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, 1996
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 95565
125 MAIN STREET (Zip Code)
SCOTIA, CALIFORNIA
(Address of Principal
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 November 1, 1996: 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.
THE PACIFIC LUMBER COMPANY
INDEX
PART I. - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet at September 30, 1996 and
December 31, 1995 3
Consolidated Statement of Operations for the three and
nine months ended September 30, 1996 and 1995 4
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1996 and 1995 5
Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures S-1
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,247 $ 26,480
Receivables:
Trade 10,963 19,688
Other 2,388 1,565
Inventories 72,310 75,580
Prepaid expenses and other current assets 5,441 6,933
------------- -------------
Total current assets 103,349 130,246
Timber and timberlands, net of depletion of
$217,507 and $204,856 at September 30, 1996
and December 31, 1995, respectively 326,486 337,390
Property, plant and equipment, net of accumulated
depreciation of $71,479 and $65,276 at
September 30, 1996 and December 31, 1995,
respectively 93,792 93,726
Deferred financing costs, net 20,589 22,397
Deferred income taxes 37,878 41,958
Restricted cash 30,453 31,367
Other assets 5,809 5,502
------------- -------------
$ 618,356 $ 662,586
============= =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 5,009 $ 3,898
Accrued compensation and related benefits 9,433 9,241
Accrued interest 7,342 20,666
Deferred income taxes 10,244 10,244
Other accrued liabilities 3,313 3,077
Long-term debt, current maturities 16,258 14,195
------------- -------------
Total current liabilities 51,599 61,321
Long-term debt, less current maturities 555,598 571,812
Other noncurrent liabilities 26,318 33,613
------------- -------------
Total liabilities 633,515 666,746
------------- -------------
Contingencies
Stockholder's deficit:
Common stock, $.01 par value, 100 shares
authorized and issued - -
Additional capital 157,520 157,520
Accumulated deficit (172,679) (161,680)
------------- -------------
Total stockholder's deficit (15,159) (4,160)
------------- -------------
$ 618,356 $ 662,586
============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales:
Lumber and logs $ 57,522 $ 50,236 $ 168,282 $ 145,619
Other 5,443 8,571 14,885 18,905
------------- ------------- ------------- -------------
62,965 58,807 183,167 164,524
------------- ------------- ------------- -------------
Operating expenses:
Cost of goods sold
(exclusive
of depletion and
depreciation) 36,735 30,945 104,605 87,741
Selling, general and
administrative 3,905 4,387 10,731 11,479
Depletion and depreciation 6,910 6,360 20,621 19,413
------------- ------------- ------------- -------------
47,550 41,692 135,957 118,633
------------- ------------- ------------- -------------
Operating income 15,415 17,115 47,210 45,891
Other income (expense):
Investment, interest and
other income 974 1,020 3,373 2,970
Interest expense (13,557) (13,776) (40,925) (41,654)
------------- ------------- ------------- -------------
Income before income taxes 2,832 4,359 9,658 7,207
Provision in lieu of income taxes (1,359) (1,690) (4,157) (2,690)
------------- ------------- ------------- -------------
Net income $ 1,473 $ 2,669 $ 5,501 $ 4,517
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,501 $ 4,517
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion and depreciation 20,621 19,413
Amortization of deferred financing
costs 1,808 1,673
Decrease in receivables 7,902 12,559
Decrease in accrued and deferred income
taxes 4,080 2,480
Decrease (increase) in inventories, net
of depletion 1,790 (6,216)
Decrease (increase) in prepaid expenses
and other current assets 1,492 (1,104)
Increase in accounts payable 1,111 947
Decrease in accrued interest (13,324) (13,549)
Increase (decrease) in other
liabilities (6,867) 9,434
Other (335) 373
------------- -------------
Net cash provided by operating
activities 23,779 30,527
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets 111 3
Capital expenditures (8,386) (6,012)
------------- -------------
Net cash used for investing activities (8,275) (6,009)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash withdrawals, net 914 563
Dividends paid (16,500) (19,000)
Principal payments on long-term debt (14,151) (13,626)
------------- -------------
Net cash used for financing
activities (29,737) (32,063)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (14,233) (7,545)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,480 24,330
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,247 $ 16,785
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 52,441 $ 53,530
Tax allocation payments to MAXXAM Inc. 300 -
Income taxes paid (refunded) - (5,461)
The accompanying notes are an integral part of these financial statements.
</TABLE>
THE PACIFIC LUMBER COMPANY 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 The Pacific
Lumber Company with the Securities and Exchange Commission for the fiscal
year ended December 31, 1995 (the "Form 10-K"). Any capitalized terms used
but not defined in the following Condensed Notes to Consolidated Financial
Statements have the same meaning given to them in the Form 10-K. All
references to the "Company" include The Pacific Lumber Company 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 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, 1996,
the consolidated results of operations for the three and nine months ended
September 30, 1996 and 1995 and consolidated cash flows for the nine months
ended September 30, 1996 and 1995. Certain reclassifications of prior
period information have been made to conform to the current presentation.
The Company is an indirect, wholly owned subsidiary of MAXXAM Group Inc.
("MGI"). MGI is a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM").
2. RESTRICTED CASH
Restricted cash represents the amount deposited into an account
held by the Trustee under the indenture governing the Timber Notes of the
Company's wholly owned subsidiary, Scotia Pacific Holding Company ("Scotia
Pacific").
At September 30, 1996 and December 31, 1995, cash and cash
equivalents also includes $5,676 and $19,742, respectively, which is
restricted for debt service payments on the succeeding note payment date
for the Timber Notes.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Lumber $ 51,065 $ 57,905
Logs 21,245 17,675
------------- -------------
$ 72,310 $ 75,580
============= =============
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized
Notes due July 20, 2015 $ 336,130 $ 350,233
10-1/2% Pacific Lumber Senior Notes due March
1, 2003 235,000 235,000
Other 726 774
------------- -------------
571,856 586,007
Less: current maturities (16,258) (14,195)
------------- -------------
$ 555,598 $ 571,812
============= =============
</TABLE>
5. CONTINGENCIES
The Company's business is 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. While the Company
does not expect that compliance with such existing laws and regulations
will have a material adverse effect on its financial position, results of
operations or liquidity, the Company is subject to certain pending matters
described below, including the resolution of issues relating to the final
designation of critical habitat for the marbled murrelet, which could have
a material adverse effect on the Company's financial position, results of
operations or liquidity. Moreover, the laws and regulations relating to
the Company's business are modified from time to time and are subject to
judicial and administrative interpretation. There can be no assurance that
certain pending or future governmental regulations, legislation or judicial
or administrative decisions would not materially and adversely affect the
Company or its ability to harvest timber.
In May 1996, the U.S. Fish and Wildlife Service (the "USFWS")
published its final designation of critical habitat for the marbled
murrelet ("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 the
Company's timberlands are included in the Final Designation, the
substantial portion of such 33,000 acres being young growth timber. The
Company's wildlife surveys to date (based upon current survey protocols)
have indicated that it has approximately 6,600 acres of occupied marbled
murrelet habitat. A substantial portion of this land contains virgin and
residual old growth timber and the bulk of it falls within the area
covered by the Final Designation. 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 its timberlands have been "taken" and seeking just
compensation (see Part II, Item 1, "Legal Proceedings--Timber Harvesting
Litigation" for a description of the Takings Litigation). Pursuant to the
Headwaters Agreement described in Note 6 below (the "Headwaters
Agreement"), the Takings Litigation has been stayed by the court 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 financial
position, results of operations or liquidity until such time as all of the
material 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 material. 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 various other species listed as threatened or
endangered under the federal Endangered Species Act ("ESA") and/or the
California Endangered Species Act and to designate critical habitat for
such species. For example, the National Marine Fisheries Service ("NMFS")
recently announced that by April 25, 1997, it would 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 Company's financial position, results of
operations or liquidity. See Note 6 below for a description of certain
terms of the Headwaters Agreement relating to processing and approval of a
multi-species habitat conservation plan ("Multi-Species HCP") covering the
Company's timberlands.
In 1994, the California Board of Forestry ("BOF") adopted certain
regulations regarding compliance with long-term sustained yield objectives.
These regulations require the projected harvest by timber companies, over
time, be capable of sustaining the average annual yield achieved during the
last decade of the planning horizon, which is currently a 100-year planning
period ("Projected Annual Growth"). During any rolling ten-year period,
the average annual harvest over such ten-year period may not exceed
Projected Annual Growth. The regulatory deadline for the Company to submit
a proposed sustained yield plan ("SYP") setting forth, among other things,
its Projected Annual Growth is November 15, 1996. However, the BOF has
adopted and sent to the Office of Administrative Law for its consideration
a regulation to extend the deadline to November 15, 1997. This review is
expected to be completed in the near future. The Company has not completed
its analysis of the projected productivity of its timberlands (including
enhancements to productivity which could be achieved by a variety of
methods). Until an SYP is submitted, reviewed, and fully approved, the
Company is unable to predict the impact that these regulations will have on
its future timber harvesting practices; however, it is possible that the
final results of this analysis could require the Company to reduce its
timber harvest in future years from the average annual harvest that it has
experienced in recent years. The Company believes it would be able to
mitigate the effect of any required reduction in harvest level by
acquisitions of additional timberlands, although there can be no assurance
that it would be able to do so. 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. See Note 6 below
for a description of certain terms of the Headwaters Agreement relating to
the SYP.
Various groups and individuals have filed objections with the
California Department of Forestry ("CDF") and the BOF regarding the CDF's
and the BOF's actions and rulings with respect to certain of the Company's
timber harvesting plans ("THPs") and other timber harvesting operations,
and the Company expects that such groups and individuals will continue to
file such objections to certain of the Company's THPs and other timber
harvesting operations. In addition, lawsuits are pending and/or threatened
which seek to prevent the Company from implementing certain of its approved
THPs and/or which challenge other operations of 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 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 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 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
financial position, results of operations or liquidity.
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 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
financial position, results of operations or liquidity.
6. HEADWATERS AGREEMENT
On September 28, 1996, MAXXAM and the Company (the "Pacific
Lumber Parties") entered into an agreement (the "Headwaters Agreement")
which 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"). The Headwaters Timberlands would be
transferred in exchange for (a) property and consideration (including cash)
from the United States and California having an aggregate fair market value
of $300 million and (b) approximately 7,775 acres of adjacent timberlands
to be acquired by the United States and California (the "Elk River
Timberlands"). The Pacific Lumber Parties have agreed not to conduct
logging operations (including salvage logging) on the Headwaters
Timberlands while the Headwaters Agreement is in effect. The continuing
effectiveness of the Headwaters Agreement is predicated on the satisfaction
of various conditions, including completion within ten months of specified
closing items.
The Headwaters Agreement also provides, among other things, for
expedited processing by the United States of an incidental take permit
("Permit") to be based upon the Multi-Species HCP which is to cover all of
the Company's existing timber properties and any timber properties acquired
as a result of the Headwaters Agreement. The agreement also requires
expedited processing by California of an SYP. 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.
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 various places in this section
and include statements regarding the intent, belief or current expectations
of the Company, its directors or its officers primarily with respect to the
future operating performance of the Company. Readers are cautioned that
any such forward looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results
may differ materially from those in the forward looking statements as a
result of various factors. This section identifies important factors that
could cause such differences.
RESULTS OF 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, 1996 and 1995.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
(In millions of dollars, except shipments and prices)
<S> <C> <C> <C> <C>
Shipments:
Lumber: (1)
Redwood upper grades 12.8 11.5 36.1 35.0
Redwood common
grades 39.2 33.6 120.2 109.4
Douglas-fir upper
grades 2.8 1.8 7.8 5.0
Douglas-fir common
grades 18.8 19.2 56.7 43.7
Other 3.7 2.6 12.0 9.6
------------- ------------- ------------- -------------
Total lumber 77.3 68.7 232.8 202.7
============= ============= ============= =============
Logs (2) 11.3 10.8 37.7 28.5
============= ============= ============= =============
Wood chips (3) 49.3 62.4 141.4 148.4
============= ============= ============= =============
Average sales price:
Lumber: (4)
Redwood upper grades $ 1,368 $ 1,514 $ 1,382 $ 1,510
Redwood common
grades 555 517 536 496
Douglas-fir upper
grades 1,108 1,261 1,138 1,308
Douglas-fir common
grades 489 416 435 395
Logs (4) 446 419 462 393
Wood chips (5) 78 119 79 109
Net sales:
Lumber, net of discount $ 52.5 $ 45.7 $ 150.9 $ 134.4
Logs 5.0 4.5 17.4 11.2
Wood chips 3.9 7.4 11.2 16.2
Cogeneration power 1.1 .9 2.4 1.7
Other .5 .3 1.3 1.0
------------- ------------- ------------- -------------
Total net sales $ 63.0 $ 58.8 $ 183.2 $ 164.5
============= ============= ============= =============
Operating income $ 15.4 $ 17.1 $ 47.2 $ 45.9
============= ============= ============= =============
Operating cash flow (6) $ 22.3 $ 23.5 $ 67.8 $ 65.3
============= ============= ============= =============
Income before income taxes $ 2.8 $ 4.4 $ 9.7 $ 7.2
============= ============= ============= =============
Net income $ 1.5 $ 2.7 $ 5.5 $ 4.5
============= ============= ============= =============
<FN>
- ---------------
(1) Lumber shipments are expressed in millions of board feet.
(2) Log shipments are expressed in millions of feet, net Scribner scale.
(3) Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds.
(4) Dollars per thousand board feet.
(5) Dollars per bone dry unit.
(6) Operating income before depletion and depreciation, also referred to as "EBITDA."
</TABLE>
Shipments
Lumber shipments for the third quarter of 1996 increased from the
third quarter of 1995 due primarily to increased shipments of both common
and upper grade redwood lumber and upper grade Douglas-fir lumber. Lumber
shipments for the nine months ended September 30, 1996 increased from the
nine months ended September 30, 1995 due primarily to increased shipments
of common and upper grade Douglas-fir lumber and redwood upper and common
grade lumber. Log shipments for the nine months ended September 30, 1996
were 37.7 million feet, an increase of 9.2 million feet from the nine
months ended September 30, 1995.
Net sales
Net sales for the third quarter of 1996 increased from the third
quarter of 1995. This increase was principally due to higher shipments of
common and upper grade redwood lumber, upper grade Douglas-fir lumber and
higher average realized prices for common grade redwood and Douglas-fir
lumber, partially offset by lower average realized prices for upper grade
redwood lumber and wood chips.
Net sales for the nine months ended September 30, 1996 increased
from the nine months ended September 30, 1995, principally due to higher
shipments of common and upper grade Douglas-fir and redwood lumber and
increased log shipments. Higher average realized prices for redwood common
lumber, logs, and Douglas-fir common grade lumber also contributed to the
increased net sales. These increases were partially offset by lower
average realized prices for redwood and Douglas-fir, upper grade 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.
See also "--Trends".
Operating income
Operating income for the third quarter of 1996 decreased from the
third quarter of 1995 principally due to lower margin common grade lumber
accounting for a larger percentage of total lumber shipments and lower wood
chip prices, partially offset by the increase in net sales as discussed
above. Operating income for the nine months ended September 30, 1996
increased from the same period in 1995, reflecting the improvement in net
sales as discussed above. Additionally, cost of goods sold for the nine
months ended September 30, 1995 was reduced by $1.5 million of business
interruption proceeds for the settlement of claims related to an April 1992
earthquake.
Income before income taxes
Income before income taxes for the third quarter of 1996
decreased from the third quarter of 1995 principally due to the decrease in
operating income discussed above. Income before income taxes for the nine
months ended September 30, 1996 increased from the same period in 1995,
primarily as a result of the increase in operating income as discussed
above and lower interest expense.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
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 September 30,
1996, under the most restrictive of these covenants, approximately $15.4
million of dividends could be paid by the Company.
As of September 30, 1996, $45.4 million of borrowings was
available under the Company's Revolving Credit Agreement, of which $4.7
million was available for letters of credit and $30.0 million for
timberland acquisitions. No borrowings were outstanding as of September
30, 1996, and letters of credit outstanding amounted to $10.3 million.
As of September 30, 1996, the Company had consolidated long-term
debt of $525.1 million (net of current maturities and restricted cash
deposited in the Liquidity Account) as compared to $540.4 million at
December 31, 1995. The decrease in long-term debt was due to principal
payments on the Timber Notes. The Company anticipates that cash flow from
operations, together with existing cash, cash equivalents and available
sources of financing, will be sufficient to fund its working capital and
capital expenditure requirements for the next year. With respect to its
long-term liquidity, the Company believes that its existing cash and cash
equivalents, together with its ability to generate sufficient cash flow
from operations and obtain both short and long-term financing, should
provide sufficient funds to meet its working capital and capital
expenditure requirements. However, due to its highly leveraged condition,
the Company is more sensitive than less leveraged companies to factors
affecting its operations, including litigation and governmental regulation
affecting its timber harvesting practices, increased competition from other
lumber producers or alternative building products and general economic
conditions.
TRENDS
The Company's business is 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. Compliance with
such laws and regulations together with the cost of litigation incurred in
connection with certain THPs filed by Pacific Lumber have increased the cost
of logging operations. While the Company does not expect that compliance
with such existing laws and regulations will have a material adverse effect
on its financial position, results of operations or liquidity, the Company
is subject to certain pending matters, including the resolution of issues
relating to the Final Designation of critical habitat for the marbled
murrelet, which could have a material adverse effect on the Company's
financial position, results of operations or liquidity.
Moreover, the laws and regulations relating to the Company's business are
modified from time to time and are subject to judicial and administrative
interpretation. There can be no assurance that certain pending or future
governmental regulations, legislation or judicial or administrative
decisions would not materially and adversely affect the Company or its
ability to harvest timber. See also Notes 5 and 6 of the Condensed Notes
to Financial Statements set forth in Part I, Item 1 and Part II, Item 1.
"Legal Proceedings--Timber Harvesting Litigation" for further information,
including a description of the Headwaters Agreement.
Judicial or regulatory actions adverse to the Company, increased
regulatory delays and inclement weather in northern California,
independently or collectively, could impair the Company's ability to
maintain adequate log inventories and force the Company to temporarily idle
or curtail operations at certain of its 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 and Part II, Item 1
of the Company's Quarterly Report on Form 10-Q for the quarterly periods
ended March 31, 1996 and June 30, 1996 (the "Forms 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.
In connection with the Kayes/Miller action and the DOL civil
action, the previously announced settlement became final on August 28,
1996.
TIMBER HARVESTING LITIGATION
In connection with the Marbled Murrelet action, on August 23,
1996, plaintiffs filed a renewed motion for preliminary injunction to
prevent harvesting of dead, dying or diseased trees ("exempt harvesting
operations") in the Company's old growth timberlands. In addition, on
September 12, 1996, plaintiffs requested an emergency TRO with respect to
such harvesting operations. The court denied both of these motions. On
October 9, 1996, Pacific Lumber was cited for accidentally downing a
hemlock tree and ordered to stop exempt harvesting operations in its old
growth timberlands for 24 hours. Plaintiffs sought a TRO and preliminary
injunction based on this citation and related events. After hearing
plaintiff's motions, the court denied the plaintiffs' requests. The CDF
has withdrawn the citation and asked that it be dismissed.
In related matters, in August, 1996, the Sierra Club, EPIC and
others petitioned the BOF to adopt emergency regulations preventing the
Company from undertaking exempt harvesting operations in its old growth
timberlands. On September 9, 1996, the BOF rejected such proposals and
petitions. In September and October, the BOF was formally asked to
reconsider its September 9, 1996 decision. The BOF reconsidered this
matter and, ultimately, enacted no emergency regulation to prevent or
further restrict the Company's exempt harvesting operations in its old
growth timberlands.
On November 4, 1996, the U.S. Ninth Circuit Court of Appeals
heard oral argument concerning defendants' appeal of the preliminary
injunction issued on April 3, 1996 preventing harvesting on eight THPs to
the extent each relies on the Owl Plan; the court has not yet rendered a
decision in this matter. In that regard, the Company has obtained
regulatory reapproval of seven of the enjoined eight THPs without reliance
on the Owl Plan and has, to date, confirmed with the court that four of
those THPs are not subject to the preliminary injunction.
In connection with the EPIC action, on September 24, 1996, the
Company filed its petition for writ of certiorari requesting that the U. S.
Supreme Court consider its appeal of the permanent injunction concerning
harvesting operations in connection with a THP for approximately 237 acres
of primarily virgin old growth timber (THP 90-237).
In connection with the Headwaters Agreement (see Notes 5 and 6
of the Condensed Notes to Financial Statements set forth in Part I, Item
1), the two actions entitled The Pacific Lumber Company, et
al. v. The United States of America and Salmon Creek Corporation v.
California State Board of Forestry, et al. have been stayed by the court at
the request of the parties.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
10 Agreement dated September 28, 1996 between 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 the Company's Form 8-K dated
September 28, 1996)
27 Financial Data Schedule
B. REPORTS ON FORM 8-K:
On October 3, 1996, the Company filed a Current Report
on Form 8-K, dated September 28, 1996, concerning the
Headwaters Agreement.
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, who has signed this report on
behalf of the Registrant and as the principal accounting officer of the
Registrant.
THE PACIFIC LUMBER COMPANY
Date: November 12, 1996 By: GARY L. CLARK
Gary L. Clark
Vice President - Finance and
Administration
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 12,247
<SECURITIES> 0
<RECEIVABLES> 10,963
<ALLOWANCES> 0
<INVENTORY> 72,310
<CURRENT-ASSETS> 103,349
<PP&E> 165,271
<DEPRECIATION> 71,479
<TOTAL-ASSETS> 618,356
<CURRENT-LIABILITIES> 51,599
<BONDS> 571,856
0
0
<COMMON> 0
<OTHER-SE> (15,159)
<TOTAL-LIABILITY-AND-EQUITY> 618,356
<SALES> 183,167
<TOTAL-REVENUES> 183,167
<CGS> 104,605
<TOTAL-COSTS> 104,605
<OTHER-EXPENSES> 31,352
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,925
<INCOME-PRETAX> 9,658
<INCOME-TAX> 4,157
<INCOME-CONTINUING> 5,501
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,501
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
