXXAM Inc. for
the quarter ended June 30, 1994; File No. 1-3924)
B. REPORTS ON FORM 8-K:
On June 2, 1994, the Company filed a Current Report on
Form 8-K, dated June 2, 1994, describing under Item 5
the settlement of litigation related to its merger with
MGI (see "-- Merger Litigation" under Part II, Item 1
of this Report for a description of such settlement).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
THE PACIFIC LUMBER COMPANY
Date: August 10, 1994 By: JOHN T. LA DUC
John T. La Duc
Vice President - Chief Financial
Officer
(Principal Financial Officer)
Date: August 10, 1994 By: GARY L. CLARK
Gary L. Clark
Vice President - Finance and
Administration
(Principal Accounting Officer)
