10-K405 1 FORM 10-K OF MAXXAM GROUP INC. FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 Commission File Number 1-8857 MAXXAM GROUP INC. (Exact name of Registrant as Specified in its Charter) DELAWARE 13-1310680 (State or other (I.R.S. Employer jurisdiction Identification Number) of incorporation or organization) 5847 SAN FELIPE, SUITE 2600 77057 HOUSTON, TEXAS (Zip Code) (Address of Principal Executive Offices) Registrant's telephone number, including area code: (713) 975-7600 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / All of the Registrant's voting stock is held by an affiliate of the Registrant. Number of shares of Common Stock outstanding at March 15, 1995: 100 REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (J)(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. DOCUMENTS INCORPORATED BY REFERENCE: The consolidated financial statements and notes thereto of Kaiser Aluminum Corporation and The Pacific Lumber Company are incorporated herein by reference under Part IV and included as Exhibits 99.1 and 99.2 hereto, respectively. PART I ITEM 1. BUSINESS GENERAL MAXXAM Group Inc. and its wholly owned subsidiaries are collectively referred to herein as the "Company" or "MGI" unless otherwise indicated or the context indicates otherwise. The Company is a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). The Company engages almost exclusively in forest products operations through its wholly owned subsidiaries, The Pacific Lumber Company and its wholly owned subsidiaries (collectively referred to herein as "Pacific Lumber," unless the context indicates otherwise), and Britt Lumber Co., Inc. ("Britt"). Pacific Lumber, which has been in continuous operation for 125 years, engages in all principal aspects of the lumber industry--the growing and harvesting of redwood and Douglas-fir timber, the milling of logs into lumber products and the manufacturing of lumber into a variety of value-added finished products. Britt manufactures redwood and cedar fencing and decking products from small diameter logs, a substantial portion of which Britt acquires from Pacific Lumber (which cannot efficiently process them in its own mills). PACIFIC LUMBER OPERATIONS Timberlands Pacific Lumber owns and manages approximately 189,000 acres of commercial timberlands in Humboldt County in northern California. These timberlands contain approximately three-quarters redwood and one-quarter Douglas-fir timber. Pacific Lumber's acreage is virtually contiguous, is located in close proximity to its sawmills and contains an extensive (1,100 mile) network of roads. These factors significantly reduce harvesting costs and facilitate Pacific Lumber's forest management techniques. The extensive roads throughout Pacific Lumber's timberlands facilitate log hauling, serve as fire breaks and allow Pacific Lumber's foresters access to employ forest stewardship techniques which protect the trees from forest fires, erosion, insects and other damage. Approximately 179,000 acres of Pacific Lumber's timberlands are owned by Scotia Pacific Holding Company (the "SPHC Timberlands"), a special purpose Delaware corporation and wholly owned subsidiary of Pacific Lumber ("SPHC"). Pacific Lumber has the exclusive right to harvest (the "Pacific Lumber Harvest Rights") approximately 8,000 non-contiguous acres of the SPHC Timberlands consisting substantially of virgin old growth redwood and virgin old growth Douglas-fir timber located on numerous small parcels throughout the SPHC Timberlands. Substantially all of SPHC's assets, including the SPHC Timberlands and the GIS (defined below), are pledged as security for SPHC's 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes"). Pacific Lumber harvests and purchases from SPHC all or substantially all of the logs harvested from the SPHC Timberlands. See "-- Relationships With SPHC and Britt Lumber" for a description of this and other relationships among Pacific Lumber, SPHC and Britt. The forest products industry grades lumber in various classifications according to quality. The two broad categories within which all grades fall, based on the absence or presence of knots, are called "upper" and "common" grades, respectively. "Old growth" trees, often defined as trees which have been growing for approximately 200 years or longer, have a higher percentage of upper grade lumber than "young growth" trees (those which have been growing for less than 200 years). "Virgin" old growth trees are located in timber stands that have not previously been harvested. "Residual" old growth trees are located in timber stands which have been selectively harvested in the past. Pacific Lumber has engaged in extensive efforts, at relatively low cost, to supplement the natural regeneration of timber and increase the amount of timber on its timberlands. Regeneration of redwood timber generally is accomplished through the natural growth of redwood sprouts from the stump remaining after a redwood tree is harvested. Such new redwood sprouts grow quickly, thriving on existing mature root systems. In addition, Pacific Lumber supplements natural redwood generation by planting redwood seedlings. Douglas-fir timber grown on Pacific Lumber's timberlands is regenerated almost entirely by planting seedlings. During the 1993-94 planting season (December through March), Pacific Lumber planted approximately 554,000 redwood and Douglas-fir seedlings. Harvesting Practices The ability of Pacific Lumber to sell logs or lumber products will depend, in part, upon its ability to obtain regulatory approval of timber harvesting plans ("THPs"). THPs are required to be filed with the California Department of Forestry ("CDF") prior to the harvesting of timber and are designed to comply with existing environmental laws and regulations. The CDF's evaluation of proposed THPs incorporates review and analysis of such THPs provided by several California and federal agencies and public comments received with respect to such THPs. An approved THP is applicable to specific acreage and specifies the harvesting method and other conditions relating to the harvesting of the timber covered by such THP. The method of harvesting as set forth in a THP is chosen from among a number of accepted methods based upon suitability to the particular site conditions. Pacific Lumber maintains a detailed geographical information system covering its timberlands (the "GIS"). The GIS covers numerous aspects of Pacific Lumber's properties, including timber type, tree class, wildlife data, roads, rivers and streams. By carefully monitoring and updating this data base, Pacific Lumber's foresters are able to develop detailed THPs which are required to be filed with and approved by the CDF prior to the harvesting of timber. Pacific Lumber also utilizes a Global Positioning System ("GPS") which allows precise location of geographic features through satellite positioning. Use of the GPS greatly enhances the quality and efficiency of GIS data. Pacific Lumber principally harvests trees through selective harvesting, which harvests only a portion of the trees in a given area, as opposed to clearcutting, which harvests an entire area of trees in one logging operation. Selective harvesting generally accounts for over 90% (by volume on a net board foot basis) of Pacific Lumber's timber harvest in any given year. Harvesting by clearcutting is used only when selective harvesting methods are impractical due to unique conditions. Selective harvesting allows the remaining trees to obtain more light, nutrients and water thereby promoting faster growth rates. Due to the size of its timberlands and conservative harvesting practices, Pacific Lumber has historically conducted harvesting operations on approximately 5% of its timberlands in any given year. See also Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Trends." Production Facilities Pacific Lumber owns four highly mechanized sawmills and related facilities located in Scotia, Fortuna and Carlotta, California. The sawmills historically have been supplied almost entirely from timber harvested from Pacific Lumber's timberlands. Since 1986, Pacific Lumber has implemented numerous technological advances which have increased the operating efficiency of its production facilities and the recovery of finished products from its timber. Over the past three years, Pacific Lumber's annual lumber production has averaged approximately 259 million board feet, with approximately 286, 228 and 264 million board feet produced in 1994, 1993 and 1992, respectively. Pacific Lumber operates a finishing plant which processes rough lumber into a variety of finished products such as trim, fascia, siding and paneling. These finished products include the industry's largest variety of customized trim and fascia patterns. Pacific Lumber also enhances the value of some grades of common grade lumber by cutting out knot-free pieces and reassembling them into longer or wider pieces in Pacific Lumber's state-of-the-art end and edge glue plant. The result is a standard sized upper grade product which can be sold at a significant premium over common grade products. Pacific Lumber dries the majority of its upper grade lumber before it is sold. Upper grades of redwood lumber are generally air-dried for six to eighteen months and then kiln-dried for seven to twenty-four days to produce a dimensionally stable and high quality product which generally commands higher prices than "green" lumber (which is lumber sold before it has been dried). Upper grade Douglas-fir lumber is generally kiln-dried immediately after it is cut. Pacific Lumber owns and operates 34 kilns, having an annual capacity of approximately 95 million board feet, to dry its upper grades of lumber efficiently in order to produce a quality, premium product. Pacific Lumber also maintains several large enclosed storage sheds which hold approximately 25 million board feet of lumber. In addition, Pacific Lumber owns and operates a modern 25-megawatt cogeneration power plant which is fueled almost entirely by the wood residue from Pacific Lumber's milling and finishing operations. This power plant generates substantially all of the energy requirements of Scotia, California, the town adjacent to Pacific Lumber's timberlands owned by Pacific Lumber where several of its manufacturing facilities are located. Pacific Lumber sells surplus power to Pacific Gas and Electric Company. In 1994, the sale of surplus power to Pacific Gas and Electric Company accounted for approximately 2% of Pacific Lumber's total revenues. Products Lumber. Pacific Lumber primarily produces and markets lumber. In 1994, Pacific Lumber sold approximately 272 million board feet of lumber, which accounted for approximately 82% of Pacific Lumber's total revenues. Lumber products vary greatly by the species and quality of the timber from which it is produced. Lumber is sold not only by grade (such as "upper" grade versus "common" grade), but also by board size and the drying process associated with the lumber. Redwood lumber is Pacific Lumber's largest product category, constituting approximately 77% of Pacific Lumber's total lumber revenues and 63% of Pacific Lumber's total revenues in 1994. Redwood is commercially grown only along the northern coast of California and possesses certain unique characteristics which permit it to be sold at a premium to many other wood products. Such characteristics include its natural beauty, superior ability to retain paint and other finishes, dimensional stability and innate resistance to decay, insects and chemicals. Typical applications include exterior siding, trim and fascia for both residential and commercial construction, outdoor furniture, decks, planters, retaining walls and other specialty applications. Redwood also has a variety of industrial applications because of its chemical resistance and because it does not impart any taste or odor to liquids or solids. Upper grade redwood lumber, which is derived primarily from old growth trees and is characterized by an absence of knots and other defects and a very fine grain, is used primarily in more costly and distinctive interior and exterior applications. During 1994, upper grade redwood lumber products accounted for approximately 17% of Pacific Lumber's total lumber production volume (on a net board foot basis), 41% of its total lumber revenues and 33% of its total revenues. Common grade redwood lumber, Pacific Lumber's largest volume product, has many of the same aesthetic and structural qualities of redwood uppers, but has some knots, sapwood and a coarser grain. Such lumber is commonly used for construction purposes, including outdoor structures such as decks, hot tubs and fencing. In 1994, common grade redwood lumber accounted for approximately 58% of Pacific Lumber's total lumber production volume (on a net board foot basis), 36% of its total lumber revenues and 29% of its total revenues. Douglas-fir lumber is used primarily for new construction and some decorative purposes and is widely recognized for its strength, hard surface and attractive appearance. Douglas-fir is grown commercially along the west coast of North America and in Chile and New Zealand. Upper grade Douglas-fir lumber is derived primarily from old growth Douglas-fir timber and is used principally in finished carpentry applications. In 1994, upper grade Douglas-fir lumber accounted for approximately 3% of Pacific Lumber's total lumber production volume (on a net board foot basis), 7% of its total lumber revenues and 5% of its total revenues. Common grade Douglas-fir lumber is used for a variety of general construction purposes and is largely interchangeable with common grades of other whitewood lumber. In 1994, common grade Douglas-fir lumber accounted for approximately 20% of Pacific Lumber's total lumber production volume, 13% of its total lumber revenues and 10% of its total revenues. Logs. Pacific Lumber currently sells certain logs that, due to their size or quality, cannot be efficiently processed by its mills into lumber. The purchasers of these logs are largely Britt, and surrounding mills which do not own sufficient timberlands to support their mill operations. In 1994, log sales accounted for approximately 9% of Pacific Lumber's total revenues. See "--Relationships With SPHC and Britt Lumber" below. Except for the agreement with Britt described below, Pacific Lumber does not have any significant contractual relationships with any third parties relating to the purchase of logs. Pacific Lumber has historically not purchased significant quantities of logs from third parties; however, Pacific Lumber may from time to time purchase logs from third parties for processing in its mills or for resale to third parties if, in the opinion of management, economic factors are advantageous to Pacific Lumber. See also Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Operating Income" for a description of 1993 log purchases by Pacific Lumber due to inclement weather conditions. Wood Chips. In 1990, Pacific Lumber installed a whole-log chipper to produce wood chips from hardwood trees which were previously left as waste. These chips primarily are sold to third parties for the production of facsimile and other specialty papers. In 1994, hardwood chips accounted for approximately 4% of Pacific Lumber's total revenues. Pacific Lumber also produces softwood chips from the wood residue and waste from its milling and finishing operations. These chips are sold to third parties for the production of wood pulp and paper products. In 1994, softwood chips accounted for approximately 4% of Pacific Lumber's total revenues. Backlog and Seasonality Pacific Lumber's backlog of sales orders at December 31, 1994 and 1993 was approximately $11.9 million and $16.0 million, respectively, the substantial portion of which was delivered in the first quarter of the succeeding fiscal year. Pacific Lumber has historically experienced lower first and fourth quarter sales due largely to the general decline in construction-related activity during the winter months. As a result, Pacific Lumber's results in any one quarter are not necessarily indicative of results to be expected for the full year. Marketing The housing, construction and remodeling markets are the primary markets for Pacific Lumber's lumber products. Pacific Lumber's policy is to maintain a wide distribution of its products both geographically and in terms of the number of customers. Pacific Lumber sells its lumber products throughout the country to a variety of accounts, the large majority of which are wholesalers, followed by retailers, industrial users, exporters and manufacturers. Upper grades of redwood and Douglas-fir lumber are sold throughout the entire United States, as well as to export markets. Common grades of redwood lumber are sold principally west of the Mississippi river, with California accounting for approximately 55% of these sales in 1994. Common grades of Douglas-fir lumber are sold primarily in California. In 1994, no single customer accounted for more than 4% of Pacific Lumber's total revenues. Exports of lumber accounted for approximately 4% of Pacific Lumber's total lumber revenues in 1994. Pacific Lumber markets its products through its own sales staff which focuses primarily on domestic sales. Pacific Lumber actively follows trends in the housing, construction and remodeling markets in order to maintain an appropriate level of inventory and assortment of product. Due to its high quality products, large inventory, competitive prices and long history, Pacific Lumber believes that it has a strong degree of customer loyalty. Competition Pacific Lumber's lumber is sold in highly competitive markets. Competition is generally based upon a combination of price, service and product quality. Pacific Lumber's products compete not only with other wood products but with metals, masonry, plastic and other construction materials made from non-renewable resources. The level of demand for Pacific Lumber's products is dependent on such broad factors as overall economic conditions, interest rates and demographic trends. In addition, competitive considerations, such as total industry production and competitors' pricing, as well as the price of other construction products, affect the sales prices for Pacific Lumber's lumber products. Pacific Lumber currently enjoys a competitive advantage in the upper grade redwood lumber market due to the quality of its timber holdings and relatively low cost production operations. Competition in the common grade redwood and Douglas-fir lumber market is more intense, and Pacific Lumber competes with numerous large and small lumber producers. Employees As of March 1, 1995, Pacific Lumber had approximately 1,520 employees. Relationships With SPHC and Britt Lumber In March 1993, Pacific Lumber consummated its offering of $235 million of 10-1/2% Senior Notes due 2003 (the "Pacific Lumber Senior Notes") and SPHC consummated its offering of $385 million of Timber Notes. Upon the closing of such offerings, Pacific Lumber, SPHC and Britt entered into a variety of agreements. Pacific Lumber and SPHC entered into a Services Agreement (the "Services Agreement") and an Additional Services Agreement (the "Additional Services Agreement"). Pursuant to the Services Agreement, Pacific Lumber provides operational, management and related services with respect to the SPHC Timberlands containing timber of SPHC ("SPHC Timber") not performed by SPHC's own employees. Such services include the furnishing of all equipment, personnel and expertise not within the SPHC's possession and reasonably necessary for the operation and maintenance of the SPHC Timberlands containing the SPHC Timber. In particular, Pacific Lumber is required to regenerate SPHC Timber, prevent and control loss of the SPHC Timber by fires, maintain a system of roads throughout the SPHC Timberlands, take measures to control the spread of disease and insect infestation affecting the SPHC Timber and comply with environmental laws and regulations, including measures with respect to waterways, habitat, hatcheries and endangered species. Pacific Lumber also is required (to the extent necessary) to assist SPHC personnel in updating the GIS and to prepare and file, on SPHC's behalf, all pleadings and motions and otherwise diligently pursue appeals of any denial of any THP and related matters. As compensation for these and the other services to be provided by Pacific Lumber, SPHC pays a fee which is adjusted on January 1 of each year based on a specified government index relating to wood products. The fee was $114,000 per month in 1994 and is expected to be approximately $115,000 per month in 1995. Pursuant to the Additional Services Agreement, SPHC provides Pacific Lumber with a variety of services, including (a) assisting Pacific Lumber to operate, maintain and harvest its own timber properties, (b) updating and providing access to the GIS with respect to information concerning Pacific Lumber's own timber properties, and (c) assisting Pacific Lumber with its statutory and regulatory compliance. Pacific Lumber pays SPHC a fee for such services equal to the actual cost of providing such services, as determined in accordance with generally accepted accounting principles. Pacific Lumber and SPHC also entered into a Master Purchase Agreement (the "Master Purchase Agreement"). The Master Purchase Agreement governs all purchases of logs by the Company from SPHC. Each purchase of logs by Pacific Lumber from SPHC is made pursuant to a separate log purchase agreement (which incorporates the terms of the Master Purchase Agreement) for the SPHC Timber covered by an approved THP. Each log purchase agreement generally constitutes an exclusive agreement with respect to the timber covered thereby, subject to certain limited exceptions. The purchase price must be at least equal to the SBE Price (as defined below). The Master Purchase Agreement provides that if the purchase price equals or exceeds (i) the price for such species and category thereof set forth on the structuring schedule applicable to the Timber Notes, and (ii) the SBE Price, then such price shall be deemed to be the fair market value of such logs. The Master Purchase Agreement defines the "SBE Price," for any species and category of timber, as the stumpage price for such species and category as set forth in the most recent "Harvest Value Schedule" published by the California State Board of Equalization applicable to the timber sold during the period covered by such Harvest Value Schedule. Such Harvest Value Schedules are published for purposes of computing yield taxes and generally are released every six months. As Pacific Lumber purchases logs from SPHC pursuant to the Master Purchase Agreement, Pacific Lumber is responsible, at its own expense, for harvesting and removing the standing SPHC Timber covered by approved THPs and, thus, the purchase price is based upon "stumpage prices." Title to the harvested logs does not pass to Pacific Lumber until the logs are transported to Pacific Lumber's log decks and measured. Substantially all of SPHC's revenues are derived from the sale of logs to Pacific Lumber under the Master Purchase Agreement. Pacific Lumber, SPHC and Salmon Creek Corporation, a wholly owned subsidiary of Pacific Lumber ("Salmon Creek"), also entered into a Reciprocal Rights Agreement granting to each other certain reciprocal rights of egress and ingress through their respective properties in connection with the operation and maintenance of such properties and their respective businesses. In addition, Pacific Lumber entered into an Environmental Indemnification Agreement with SPHC pursuant to which Pacific Lumber agreed to indemnify SPHC from and against certain present and future liabilities arising with respect to hazardous materials, hazardous materials contamination or disposal sites, or under environmental laws with respect to the SPHC Timberlands. Pacific Lumber entered into an agreement with Britt (the "Britt Agreement") which governs the sale of logs by Pacific Lumber and Britt to each other, the sale of hog fuel (wood residue) by Britt to Pacific Lumber for use in Pacific Lumber's cogeneration plant, the sale of lumber by Pacific Lumber and Britt to each other, and the provision by Pacific Lumber of certain administrative services to Britt (including accounting, purchasing, data processing, safety and human resources services). The logs which Pacific Lumber sells to Britt and which are used in Britt's manufacturing operations are sold at approximately 75% of applicable SBE prices (to reflect the lower quality of these logs). Logs which either Pacific Lumber or Britt purchases from third parties and which are then sold to each other are transferred at the actual cost of such logs. Hog fuel is sold at applicable market prices, and administrative services are provided by Pacific Lumber based on Pacific Lumber's actual costs and an allocable share of Pacific Lumber's overhead expenses consistent with past practice. BRITT LUMBER OPERATIONS Business Britt is located in Arcata, California, approximately 45 miles north of Pacific Lumber's headquarters. Britt's primary business is the processing of small diameter redwood logs into wood fencing products for sale to retail and wholesale customers. Britt was incorporated in 1965 and operated as an independent manufacturer of fence products until July 1990, when it was purchased by a subsidiary of the Company. Britt purchases small diameter (6 to 14 inch) and short length (6 to 12 feet) redwood logs from Pacific Lumber and a variety of different diameter and different length logs from various timberland owners. Britt processes logs at its mill into a variety of different fencing products, including "dog-eared" 1" x 6" fence stock in six and eight foot lengths, 4" x 4" fence posts in 6 through 12 foot lengths, and other fencing products in 6 through 12 foot lengths. Britt's purchases of logs from third parties are generally consummated pursuant to short-term contracts of twelve months or less. See "--Pacific Lumber Operations--Relationships With SPHC and Britt Lumber" for a description of Britt's log purchases from Pacific Lumber. Marketing In 1994, Britt sold approximately 79 million board feet of lumber products to approximately 83 different customers. Over one-half of its sales were in northern California. The remainder of its 1994 sales were in southern California, Arizona, Colorado, Hawaii, Nevada, Oregon and Washington. The largest and top five of such customers accounted for approximately 35% and 81%, respectively, of such 1994 sales. Britt markets its products through its own sales person to a variety of customers, including distribution centers, industrial remanufacturers, wholesalers and retailers. Facilities and Employees Britt's manufacturing operations are conducted on 12 acres of land, 10 acres of which are leased on a long-term fixed-price basis from an unrelated third party. Fence production is conducted in a 46,000 square foot mill. An 18 acre log sorting and storage yard is located one quarter of a mile away. The mill was constructed in 1980, and capital expenditures to enhance its output and efficiency are made on a yearly basis. Britt's (single shift) mill capacity, assuming 40 production hours per week, is estimated at 40.3 million board feet of fencing products per year. As of March 1, 1995, Britt employed approximately 100 people. Competition Management estimates that Britt accounted for approximately one quarter of the redwood fence market in 1994 in competition with the northern California mills of Louisiana Pacific, Georgia Pacific and Eel River. REGULATORY AND ENVIRONMENTAL FACTORS Regulatory and environmental issues play a significant role in Pacific Lumber's forest products operations. Pacific Lumber's forest products operations are subject to a variety of California, and in some cases, federal laws and regulations dealing with timber harvesting, endangered species, and air and water quality. These laws include the California Forest Practice Act (the "Forest Practice Act"), which requires that timber harvesting operations be conducted in accordance with detailed requirements set forth in the Forest Practice Act and in the regulations promulgated thereunder by the California Board of Forestry (the "BOF"). The federal Endangered Species Act (the "ESA") and the California Endangered Species Act (the "CESA") provide in general for the protection and conservation of specifically listed fish, wildlife and plants which have been declared to be endangered or threatened. The California Environmental Quality Act ("CEQA") provides, in general, for protection of the environment of the state, including protection of air and water quality and of fish and wildlife. In addition, the California Water Quality Act requires, in part, that Pacific Lumber's operations be conducted so as to reasonably protect the water quality of nearby rivers and streams. For instance, in March and May 1994, the BOF approved additional rules providing for among other things, inclusion of additional information in THPs (concerning, among other things, timber generation systems, the presence or absence of fish, wildlife and plant systems, potentially impacted watersheds and compliance with long term sustained yield objectives) and modification of certain timber harvesting practices (including the creation of buffer zones between harvest areas and increases in the amount of timber required to be retained in a harvest area). See also Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Trends" for a description of the sustained yield regulations. Pacific Lumber does not expect that compliance with such existing laws and regulations will have a material adverse effect on its timber harvesting practices or future operating results. There can be no assurance, however, that future legislation, governmental regulations or judicial or administrative decisions would not adversely affect Pacific Lumber. Various groups and individuals have filed objections with the CDF regarding the CDF's actions and rulings with respect to certain of Pacific Lumber's THPs, and the Company expects that such groups and individuals will continue to file objections to certain of Pacific Lumber's THPs. In addition, lawsuits are pending which seek to prevent Pacific Lumber from implementing certain of its approved THPs. These challenges have severely restricted Pacific Lumber's ability to harvest virgin old growth timber on its property during the past few years. To date, litigation with respect to Pacific Lumber's THPs relating to young growth and residual old growth timber has been limited; however, no assurance can be given as to the extent of such litigation in the future. See Item 3. "Legal Proceedings-- Timber Harvesting Litigation." In June 1990, the U.S. Fish and Wildlife Service (the "USFWS") designated the northern spotted owl as threatened under the ESA. The owl's range includes all of Pacific Lumber's timberlands. The ESA and its implementing regulations (and related California regulations) generally prohibit harvesting operations in which individual owls might be killed, displaced or injured or which result in significant habitat modification that could impair the survival of individual owls or the species as a whole. Since 1988, biologists have conducted inventory and habitat utilization studies of northern spotted owls on Pacific Lumber's timberlands. Pacific Lumber has developed and the USFWS has given its full concurrence to a comprehensive wildlife management plan for the northern spotted owl (the "Owl Plan"). By incorporating the Owl Plan into each THP filed with the CDF, Pacific Lumber is able to expedite the approval process with respect to its THPs. Both federal and state agencies continue to review and consider possible additional regulations regarding the northern spotted owl. It is uncertain if such additional regulations will become effective or their ultimate content. In March 1992, the marbled murrelet was approved for listing as endangered under the CESA. Pacific Lumber has incorporated, and will continue to incorporate as required, additional mitigation measures into its THPs to protect and maintain habitat for marbled murrelets on its timberlands. The California Department of Fish and Game (the "CDFG") requires Pacific Lumber to conduct pre-harvest marbled murrelet surveys and to provide certain other site specific mitigations in connection with its THPs covering virgin old growth timber and unusually dense stands of residual old growth timber. Such surveys can only be conducted during April to July, the murrelets' nesting and breeding season. Accordingly, such surveys are expected to delay the review and approval process with respect to certain of the THPs filed by Pacific Lumber. The results of such surveys could prevent Pacific Lumber from conducting certain of its harvesting operations. In October 1992, the USFWS issued its final rule listing the marbled murrelet as a threatened species under the ESA in the tri-state area of Washington, Oregon and California. In January 1994, the USFWS proposed designation of critical habitat for the marbled murrelet under the ESA. This proposal is subject to public comment, hearings and possible future modification. Both federal and state agencies continue to review and consider possible additional regulations regarding the marbled murrelet. It is uncertain if such additional regulations will become effective or their ultimate content. Pacific Lumber's wildlife biologist is conducting research concerning the marbled murrelet on Pacific Lumber's timberlands and is currently developing a comprehensive management plan for the marbled murrelet (the "Murrelet Plan") similar to the Owl Plan. Pacific Lumber is continuing to work with the USFWS and the other government agencies on the Murrelet Plan. It is uncertain when the Murrelet Plan will be completed. Laws and regulations dealing with Pacific Lumber's operations are subject to change and new laws and regulations are frequently introduced concerning the California timber industry. From time to time, bills are introduced in the California legislature and the U.S. Congress which relate to the business of Pacific Lumber, including the protection and acquisition of old growth and other timberlands, endangered species, environmental protection and the restriction, regulation and administration of timber harvesting practices. Because such bills are subject to amendment, it is premature to assess the ultimate content of these bills, the likelihood of any of the bills passing, or the impact of any of these bills on the financial position or results of operations of the Company. Furthermore, any bills which are passed are subject to executive veto and court challenge. In addition to existing and possible new or modified statutory enactments, regulatory requirements, administrative and legal actions, the California timber industry remains subject to potential California or local ballot initiatives and evolving federal and California case law which could affect timber harvesting practices. It is, however, impossible to assess the effect of such matters on the future operating results or consolidated financial position of the Company. ITEM 2. PROPERTIES A description of the Company's properties is included under Item 1 above. ITEM 3. LEGAL PROCEEDINGS MERGER LITIGATION As a result of the below-described settlement of the In Re Ivan F. Boesky Multidistrict Securities Litigation (the "Boesky Settlement"), all material stockholder claims against the Company and other defendants have been resolved and have been dismissed or are in the process of being dismissed. During the mid-to-late 1980's, Pacific Lumber was named as defendant along with several other entities and individuals, including MAXXAM and MGI, in various class, derivative and other actions brought in the Superior Court of Humboldt County by former stockholders of Pacific Lumber relating to the cash tender offer (the "Tender Offer") for the shares of Pacific Lumber by a subsidiary of MGI and the subsequent merger (the "Merger"), as a result of which Pacific Lumber became a wholly owned subsidiary of MGI (the "Humboldt County Lawsuits"). As of the date the Court approved the Boesky Settlement, the Humboldt County Lawsuits which remained open were captioned: Fries, et al. v. Carpenter, et al. (No. 76328) ("Fries State"); Omicini, et al. v. The Pacific Lumber Company, et al. (No. 76974) ("Omicini"); Thompson, et al. v. Elam, et al. (No. 78467) ("Thompson State"); and Russ, et al. v. Milken, et al. (No. DR-85429) ("Russ"). The Humboldt County Lawsuits generally alleged, among other things, that in documents filed with the Securities and Exchange Commission (the "Commission"), the defendants made false statements concerning, among other things, the estimated value of Pacific Lumber's assets, financing for the Tender Offer and the Merger and minority stockholders' appraisal rights, and that the individual directors of Pacific Lumber breached certain fiduciary duties owed stockholders and other constituencies of Pacific Lumber. MGI and MAXXAM were alleged to have aided and abetted these violations and committed other wrongs. The Thompson State, Omicini and Fries State suits seek compensatory damages in excess of $1 billion, exemplary damages in excess of $750 million, rescission and other relief. The Russ suit did not specify the amount of damages sought. In 1988, two lawsuits similar to the Humboldt County Lawsuits were filed in the United States District Court, Central District of California-- Fries, et al. v. Hurwitz, et al. (No. 88-3493 RMT) ("Fries Federal") and Thompson, et al. v. MAXXAM Group Inc., et al. (No. 88-06274) ("Thompson Federal"). These actions sought damages and relief similar to that sought in the Humboldt County Lawsuits. In May 1989, the Thompson Federal and Fries Federal actions were consolidated in the In re Ivan F. Boesky Multidistrict Securities Litigation in the United States District Court, Southern District of New York (MDL No. 732 M 21-45-MP) ("Boesky"). An additional action filed in November 1989, entitled American Red Cross, et al. v. Hurwitz, et al. (No. 89 Civ 7722) ("American Red Cross"), was also consolidated with the Boesky action. The American Red Cross action contained allegations and sought damages and relief similar to that contained in the Humboldt County Lawsuits. At a fairness hearing held on November 17, 1994, the Court approved a settlement of, and dismissed with prejudice, the pending federal actions against the settling defendants. The actions dismissed with prejudice include specifically: In Re Ivan F. Boesky Multidistrict Securities Litigation; the Fries Federal action; the Thompson Federal action; and the American Red Cross, et al. v. Hurwitz, et al. action. The court's order also provides for the dismissal of all other shareholder claims against the defendants, including dismissal of the Fries State, Omicini, and Russ actions in their entirety, and all shareholder claims in the Thompson State action. Of the approximately $52 million settlement, approximately $33 million was paid by insurance carriers of the Company, MAXXAM, and Pacific Lumber, approximately $14.8 million was paid by Pacific Lumber and the balance was paid by other defendants and through the assignment of certain claims. Dismissals have already been entered or are in process with respect to all of the dismissed actions. In September 1989, seven past and present employees of Pacific Lumber brought an action against Pacific Lumber, MAXXAM, MGI, certain current and former directors and officers of Pacific Lumber, MAXXAM and MGI, and First Executive Life Insurance Company ("First Executive") (subsequently dismissed as a defendant) in the United States District Court, Northern District of California, entitled Kayes, et al. v. Pacific Lumber Company, et al. (No. C89-3500) ("Kayes"). Plaintiffs purport to be participants in or beneficiaries of Pacific Lumber's former Retirement Plan (the "Retirement Plan") for whom a group annuity contract was purchased from Executive Life Insurance Company ("Executive Life") in 1986 after termination of the Retirement Plan. The Kayes action alleges that the Pacific Lumber, MAXXAM and MGI defendants breached their ERISA fiduciary duties to participants and beneficiaries of the Retirement Plan by purchasing the group annuity contract from First Executive and selecting First Executive to administer the annuity payments. Plaintiffs seek, among other things, a new group annuity contract on behalf of the Retirement Plan participants and beneficiaries. This case was dismissed on April 14, 1993 and was refiled as Jack Miller, et al. v. Pacific Lumber Company, et al. (No. C-89-3500-SBA) ("Miller") on April 26, 1993; the Miller case was dismissed on May 14, 1993. These dismissals have been appealed. On October 3, 1994, the U.S. House of Representatives approved a bill amending ERISA, which had previously been passed by the U.S. Senate, and is intended, in part, to overturn the U.S. District Court's dismissal of the Miller action and to make available certain remedies not previously provided under ERISA. On October 22, 1994, the President signed this legislation (the Pension Annuitants' Protection Act of 1994). As a result of the passage of this legislation, the Miller plaintiffs have asked the U.S. Ninth Circuit Court of Appeals to vacate the U. S. District Court judgment dismissing their case and to remand the case to the U.S. District Court; defendants have opposed this request. It is uncertain what effect, if any, this legislation will have on the pending appeal or the final disposition of this case. The defendants and plaintiff in the DOL civil action have invited the Miller plaintiffs to participate in the court- supervised settlement discussions concerning the Miller and DOL civil actions. In June 1991, the U.S. Department of Labor filed a civil action entitled Lynn Martin, Secretary of the U.S. Department of Labor v. The Pacific Lumber Company, et al. (No. 91-1812-RHS) ("DOL civil action") in the United States District Court, Northern District of California, against Pacific Lumber, MAXXAM, MGI and certain of their current and former officers and directors. The allegations in the DOL civil action are substantially similar to that in the Kayes action. The DOL civil action has been stayed pending resolution of the Kayes and Miller appeals. Formal settlement negotiations continue to be overseen by the court in this matter. Management is of the opinion that the outcome of the foregoing litigation should not have a material adverse effect on the Company's consolidated financial position or results of operations. TIMBER HARVESTING LITIGATION Various actions, similar to each other, have been filed against Pacific Lumber, MAXXAM, MGI, various state officials and others, alleging, among other things, violations of the Forest Practice Act, the CEQA, ESA, CESA, and/or related regulations. These actions seek to prevent Pacific Lumber from harvesting certain of its THPs. The EPIC v. The California Department of Forestry, et al. (No. 90CP0341) action in Superior Court of Humboldt County, filed by the Environmental Protection Information Center ("EPIC") in May 1990, relates to a THP for approximately 378 acres of virgin old growth timber. A nearly identical action in Superior Court of Humboldt County, entitled Sierra Club v. The California Department of Forestry, et al. (No. 90CP0405), was brought by the Sierra Club in June 1990. These actions were subsequently consolidated and after a trial on the merits, the Superior Court in June 1992 issued its judgment in favor of Pacific Lumber and affirming the BOF's approval of this THP. The trial court's decision was appealed by the Company; however, the Company has decided to withdraw the THP involved in the above-referenced litigation and moot the appeal. The EPIC, et al. v. California State Board of Forestry, et al. (No. 91CP244) action in the Superior Court of Humboldt County, filed by the Sierra Club and EPIC in 1991, relates to a THP for approximately 237 acres of virgin old growth timber ("THP 90-237"). After the Superior Court reversed the BOF's approval of this THP, certain modifications were made to the THP which was then unanimously approved by the BOF. The Superior Court later issued judgment in favor of Pacific Lumber. On appeal, the Court of Appeal in October 1993 affirmed the trial court's judgment approving THP 90-237. In April 1993, EPIC filed another action with respect to THP 90- 237 entitled Marbled Murrelet, et al. v. Bruce Babbitt, Secretary, Department of Interior, et al. (No. C93-1400) in the U.S. District Court for the Northern District of California, alleging an unlawful "taking" of the marbled murrelet under the ESA. The Court dismissed the federal and state agency defendants and limited plaintiffs' claims against Pacific Lumber. In January 1994, plaintiffs appealed the dismissal of the state and federal defendants. Harvesting was stayed pending outcome of a trial which commenced in August 1994 and concluded in September 1994. On February 24, 1995, the judge ruled that THP 237 is occupied by the marbled murrelet and permanently enjoined implementation of THP 237 in order to protect the marbled murrelet. On March 10, 1995, the Sierra Club and EPIC filed an action entitled Sierra Club and EPIC v. The California Department of Forestry, Scotia Pacific Holding Co., et al. (No. 95 DR 0072) in Superior Court of Humboldt County. This action relates to an exemption for forest health which SPHC had previously filed covering SPHC timberlands. The plaintiffs allege, among other things, that the defendants have violated the CEQA, the CESA and the Forest Practice Act and seek, among other things, to stay all operations authorized by the exemption. The Company's management believes that the matters described above are unlikely to have a material adverse effect on the Company's consolidated financial position or results of operations. See Item 1. "Business--Regulatory and Environmental Factors" above for a general description of regulatory and similar matters which could affect Pacific Lumber's timber harvesting practices and future operating results. ZERO COUPON NOTE LITIGATION In April 1989, an action was filed against the Company, MAXXAM, MAXXAM Properties Inc. ("MPI," a wholly owned subsidiary of MGI) and certain of MAXXAM's directors in the Court of Chancery of the State of Delaware, entitled Progressive United Corporation v. MAXXAM Inc., et al., Civil Action No. 10785. Plaintiff purports to bring this action as a stockholder of MAXXAM derivatively on behalf of MAXXAM and MPI. In May 1989, a second action containing substantially similar allegations was filed in the Court of Chancery of the State of Delaware, entitled Wolf v. Hurwitz, et al. (No. 10846) and the two cases were consolidated (collectively, the "Zero Coupon Note" actions). The Zero Coupon Note actions relate to a Put and Call Agreement between MPI and Mr. Charles Hurwitz (Chairman of the Board of the Company, MAXXAM and MPI), as well as a predecessor agreement (the "Prior Agreement"). Among other things, the Put and Call Agreement provided that Mr. Hurwitz had the option (the "Call") to purchase from MPI certain notes (or the common stock of MAXXAM into which they were converted) for $10.3 million. In July 1989, Mr. Hurwitz exercised the Call and acquired 990,400 shares of MAXXAM's common stock. The Zero Coupon Note actions generally allege that in entering into the Prior Agreement Mr. Hurwitz usurped a corporate opportunity belonging to MAXXAM, that the Put and Call Agreement constituted an alleged waste of corporate assets of MAXXAM and MPI, and that the defendant directors breached their fiduciary duties in connection with these matters. Plaintiffs seek to have the Put and Call Agreement declared null and void, among other remedies. OTHER LITIGATION MATTERS The Company is involved in various other claims, lawsuits and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is held entirely by MAXXAM. Accordingly, the Company's common stock is not traded on any stock exchange and has no established public trading market. The Company declared and paid cash dividends on its common stock of $20.0 million in 1993. No dividends were declared or paid in 1994. As of December 31, 1994, approximately $4.9 million of dividends could be paid by the Company. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition and Investing and Financing Activities" and Note 5 to the Consolidated Financial Statements appearing in Item 8. The 11-1/4% Senior Secured Notes due 2003 (the "MGI Senior Notes") and the 12-1/4% Senior Secured Discount Notes due 2003 (the "MGI Discount Notes," which, together with the MGI Senior Notes, are referred to collectively as the "MGI Notes") are secured by the Company's pledge of 100% of the common stock of Pacific Lumber, Britt and MPI, and by a pledge of 28 million common shares of Kaiser Aluminum Corporation ("Kaiser") that are owned by MAXXAM. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition and Investing and Financing Activities" and Note 5 to the Consolidated Financial Statements appearing in Item 8. ITEM 6. SELECTED FINANCIAL DATA Not applicable. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As a result of the Forest Products Group Formation (as discussed in Note 1 to the Consolidated Financial Statements), the Company's financial statements have been restated to present the historical results of operations relating to the net assets transferred to MAXXAM pursuant to the Forest Products Group Formation. Such restatement has been made with respect to all periods presented in this Report in a manner similar to that which would be presented if the Company had discontinued the operations relating to such net assets. RESULTS OF OPERATIONS The following should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto appearing in Item 8. The following table presents selected historical operational and financial information for the years ended December 31, 1994 and 1993.
Years Ended December 31, 1994 1993 (In millions of dollars, except shipments and prices) Shipments: Lumber: (1) Redwood upper grades 52.9 68.3 Redwood common grades 218.4 184.7 Douglas-fir upper grades 8.6 10.7 Douglas-fir common grades and other 66.3 46.4 ---------- ---------- Total lumber 346.2 310.1 ========== ========== Logs (2) 17.7 18.6 ========== ========== Wood chips (3) 210.3 156.8 ========== ========== Average sales price: Lumber: (4) Redwood upper grades $ 1,443 $ 1,275 Redwood common grades 460 469 Douglas-fir upper grades 1,420 1,218 Douglas-fir common grades 444 447 Logs (4) 615 704 Wood chips (5) 83 81 Net sales: Lumber, net of discount $ 216.5 $ 202.6 Logs 10.9 13.1 Wood chips 17.4 12.7 Cogeneration power 3.5 3.8 Other 1.3 1.2 ---------- ---------- Total net sales $ 249.6 $ 233.4 ========== ========== Operating income $ 77.8 $ 53.0 ========== ========== Operating cash flow (6) $ 103.8 $ 78.8 ========== ========== Income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles $ 14.8 $ (17.7) ========== ========== Loss from net assets transferred to MAXXAM, net of minority interests and related income taxes $ - $ (513.0) ========== ========== Net income (loss) $ 3.6 $ (531.9) ========== ========== (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."
Shipments Lumber shipments to third parties in 1994 were 346.2 million board feet, an increase of 12% from 310.1 million board feet in 1993. This increase was attributable to an 18% increase in redwood common lumber shipments and a 43% increase in shipments of common grade Douglas-fir and other lumber, partially offset by a 23% decrease in shipments of upper grade redwood lumber. Log shipments in 1994 were 17.7 million feet (net Scribner scale), a decrease of 5% from 18.6 million feet in 1993. Old growth trees constitute Pacific Lumber's principal source of upper grade redwood lumber. Due to the severe restrictions on Pacific Lumber's ability to harvest virgin old growth timber on its property (see "--Trends"), Pacific Lumber's supply of upper grade lumber has decreased in some premium product categories. Pacific Lumber has been able to lessen the impact of these decreases by augmenting its production facilities to increase its recovery of upper grade lumber from smaller diameter logs and increasing the production of manufactured upper grade lumber products through its end and edge glue facility (which was expanded during 1994). However, unless Pacific Lumber is able to sustain the harvest level of old growth trees it has experienced in recent years, Pacific Lumber 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 1994 increased by approximately 5% from 1993. This increase was principally due to increased shipments of redwood common lumber, a 13% increase in the average realized price of upper grade redwood lumber and increased shipments of common grade Douglas-fir and other lumber, partially offset by decreased shipments of upper grade redwood lumber, a 2% decrease in the average realized price of redwood common lumber and a 13% decrease in the average realized price of log sales. The increase in other sales for 1994 as compared to 1993 was attributable to increased sales of wood chips reflecting higher demand from pulp mills. Operating income Operating income for 1994 increased by approximately 47% as compared to 1993. This increase was principally due to higher sales of lumber and wood chips, lower purchases of lumber and logs from third parties, improved sawmill productivity and reduced overhead costs. The Company arranged for the purchase of a significant number of logs early in 1993 in response to concerns regarding inclement weather conditions hindering logging activities on the Company's timberlands during the first five months of 1993. The cost associated with the purchase of logs from third parties significantly exceeds the Company's cost to harvest its own timber. As a result of the Company's last-in, first-out (LIFO) methodology of accounting for inventories, a substantial portion of the additional cost associated with the purchased logs was charged to cost of sales in the third quarter of 1993. Cost of goods sold for 1993 was reduced by a $1.2 million business interruption insurance claim as a result of the April 1992 earthquake. Cost of goods sold as a percentage of sales was approximately 52% and 58% for 1994 and 1993, respectively. The decrease for 1994 reflects the impact of purchased logs in 1993 as discussed above. Logging costs have increased primarily due to the harvest of smaller diameter logs and, to a lesser extent, compliance with environmental regulations relating to the harvesting of timber and litigation costs incurred in connection with certain THPs filed by Pacific Lumber. See "--Trends." During the past few years, the Company has significantly increased its production capacity for manufactured lumber products by assembling knot-free pieces of common grade lumber into wider and longer pieces in the Company's end and edge glue plant. This manufactured lumber results in a significant increase in lumber recovery and produces a standard size upper grade product which is sold at a premium price compared to common grade products of similar dimensions. The Company has instituted a number of measures at its sawmills during the past several years designed to enhance the efficiency of its operations such as expansion of its manufactured lumber facilities and other improvements in lumber recovery, automated lumber handling and the modification of its production scheduling to increase cogeneration power revenues. Income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles Income from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles increased for 1994 as compared to 1993. This increase resulted from the increase in operating income, higher investment, interest and other income and decreased interest expense. Investment, interest and other income for 1994 includes the receipt of a franchise tax refund of $7.2 million (as described in Note 1 to the Consolidated Financial Statements) and net gains on marketable securities of $1.7 million. Investment, interest and other income for 1993 includes net gains on marketable securities of $6.4 million. Interest expense decreased due to lower interest rates resulting from the refinancing of the Company's long- term debt during 1993. Credit (provision) in lieu of income taxes The credit in lieu of income taxes for 1994 includes a credit relating to reserves the Company no longer believes are necessary. Loss from net assets transferred to MAXXAM The loss from net assets transferred to MAXXAM for 1993 was $513.0 million. The operations associated with these net assets consist primarily of aluminum operations conducted by Kaiser and the real estate management and development operations of Palmas del Mar. Aluminum operations incurred losses for 1993 of $501.3 million, consisting of (a) losses before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles of $74.4 million, (b) benefits for minority interests of $3.6 million and income taxes of $31.1 million, (c) an extraordinary loss on the redemption of debt of $19.0 million, net of related benefits for minority interests of $2.8 million and income taxes of $11.3 million, and (d) losses attributable to the cumulative effect of changes in accounting principles for postretirement benefits other than pensions and postemployment benefits of $440.5 million, net of related benefits for minority interests of $64.6 million and income taxes of $237.7 million, and income taxes of $2.0 million. Real estate operations, together with the other net assets transferred to MAXXAM pursuant to the Forest Products Group Formation, incurred losses before income taxes, extraordinary item and cumulative effect of changes in accounting principles of $8.5 million and losses attributable to the cumulative effect of the change in accounting principle for income taxes of $3.2 million for 1993. See Notes 1 and 2 to the Consolidated Financial Statements. Extraordinary items The litigation settlement in the second quarter of 1994 (as described in Note 9 to the Consolidated Financial Statements) resulted in an extraordinary loss of $14.9 million, net of related income taxes of $6.3 million. The extraordinary loss consists of Pacific Lumber's $14.8 million cash payment to the settlement fund, a $2.0 million accrual for additional contingent claims and $4.4 million of related legal fees. See also Item 3. "Legal Proceedings--Merger Litigation." The refinancing of Pacific Lumber's outstanding public indebtedness on March 23, 1993, consisting of the 12% Series A Senior Notes, the 12.2% Series B Senior Notes and the 12-1/2% Senior Subordinated Debentures (collectively, the "Old Pacific Lumber Securities"), and the Company's 12-3/4% Notes on August 4, 1993 resulted in an extraordinary loss of $17.2 million, net of related income taxes of $8.9 million. The extraordinary loss consists primarily of the redemption premiums paid and the write-off of unamortized deferred financing costs on the Old Pacific Lumber Securities and the 12-3/4% Notes. See Note 5 to the Consolidated Financial Statements. Cumulative effect of changes in accounting principles As of January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109") and Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106") as more fully described in Notes 6 and 7 to the Consolidated Financial Statements. The cumulative effect of the change in accounting principle for the adoption of SFAS 109 increased results of operations by $14.9 million. The cumulative effect of the change in accounting principle for the adoption of SFAS 106 reduced results of operations by $2.3 million, net of related income taxes of $1.6 million. The new accounting method has no effect on the Company's cash outlays for postretirement benefits, nor will the cumulative effect of the change in accounting principle affect the Company's compliance with its existing debt covenants. The Company reserves the right to amend or terminate these benefits. FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES The Company conducts its operations primarily through its subsidiaries. Creditors of the Company's subsidiaries have priority with respect to the assets and earnings of such subsidiaries over the claims of the creditors of the Company, including the holders of the MGI Notes. As of December 31, 1994, the indebtedness of the subsidiaries reflected on the Company's Consolidated Balance Sheet was $599.7 million. The indentures governing the Pacific Lumber Senior Notes and the Timber Notes (the "Timber Note Indenture") and Pacific Lumber's Revolving Credit Agreement contain various covenants which, among other things, restrict transactions between Pacific Lumber and its affiliates and the payment of dividends. Pacific Lumber can pay dividends in an amount that is generally equal to 50% of Pacific Lumber's consolidated net income plus depletion and cash dividends received from SPHC (for periods subsequent to March 1, 1993), exclusive of the net income and depletion of SPHC so long as any Timber Notes are outstanding. As of December 31, 1994, under the most restrictive of these covenants, approximately $20.8 million of dividends could be paid by Pacific Lumber. Pacific Lumber paid an aggregate of $24.5 million of dividends in 1994. As of December 31, 1994, the Company had consolidated working capital of $102.5 million and long-term debt of $736.4 million (net of current maturities and restricted cash deposited in a liquidity account for the benefit of the holders of the Timber Notes) as compared to $81.9 million and $738.7 million, respectively, at December 31, 1993. The decrease in long-term debt was primarily due to principal payments on the Timber Notes. 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 working capital and capital expenditures requirements of the Company and its respective subsidiaries 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. Substantially all of the Company's consolidated assets are owned by Pacific Lumber and a significant portion of Pacific Lumber's consolidated assets are owned by SPHC. The Company expects that Pacific Lumber will provide a major portion of the Company's future operating cash flow. Pacific Lumber is dependent upon SPHC for a significant portion of its operating cash flow. The holders of the Timber Notes have priority over the claims of creditors of Pacific Lumber with respect to the assets and cash flow of SPHC and the holders of the Pacific Lumber Senior Notes will have priority over the claims of creditors of the Company with respect to the assets and cash flows of Pacific Lumber. Under the terms of the Timber Note Indenture, SPHC will not have available cash for distribution to Pacific Lumber unless SPHC's cash flow from operations exceeds the amounts required by the Timber Note Indenture to be reserved for the payment of current debt service (including interest, principal and premiums) on the Timber Notes, capital expenditures and certain other operating expenses. The Timber Note Indenture prohibits SPHC from incurring any additional indebtedness for borrowed money and limits the business activities of SPHC to the ownership and operation of its timber and timberlands and actions reasonably incidental thereto. The Timber Notes are structured to link, to the extent of cash available, the deemed depletion of SPHC's timber (through the harvest and sale of logs) to required amortization of the Timber Notes. The required amount of amortization due on any Timber Note payment date is determined by various mathematical formulas set forth in the Timber Note Indenture. The minimum amount of principal which SPHC must pay (on a cumulative basis) through any Timber Note payment date in order to avoid an Event of Default (as defined in the Timber Note Indenture) is referred to as Rated Amortization. Rated Amortization on the Timber Notes is as follows: years ending December 31, 1995 - $5.7 million; 1996 - $8.3 million; 1997 - $8.5 million; 1998 - $8.7 million; 1999 - $10.2 million; thereafter - $322.4 million. If all payments of principal are made in accordance with Rated Amortization, the payment date on which SPHC will pay the final installment of principal is July 20, 2015. The amount of principal which SPHC must pay through each Timber Note payment date in order to avoid payment of prepayment or deficiency premiums is referred to as Scheduled Amortization. If all payments of principal are made in accordance with Scheduled Amortization, the payment date on which SPHC will pay the final installment of principal is July 20, 2009. Scheduled Amortization on the Timber Notes is as follows: years ending December 31, 1995 - $13.6 million; 1996 - $14.1 million; 1997 - $16.2 million; 1998 - $19.3 million; 1999 - $21.7 million; thereafter - $278.9 million. During 1993, 1994 and on January 20, 1995, SPHC repaid approximately $8.0 million, $13.1 million and $8.2 million, respectively, of the aggregate principal amount outstanding on the Timber Notes in accordance with Scheduled Amortization. The Company expects that, consistent with SPHC's purposes and its need to fund operating and capital expenses, substantially all of SPHC's available cash will be periodically distributed to Pacific Lumber. Once appropriate provision is made for current debt service on the Timber Notes and expenditures for operating and capital costs, and in the absence of certain Trapping Events (as defined in the Timber Note Indenture) or outstanding judgments, the Timber Note Indenture does not limit monthly distributions of available cash from SPHC to Pacific Lumber. In the event SPHC's cash flows are not sufficient to generate distributable funds to Pacific Lumber, Pacific Lumber's ability to pay interest on the Pacific Lumber Senior Notes and to service its other indebtedness would be materially impaired and the Company's ability to pay interest on the MGI Notes and its other indebtedness would also be materially impaired. SPHC paid $88.9 million and $58.3 million of dividends to Pacific Lumber during the year ended December 31, 1994 and the period from March 23, 1993 to December 31, 1993, respectively. The indenture governing the MGI Notes, among other things, restricts the ability of the Company to incur additional indebtedness, engage in transactions with affiliates, pay dividends and make investments. As of December 31, 1994, under the most restrictive of these covenants, approximately $4.9 million of dividends could be paid by the Company. The MGI Notes are senior indebtedness of the Company; however, they are effectively subordinate to the liabilities of the Company's subsidiaries, which include the Timber Notes and the Pacific Lumber Senior Notes. The MGI Senior Notes require annual interest payments of $11.3 million. The Company's annual interest expense on the MGI Discount Notes currently aggregates approximately $9.3 million. The MGI Discount Notes will require annual interest payments of $15.5 million beginning on February 1, 1999. As of December 31, 1994, the Company (excluding Pacific Lumber and its subsidiary companies) had cash and marketable securities of approximately $37.1 million. The Company believes, although there can be no assurance, that the aggregate dividends that will be available to it from Pacific Lumber and Britt, during the four year period in which cash interest will not be payable on the MGI Discount Notes, will exceed the Company's cash interest payments on the MGI Senior Notes. When cash interest payments on the MGI Discount Notes commence on February 1, 1999, the Company believes that it will be able to make such cash interest payments out of its then existing cash resources and from cash expected to be available to it from Pacific Lumber and Britt. On June 23, 1993, Pacific Lumber entered into a new Revolving Credit Agreement with a bank which provides for borrowings of up to $30.0 million, of which $15.0 million may be used for standby letters of credit. As of December 31, 1994, $19.7 million of borrowings was available under the Revolving Credit Agreement, of which $4.7 million was available for letters of credit. No borrowings were outstanding as of December 31, 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. The Revolving Credit Agreement is secured by Pacific Lumber's trade receivables and inventories and contains covenants substantially similar to those contained in the indenture governing the Pacific Lumber Senior Notes. During the years ended December 31, 1994 and 1993, Pacific Lumber's operating income before depletion and depreciation ("operating cash flow") amounted to $95.9 million and $76.6 million, respectively, which exceeded interest accrued on all of its indebtedness in those years by $39.8 million and $17.4 million, respectively. The Company believes that Pacific Lumber's and SPHC's level of operating cash flow and other available sources of financing will enable them to meet the debt service requirements on the Pacific Lumber Senior Notes and the Timber Notes, respectively. Capital expenditures for Pacific Lumber and Britt were made to improve production efficiency and reduce operating costs. Capital expenditures of the Company's subsidiaries were $11.3 million and $11.1 million for the years ended December 31, 1994 and 1993, respectively. Capital expenditures for 1995 are expected to be $10 million and for the 1996 - 1997 period are estimated to be between $5 million and $10 million per year. Capital expenditures attributable to the reconstruction of Pacific Lumber's commercial facilities destroyed by the April 1992 earthquake were approximately $1.9 million for 1993 and $2.6 million for 1994 when construction was completed. The Company anticipates that the funds necessary to finance the capital expenditures of its subsidiaries will be obtained through cash flows generated by operations of such subsidiaries and other available sources of financing to the Company's subsidiaries. TRENDS The Company's forest products operations are primarily conducted by Pacific Lumber and 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 its future operating results or financial position; however, these laws and regulations are periodically modified. For example, in 1994 the California Board of Forestry adopted certain regulations regarding compliance with long term sustained yield objectives. These regulations require timber companies to project the average annual growth they will have on their timberlands during the last decade of a 100-year planning period ("Projected Annual Growth"). During any rolling ten-year period, the average annual harvest over such ten-year period may not exceed Projected Annual Growth. The first ten-year period began in May 1994. Pacific Lumber is required to submit, by October 1996, a plan setting forth, among other things, its Projected Annual Growth. Pacific Lumber has not completed its analysis of the projected productivity of its timberlands and is therefore unable to predict the impact that these regulations will have on its future timber harvesting practices; however, the final results of this analysis could require Pacific Lumber to reduce (or permit it to increase) its timber harvest in future years from the average annual harvest that it has experienced in recent years. Pacific Lumber believes that it would be able to mitigate the effect of any required reduction in harvest level by acquisitions of additional timberlands and by increasing the productivity of its timberlands. In addition, new laws and regulations are frequently introduced concerning the California timber industry. From time to time, bills are introduced in the California legislature and the U.S. Congress which relate to the business of Pacific Lumber, including the protection and acquisition of old growth and other timberlands, endangered species, environmental protection and the restriction, regulation and administration of timber harvesting practices. 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 any of these bills on the consolidated financial position or results of operations of the Company. Furthermore, any bills which are passed are subject to executive veto and court challenge. In addition to existing and possible new or modified statutory enactments, regulatory requirements and administrative actions, the California timber industry remains subject to potential California or local ballot initiatives and evolving federal and California case law which could affect timber harvesting practices. It is, however, impossible to assess the effect of such matters on the future operating results or consolidated financial position of the Company. Various groups and individuals have filed objections with the CDF regarding the CDF's actions and rulings with respect to certain of Pacific Lumber's THPs, and the Company expects that such groups and individuals will continue to file objections to Pacific Lumber's THPs. In addition, lawsuits are pending which seek to prevent Pacific Lumber from implementing certain of its approved THPs. See Item 3. "Legal Proceedings--Timber Harvesting Litigation." These challenges have severely restricted Pacific Lumber'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 Pacific Lumber's THPs are likely to occur in the future. Although such challenges have delayed or prevented Pacific Lumber from conducting a portion of its operations, to date such challenges have not had a material adverse effect on the Company's 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholder and Board of Directors of MAXXAM Group Inc.: We have audited the accompanying consolidated balance sheets of MAXXAM Group Inc. (a Delaware corporation and a wholly owned subsidiary of MAXXAM Inc.) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, cash flows and stockholder's equity (deficit) for each of the three years in the period ended December 31, 1994. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MAXXAM Group Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As explained in Notes 6 and 7 to the financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes and postretirement benefits other than pensions. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a)(2) of this Form 10-K is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP San Francisco, California January 27, 1995 CONSOLIDATED BALANCE SHEET
December 31, 1994 1993 (In thousands of dollars) ASSETS Current assets: Cash and cash equivalents $ 48,575 $ 39,001 Marketable securities 19,514 17,775 Receivables: Trade 23,170 15,910 Other 7,435 4,212 Inventories 70,098 73,413 Prepaid expenses and other current assets 3,717 3,189 ----------- ----------- Total current assets 172,509 153,500 Timber and timberlands, net of depletion of $188,003 and $171,007 at December 31, 1994 and 1993, respectively 350,871 365,511 Property, plant and equipment, net 103,183 102,780 Deferred financing costs, net 30,096 32,725 Deferred income taxes 61,498 58,371 Restricted cash 32,402 33,562 Other assets 6,122 9,572 ----------- ----------- $ 756,681 $ 756,021 =========== =========== LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Accounts payable $ 3,703 $ 2,871 Accrued interest 25,765 26,216 Accrued compensation and related benefits 10,622 7,919 Deferred income taxes 12,986 14,132 Other accrued liabilities 3,266 4,406 Long-term debt, current maturities 13,670 16,093 ---------- ----------- Total current liabilities 70,012 71,637 Long-term debt, less current maturities 768,786 772,310 Other noncurrent liabilities 30,365 28,125 ----------- ----------- Total liabilities 869,163 872,072 ----------- ----------- Contingencies Stockholder's deficit: Common stock, $.08-1/3 par value; 1000 shares authorized; 100 shares issued - - Additional capital 81,287 81,287 Accumulated deficit (193,769) (197,338) ----------- ----------- Total stockholder's deficit (112,482) (116,051) ----------- ----------- $ 756,681 $ 756,021 =========== =========== The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended December 31, 1994 1993 1992 (In thousands of dollars) Net sales: Lumber and logs $ 227,430 $ 215,743 $ 201,176 Other 22,199 17,696 22,169 ---------- ---------- ---------- 249,629 233,439 223,345 ---------- ---------- ---------- Operating expenses: Cost of goods sold (exclusive of depletion and depreciation) 129,598 134,563 113,769 Selling, general and administrative 16,250 20,108 17,136 Depletion and depreciation 25,946 25,811 29,932 ---------- ---------- ---------- 171,794 180,482 160,837 ---------- ---------- ---------- Operating income 77,835 52,957 62,508 Other income (expense): Investment, interest and other income 14,367 9,718 399 Interest expense (77,383) (80,339) (87,606) ---------- ---------- ---------- Income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles 14,819 (17,664) (24,699) Credit (provision) in lieu of income taxes 3,616 3,355 (1,276) ---------- ---------- ---------- Income (loss) from continuing operations before extraordinary items and cumulative effect of changes in accounting principles 18,435 (14,309) (25,975) Income (loss) from net assets transferred to MAXXAM, net of minority interests and related income taxes - (512,970) 33,691 ---------- ---------- ---------- Income (loss) before extraordinary items and cumulative effect of changes in accounting principles 18,435 (527,279) 7,716 Extraordinary items: Loss on litigation settlement, net of related credit in lieu of income taxes of $6,312 (14,866) - - Loss on early extinguishment of debt, net of related credit in lieu of income taxes of $8,856 - (17,189) - Cumulative effect of changes in accounting principles: Postretirement benefits other than pensions, net of related credit in lieu of income taxes of $1,566 - (2,348) - Accounting for income taxes - 14,916 - ---------- ---------- ---------- Net income (loss) $ 3,569 $(531,900) $ 7,716 ========== ========== ========== The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, 1994 1993 1992 (In thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 3,569 $(531,900) $ 7,716 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depletion and depreciation 25,946 25,811 29,932 Amortization of deferred financing costs and discounts on long-term debt 12,127 7,435 3,018 Net sales of marketable securities 5,321 12,389 23,355 Net losses (gains) on marketable securities (1,669) (6,414) 5,374 Incurrence of financing costs (213) (34,738) (505) Loss (income) from net assets transferred to MAXXAM, net - 512,970 (33,691) Extraordinary loss on early extinguishment of debt, net - 17,189 - Cumulative effect of changes in accounting principles, net - (12,568) - Decrease (increase) in inventories, net of depletion 3,634 (2,077) 7,872 Increase (decrease) in accounts payable 832 471 (3,418) Decrease (increase) in receivables (7,660) 7,558 (7,576) Increase in accrued and deferred income taxes (3,815) (5,123) - Decrease in other liabilities (2,283) (185) - Decrease in accrued interest (451) (7,284) (53) Other (614) 1,060 (59) ---------- ---------- ---------- Net cash provided by (used for) operating activities 34,724 (15,406) 31,965 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sale of assets 1,149 256 573 Capital expenditures (11,322) (11,120) (8,669) Increase in net assets transferred to MAXXAM - (11,770) (24,264) ---------- ---------- ---------- Net cash used for investing activities (10,173) (22,634) (32,360) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Restricted cash released 1,160 1,438 - Redemptions, repurchase of and principal payments on long-term debt (13,237) (716,551) (4,773) Net borrowings (payments) under revolving credit agreements (2,900) 2,900 - Proceeds from issuance of long-term debt - 790,000 - Restricted cash deposits - (35,000) - Dividends paid - (20,000) (36) ---------- ---------- ---------- Net cash provided by (used for) financing activities (14,977) 22,787 (4,809) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,574 (15,253) (5,204) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 39,001 54,254 59,458 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 48,575 $ 39,001 $ 54,254 ========== ========== ========== SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Net margin borrowings for marketable securities $ 5,628 $ 1,020 Timber and timberlands acquired subject to loan from seller 910 Net assets transferred to MAXXAM 30,531 Dividend of notes receivable and marketable securities to MAXXAM $ 14,964 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest $ 65,707 $ 80,188 $ 84,641 Income taxes paid 1,170 46 966 Tax allocation payments to MAXXAM 397 1,722 1,079 The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
Common Retained Stock Additional Earnings ($.08-1/3 Par) Capital (Deficit) Total (In thousands of dollars) Balance, January 1, 1992 $ - $ 81,376 $ 392,377 $ 473,753 Net income - - 7,716 7,716 Dividend - - (15,000) (15,000) Loss from issuance of Kaiser Aluminum Corporation common stock - (119) - (119) --------------- ----------- ----------- ----------- Balance, December 31, 1992 - 81,257 385,093 466,350 Net loss - - (531,900) (531,900) Dividend - - (20,000) (20,000) Gain from issuance of Kaiser Aluminum Corporation common stock - 30 - 30 Net assets transferred to MAXXAM - - (30,531) (30,531) --------------- ----------- ----------- ----------- Balance, December 31, 1993 - 81,287 (197,338) (116,051) Net income - - 3,569 3,569 --------------- ----------- ----------- ----------- Balance, December 31, 1994 $ - $ 81,287 $ (193,769) $ (112,482) =============== =========== =========== =========== The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of MAXXAM Group Inc. ("MGI") and its subsidiaries, collectively referred to herein as the "Company." The Company is a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). The Company conducts its business primarily through the operations of its subsidiaries. Prior to the Forest Products Group Formation (as defined below), the Company operated in three industries: aluminum, through its majority owned subsidiary, Kaiser Aluminum Corporation ("Kaiser"), a fully integrated aluminum producer; forest products, through The Pacific Lumber Company ("Pacific Lumber") and Britt Lumber Co., Inc. ("Britt"), each a wholly owned subsidiary; and real estate management and development, through the Palmas del Mar development located in Puerto Rico ("Palmas") which was owned by the Company's subsidiary, MAXXAM Properties Inc. ("MPI"). On August 4, 1993, contemporaneously with the consummation of the sale of the MGI Notes (as defined in Note 5), the Company (i) transferred to MAXXAM 50 million common shares of Kaiser held by a subsidiary of the Company, representing the Company's (and MAXXAM's) entire interest in Kaiser's common stock, (ii) transferred to MAXXAM 60,075 shares of MAXXAM common stock held by a subsidiary of the Company, (iii) transferred to MAXXAM certain notes receivable, long-term investments, and other assets, each net of related liabilities, collectively having a carrying value to the Company of approximately $1,100 and (iv) exchanged with MAXXAM 2,132,950 Depositary Shares, acquired from Kaiser on June 30, 1993 for $15,000, such exchange being in satisfaction of a $15,000 promissory note evidencing a cash loan made by MAXXAM to the Company in January 1993. On the same day, MAXXAM assumed approximately $17,500 of certain liabilities of the Company that were unrelated to the Company's forest products operations or were related to operations which have been disposed of by the Company. Additionally, on September 28, 1993, the Company transferred to MAXXAM its interest in Palmas. The foregoing transactions are collectively referred to as the "Forest Products Group Formation." As a result of the Forest Products Group Formation, the Company restated its Consolidated Financial Statements to present the net assets transferred to MAXXAM pursuant to the Forest Products Group Formation (including certain allocated costs from MAXXAM for general and administrative expenses unrelated to the Company's forest products operations). Such restatement has been made with respect to all periods presented in a manner similar to that which would have been presented if the Company had discontinued the operations relating to such net assets. See Note 2. As a result of the Forest Products Group Formation, the Company's business is substantially limited to forest products operations which consists of 100% of the outstanding common stock of Pacific Lumber and 100% of the outstanding common stock of Britt. Pacific Lumber is engaged in all principal aspects of the lumber industry, including the growing and harvesting of redwood and Douglas-fir timber, the milling of logs into lumber and the production of manufactured lumber products. Britt mills logs to produce a variety of fencing and decking products. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents Cash equivalents consist of highly liquid money market instruments with original maturities of three months or less. Marketable Securities On December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"). In accordance with the provisions of SFAS 115, marketable securities are carried at fair value beginning on December 31, 1993. Prior to that date, marketable securities portfolios were carried at the lower of cost or market at the balance sheet date. The cost of the securities sold is determined using the first-in, first-out method. Included in investment, interest and other income for each of the three years ended December 31, 1994 were: 1994 - net unrealized holding losses of $1,094 and net realized gains of $2,763; 1993 - net realized gains of $3,510, the recovery of $2,063 of net unrealized losses and net unrealized gains of $841; and 1992 - net realized losses of $5,003 and net unrealized losses of $371. Net unrealized losses represent the amount required to reduce the short-term marketable securities portfolios from cost to market value prior to December 31, 1993. Subsequent to the adoption of SFAS 115, purchases and sales of marketable securities are presented as cash flows from operating activities in the Consolidated Statement of Cash Flows. Inventories Inventories are stated at the lower of cost or market. Cost is primarily determined using the last-in, first-out (LIFO) method. Timber and Timberlands Depletion is computed utilizing the unit-of-production method based upon estimates of timber values and quantities. Property, Plant and Equipment Property, plant and equipment, including capitalized interest, is stated at cost, net of accumulated depreciation. Depreciation is computed utilizing the straight-line method at rates based upon the estimated useful lives of the various classes of assets. Deferred Financing Costs Costs incurred to obtain financing are deferred and amortized over the estimated term of the related borrowing. Restricted Cash and Concentrations of Credit Risk Restricted cash represents the amount initially deposited into an account (the "Liquidity Account") held by the trustee under the indenture governing the 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes") as described in Note 5. The Liquidity Account is not available, except under certain limited circumstances, for working capital purposes; however, it is available to pay the Rated Amortization (as defined in Note 5) and interest on the Timber Notes if and to the extent that cash flows are insufficient to make such payments. The required Liquidity Account balance will generally decline as principal payments are made on the Timber Notes. Investment, interest and other income for the years ended December 31, 1994 and 1993 includes approximately $2,490 and $2,101, respectively, attributable to an investment rate agreement (at 7.95% per annum) with the financial institution which holds the Liquidity Account. At December 31, 1994 and 1993, cash and cash equivalents includes $19,439 and $20,280, respectively, (the "Payment Account") which is reserved for debt service payments on the Timber Notes (see Note 5). The Payment Account and the Liquidity Account are each held by a different financial institution. In the event of nonperformance by such financial institutions, the Company's exposure to credit loss is represented by the amounts deposited plus any unpaid accrued interest thereon. The Company mitigates its concentrations of credit risk with respect to these restricted cash deposits by maintaining them at high credit quality financial institutions and monitoring the credit ratings of these institutions. Stockholder's Equity (Deficit) Adjustments to the Company's additional capital for the years ended December 31, 1992 and 1993 resulted from transactions relating to Kaiser's common stock prior to the Forest Products Group Formation. Pursuant to the terms of an amended compensation plan, Kaiser issued 77,279 and 4,228 shares to certain members of its management in 1992 and 1993, respectively. As a result of these transactions, the Company's equity in Kaiser's net assets differed from the Company's historical cost. The Company accounted for these differences as adjustments to additional capital. Investment, Interest and Other Income In February 1994, Pacific Lumber received a franchise tax refund of $7,243, the substantial portion of which represents interest, from the State of California relating to tax years 1972 through 1985. This amount is included in investment, interest and other income for the year ended December 31, 1994. Items Related to 1992 Earthquake In 1993 and 1992, Pacific Lumber recorded reductions in cost of sales of $1,200 and $3,300, respectively, from business interruption insurance claims for reimbursement of higher operating costs and the related loss of revenues resulting from the April 1992 earthquake. In 1992, Pacific Lumber recorded a $1,600 gain in investment, interest and other income on a casualty insurance claim for the loss of certain commercial property due to the earthquake. Other receivables at December 31, 1994 and 1993 included $1,684 and $1,235, respectively, related to these and other earthquake related insurance claims. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents and restricted cash approximate fair value. The fair value of marketable securities is determined based on quoted market prices. The estimated fair value of long-term debt is determined based on the quoted market prices for the Timber Notes, the 10-1/2% Senior Notes due 2003 (the "Pacific Lumber Senior Notes"), the 11-1/4% Senior Secured Notes due 2003 (the "MGI Senior Notes") and the 12-1/4% Senior Secured Discount Notes due 2003 (the "MGI Discount Notes"), and on the current rates offered for borrowings similar to the other debt. The Timber Notes, the Pacific Lumber Senior Notes, the MGI Senior Notes and the MGI Discount Notes are thinly traded financial instruments; accordingly, their market prices at any balance sheet date may not be representative of the prices which would be derived from a more active market. The estimated fair values of the Company's financial instruments, along with the carrying amounts of the related assets (liabilities), are as follows:
December 31, 1994 December 31, 1993 Carrying Fair Carrying Fair Amount Value Amount Value Cash and cash equivalents $ 48,575 $ 48,575 $ 39,001 $ 39,001 Marketable securities (held for trading purposes) 19,514 19,514 17,775 17,775 Restricted cash 32,402 32,402 33,562 33,562 Long-term debt (782,456) (725,031) (788,403) (817,400)
Reclassifications Certain reclassifications have been made to prior years' financial statements to be consistent with the presentation in the current year. 2. NET ASSETS TRANSFERRED TO MAXXAM As a result of the Forest Products Group Formation (as described in Note 1), the Company transferred all of its interest in Kaiser's common stock, the assets and related liabilities of Palmas, and certain other net assets that were unrelated to the Company's forest products operations, to MAXXAM. The Company did not incur any gain or loss relating to the transfer of such assets and liabilities to MAXXAM. The net income (loss) from net assets transferred to MAXXAM is as follows:
Seven Months Ended Year Ended July 31, December 31, 1993 1992 Net sales: Aluminum operations $ 1,016,966 $ 1,909,115 Real estate and other 19,654 27,464 ------------ ------------ 1,036,620 1,936,579 ----------- ------------ Costs and expenses: Aluminum operations 1,091,353 1,877,004 Real estate and other 28,132 33,298 ------------ ------------ 1,119,485 1,910,302 ------------ ------------ Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles (82,865) 26,277 Credit for income taxes 31,050 10,755 Minority interests 3,641 (3,341) ------------ ------------ Income (loss) before extraordinary item and cumulative effect of changes in accounting principles (48,174) 33,691 Extraordinary item: Loss on redemption of debt, net of related benefits for income taxes and minority interests of $11,249 and $2,791, respectively (19,045) - Cumulative effect of changes in accounting principles: Postretirement and postemployment benefits, net of related benefits for income taxes and minority interests of $237,682 and $64,554, respectively (440,519) - Accounting for income taxes (5,232) - ------------ ------------ Income (loss) from net assets transferred to MAXXAM $ (512,970) $ 33,691 ============ ============
Net assets transferred to MAXXAM are as follows as of the date of transfer:
Current assets: Aluminum operations $ 780,791 Real estate and other 16,480 ---------- 797,271 ---------- Current liabilities: Aluminum operations 477,805 Real estate and other 28,853 ---------- 506,658 ---------- Net current assets 290,613 Non-current assets: ---------- Aluminum operations 1,722,362 Real estate and other 56,422 ---------- 1,778,784 ---------- Non-current liabilities: Aluminum operations 1,790,946 Minority interests in aluminum operations 221,907 Real estate and other 26,013 ---------- 2,038,866 ---------- Net assets transferred to MAXXAM $ 30,531 ==========
3. INVENTORIES Inventories consist of the following:
December 31, 1994 1993 Lumber $ 55,310 $ 52,354 Logs 14,788 21,059 ---------- ---------- $ 70,098 $ 73,413 ========== ==========
During 1993 and 1992, Pacific Lumber's inventory quantities were reduced. These reductions resulted in the liquidation of Pacific Lumber's LIFO inventory quantities carried at prevailing costs from prior years which were higher than the current cost of inventory in 1993 and lower than current costs in 1992. The effects of these inventory liquidations increased cost of goods sold by approximately $222 for the year ended December 31, 1993 and decreased cost of goods sold by approximately $372 for the year ended December 31, 1992. 4. PROPERTY, PLANT AND EQUIPMENT The major classes of property, plant and equipment are as follows:
Estimated December 31, Useful Lives 1994 1993 Logging roads, land and improvements 15 years $ 7,545 $ 7,241 Buildings 33 years 28,209 22,234 Machinery and equipment 5 - 15 years 126,480 123,270 Construction in progress 30 125 ----------- ------------ 162,264 152,870 Less: accumulated depreciation (59,081) (50,090) ----------- ------------ $ 103,183 $ 102,780 =========== ============ /TABLE Depreciation expense for the years ended December 31, 1994, 1993 and 1992 was $9,269, $8,670 and $8,491, respectively. 5. LONG-TERM DEBT Long-term debt consists of the following:
December 31, 1994 1993 7.95% Timber Collateralized Notes due July 20, 2015 $ 363,811 $ 376,953 11-1/4% Senior Secured Notes due August 1, 2003 100,000 100,000 12-1/4% Senior Secured Discount Notes due August 1, 2003, net of discount 82,779 73,499 10-1/2% Senior Notes due March 1, 2003 235,000 235,000 Other 866 2,951 ---------- ---------- 782,456 788,403 Less: current maturities (13,670) (16,093) ---------- ---------- $ 768,786 $ 772,310 ========== ==========
On March 23, 1993, Pacific Lumber issued $235,000 of the Pacific Lumber Senior Notes and its newly-formed wholly owned subsidiary, Scotia Pacific Holding Company ("SPHC"), issued $385,000 of the Timber Notes. Pacific Lumber and SPHC used the net proceeds from the sale of the Pacific Lumber Senior Notes and the Timber Notes, together with Pacific Lumber's cash and marketable securities, to (i) retire (a) $163,784 aggregate principal amount of Pacific Lumber's 12% Series A Senior Notes due July 1, 1996 (the "Series A Notes"), (b) $299,725 aggregate principal amount of Pacific Lumber's 12.2% Series B Senior Notes due July 1, 1996 (the "Series B Notes") and (c) $41,750 aggregate principal amount of Pacific Lumber's 12-1/2% Senior Subordinated Debentures due July 1, 1998 (the "Debentures;" the Series A Notes, the Series B Notes and the Debentures are referred to collectively as the "Old Pacific Lumber Securities"); (ii) pay accrued interest on the Old Pacific Lumber Securities through the date of redemption thereof; (iii) pay the applicable redemption premiums on the Old Pacific Lumber Securities; (iv) repay Pacific Lumber's $28,867 cogeneration facility loan; (v) fund the initial deposit of $35,000 to the Liquidity Account; and (vi) pay a $25,000 dividend to a subsidiary of the Company. These transactions resulted in a pre-tax extraordinary loss of $16,368, consisting primarily of the payment of premiums and the write-off of unamortized deferred financing costs on the Old Pacific Lumber Securities. The indenture governing the Timber Notes (the "Timber Note Indenture") prohibits SPHC from incurring any additional indebtedness for borrowed money and limits the business activities of SPHC to the ownership and operation of its timber and timberlands. The Timber Notes are senior secured obligations of SPHC and are not obligations of, or guaranteed by, Pacific Lumber or any other person. The Timber Notes are secured by a lien on (i) SPHC's timber and timberlands (representing $192,445 of the Company's consolidated balance at December 31, 1994), (ii) substantially all of SPHC's property and equipment, (iii) SPHC's contract rights and certain other assets and (iv) the funds deposited in the Payment Account and the Liquidity Account. The Timber Notes are structured to link, to the extent of cash available, the deemed depletion of SPHC's timber (through the harvest and sale of logs) to required amortization of the Timber Notes. The required amount of amortization due on any Timber Note payment date is determined by various mathematical formulas set forth in the Timber Note Indenture. The minimum amount of principal which SPHC must pay (on a cumulative basis) through any Timber Note payment date in order to avoid an Event of Default (as defined in the Timber Note Indenture) is referred to as rated amortization ("Rated Amortization"). If all payments of principal are made in accordance with Rated Amortization, the payment date on which SPHC will pay the final installment of principal is July 20, 2015. The amount of principal which SPHC must pay through each Timber Note payment date in order to avoid payment of prepayment or deficiency premiums is referred to as scheduled amortization ("Scheduled Amortization"). If all payments of principal are made in accordance with Scheduled Amortization, the payment date on which SPHC will pay the final installment of principal is July 20, 2009. Substantially all of the Company's consolidated assets are owned by Pacific Lumber and a significant portion of Pacific Lumber's assets are owned by SPHC. The Company expects that Pacific Lumber will provide a major portion of the Company's future operating cash flow. Pacific Lumber is dependent upon SPHC for a significant portion of its operating cash flow. The holders of the Timber Notes have priority over the claims of creditors of Pacific Lumber with respect to the assets and cash flow of SPHC, and the holders of the Pacific Lumber Senior Notes have priority over the claims and creditors of the Company with respect to the assets and cash flows of Pacific Lumber. Under the terms of the Timber Note Indenture, SPHC will not have available cash for distribution to Pacific Lumber unless SPHC's cash flow from operations exceeds the amounts required by the Timber Note Indenture to be reserved for the payment of current debt service (including interest, principal and premiums) on the Timber Notes, capital expenditures and certain other operating expenses. Principal and interest on the Timber Notes is payable semi- annually on January 20 and July 20. The Timber Notes are redeemable at the option of SPHC, in whole but not in part, at any time. The redemption price of the Timber Notes is equal to the sum of the principal amount, accrued interest and a prepayment premium calculated based upon the yield of like term Treasury securities plus 50 basis points. Interest on the Pacific Lumber Senior Notes is payable semi- annually on March 1 and September 1. The Pacific Lumber Senior Notes are redeemable at the option of Pacific Lumber, in whole or in part, on or after March 1, 1998 at a price of 103% of the principal amount plus accrued interest. The redemption price is reduced annually until March 1, 2000, after which time the Pacific Lumber Senior Notes are redeemable at par. Pacific Lumber has a revolving credit agreement with a bank (the "Revolving Credit Agreement") which expires on May 31, 1997. Borrowings under the Revolving Credit Agreement are secured by Pacific Lumber's trade receivables and inventories, with interest computed at the bank's reference rate plus 1-1/4% or the bank's offshore rate plus 2-1/4%. The Revolving Credit Agreement provides for borrowings of up to $30,000, of which $15,000 may be used for standby letters of credit. As of December 31, 1994, $19,742 of borrowings was available under the Revolving Credit Agreement, of which $4,742 was available for letters of credit. No borrowings were outstanding as of December 31, 1994, and letters of credit outstanding amounted to $10,258. The indentures governing the Pacific Lumber Senior Notes and the Timber Notes and Pacific Lumber's Revolving Credit Agreement contain various covenants which, among other things, limit the payment of dividends and restrict transactions between Pacific Lumber and its affiliates. As of December 31, 1994, under the most restrictive of these covenants, approximately $20,800 of dividends could be paid by Pacific Lumber. On August 4, 1993, the Company issued $100,000 aggregate principal amount of the MGI Senior Notes and $126,720 aggregate principal amount (approximately $70,000 net of original issue discount) of the MGI Discount Notes, which, together with the MGI Senior Notes, are referred to collectively as the "MGI Notes". The MGI Notes are secured by the Company's pledge of 100% of the common stock of Pacific Lumber, Britt and MPI, and by MAXXAM's pledge of 28 million shares of Kaiser's common stock it received as a result of the Forest Products Group Formation. The indenture governing the MGI Notes, among other things, restricts the ability of the Company to incur additional indebtedness, engage in transactions with affiliates, pay dividends and make investments. As of December 31, 1994, under the most restrictive of these covenants, approximately $4,900 of dividends could be paid by the Company. The MGI Notes are senior indebtedness of the Company; however, they are effectively subordinate to the liabilities of the Company's subsidiaries, which include the Timber Notes and the Pacific Lumber Senior Notes. The MGI Discount Notes are net of discount of $43,941 and $53,221 at December 31, 1994 and 1993, respectively. The MGI Senior Notes pay interest semi-annually on February 1 and August 1 of each year. The MGI Discount Notes will not pay any interest until February 1, 1999, at which time semi-annual interest payments will become due on each February 1 and August 1 thereafter. The Company used a portion of the net proceeds from the sale of the MGI Notes to retire the entire outstanding balance of its 12-3/4% Notes at 101% of their principal amount, plus accrued interest through November 14, 1993. The Company used the remaining portion of the net proceeds from the sale of the MGI Notes, together with a portion of its existing cash resources, to pay a $20,000 dividend to MAXXAM. MAXXAM used such proceeds to redeem, on August 20, 1993, $20,000 aggregate principal amount of its 14% Senior Subordinated Reset Notes due 2000 at 100% of their principal amount plus accrued interest thereon. The Company incurred a pre-tax extraordinary loss associated with the early retirement of the 12-3/4% Notes of $9,677 consisting of net interest cost of $3,763, the write-off of $3,472 of unamortized deferred financing costs, a premium of $1,500 and the write-off of $942 of unamortized original issue discount. Maturities The following table of scheduled maturities of long-term debt outstanding at December 31, 1994 reflects Scheduled Amortization with respect to the Timber Notes:
Years Ending December 31, 1995 1996 1997 1998 1999 Thereafter 7.95% Timber Collateralized Notes $ 13,578 $ 14,103 $ 16,165 $ 19,335 $ 21,651 $ 278,979 11-1/4% Senior Secured Notes - - - - - 100,000 12-1/4% Senior Secured Discount Notes - - - - - 126,720 10-1/2% Senior Notes - - - - - 235,000 Other 92 92 93 94 94 401 -------- -------- -------- -------- -------- ---------- $ 13,670 $ 14,195 $ 16,258 $ 19,429 $ 21,745 $ 741,100 ======== ======== ======== ======== ======== ==========
Restricted Net Assets of Subsidiaries At December 31, 1994, certain debt instruments restricted the ability of Pacific Lumber to transfer assets, make loans and advances and pay dividends to the Company. The restricted net assets of Pacific Lumber totaled approximately $10,000 at December 31, 1994. 6. CREDIT (PROVISION) IN LIEU OF INCOME TAXES The Company and its subsidiaries are members of MAXXAM's consolidated return group for federal income tax purposes. Prior to August 4, 1993, the Company and each of its subsidiaries computed their tax liabilities or tax benefits on a separate company basis (except as discussed in the following paragraph), in accordance with their respective tax allocation agreements with MAXXAM. Effective on March 23, 1993, MAXXAM, Pacific Lumber, SPHC and Salmon Creek Corporation ("Salmon Creek") entered into a tax allocation agreement that, among other things, amended the tax calculations with respect to Pacific Lumber (the "Amended PL Tax Allocation Agreement"). Under the terms of the Amended PL Tax Allocation Agreement, Pacific Lumber is liable to MAXXAM for the federal consolidated income tax liability of Pacific Lumber, SPHC and certain other subsidiaries of Pacific Lumber (but excluding Salmon Creek) (collectively, the "PL Subgroup") computed as if the PL Subgroup was a separate affiliated group of corporations which was never connected with MAXXAM. The Amended PL Tax Allocation Agreement further provides that Salmon Creek is liable to MAXXAM for its federal income tax liability computed on a separate company basis as if it was never connected with MAXXAM. The remaining subsidiaries of MGI are each liable to MAXXAM for their respective income tax liabilities computed on a separate company basis as if they were never connected with MAXXAM, pursuant to their respective tax allocation agreements. MGI's tax allocation agreement with MAXXAM, as amended on August 4, 1993 (the "Amended Tax Allocation Agreement"), provides that the Company's federal income tax liability is computed as if MGI files a consolidated tax return with all of its subsidiaries except Salmon Creek, and that such corporations were never connected with MAXXAM (the "MGI Consolidated Tax Liability"). The federal income tax liability of MGI is the difference between (i) the MGI Consolidated Tax Liability and (ii) the sum of the separate tax liabilities for the Company's subsidiaries (computed as discussed above), but excluding Salmon Creek. To the extent that the MGI Consolidated Tax Liability is less than the aggregate amounts in (ii), MAXXAM is obligated to pay the amount of such difference to MGI. The credit (provision) in lieu of income taxes on income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles consists of the following:
Years Ended December 31, 1994 1993 1992 Current: Federal credit (provision) in lieu of income taxes $ - $ (988) $ (1,774) State and local (55) (253) (424) ---------- ---------- ---------- (55) (1,241) (2,198) ---------- ---------- ---------- Deferred: Federal credit (provision) in lieu of income taxes 2,366 4,825 922 State and local 1,305 (229) - ---------- ---------- ---------- 3,671 4,596 922 ---------- ---------- ---------- $ 3,616 $ 3,355 $ (1,276) ========== ========== ==========
The 1994 deferred federal credit in lieu of income taxes of $2,366 includes a credit relating to reserves the Company no longer believes are necessary. The 1993 deferred federal credit in lieu of income taxes of $4,825 includes $2,601 for the benefit of operating loss carryforwards generated in 1993 and includes an $850 benefit for increasing net deferred income tax assets (liabilities) as of the date of enactment (August 10, 1993) of the Omnibus Budget Reconciliation Act of 1993 which retroactively increased the federal statutory income tax rate from 34% to 35% for periods beginning on or after January 1, 1993. A reconciliation between the credit (provision) in lieu of income taxes and the amount computed by applying the federal statutory income tax rate to income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles is as follows:
Years Ended December 31, 1994 1993 1992 Income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles $ 14,819 $ (17,664) $ (24,699) ========== ========== ========== Amount of federal income tax based upon the statutory rate $ (5,187) $ 6,182 $ 8,398 Revision of prior years' tax estimates and other changes in valuation allowances 7,739 (3,468) - Increase in net deferred income tax assets due to tax rate change - 850 - State and local taxes, net of federal tax benefit 812 (313) (280) Financial reporting and tax basis differences - - 343 Losses and expenses for which no federal tax benefit was recognized - - (9,744) Other 252 104 7 ---------- ---------- ---------- $ 3,616 $ 3,355 $ (1,276) ========== ========== ==========
As shown in the Consolidated Statement of Operations for the year ended December 31, 1994, the Company recorded an extraordinary loss related to the settlement of litigation in connection with the Company's acquisition of Pacific Lumber (see Note 9). The Company reported the loss net of related deferred income taxes of $6,312 which is less than the federal and state statutory income tax rates due to expenses for which no tax benefit was recognized. As shown in the Consolidated Statement of Operations for the year ended December 31, 1993, the Company reported an extraordinary loss related to the early extinguishment of debt. The Company reported the loss net of related deferred income taxes of $8,856 which approximated the federal statutory income tax rate in effect on the dates the transactions occurred. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The adoption of SFAS 109 changed the Company's method of accounting for income taxes to an asset and liability approach from the deferral method prescribed by APB 11. The asset and liability approach requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred income tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. The cumulative effect of the change in accounting principle, as of January 1, 1993, increased the Company's results of operations by $14,916. The implementation of SFAS 109 required the Company to restate certain assets and liabilities to their pre-tax amounts from their net-of-tax amounts originally recorded in connection with the acquisitions of Pacific Lumber in 1986 and Britt in 1990. As a result of restating these assets and liabilities, the loss from continuing operations before income taxes, extraordinary item and cumulative effect of changes in accounting principles for the year ended December 31, 1993 was decreased by $377. The components of the Company's net deferred income tax assets (liabilities) are as follows:
December 31, 1994 1993 Deferred income tax assets: Loss and credit carryforwards $ 86,864 $ 92,408 Timber and timberlands 37,209 36,443 Other liabilities 10,460 4,616 Postretirement benefits other than pensions 2,145 1,734 Investments 406 4,729 Other 1,412 4,569 Valuation allowances (52,060) (57,676) ---------- ---------- Total deferred income tax assets, net 86,436 86,823 ---------- ---------- Deferred income tax liabilities: Inventories (17,934) (17,172) Property, plant and equipment (16,563) (21,160) Other (3,427) (4,252) ---------- ---------- Total deferred income tax liabilities (37,924) (42,584) ---------- ---------- Net deferred income tax assets $ 48,512 $ 44,239 ========== ==========
The valuation allowances listed above relate primarily to loss and credit carryforwards. As of December 31, 1994, approximately $37,209 of the net deferred income tax assets listed above relate to the excess of the tax basis over financial statement basis with respect to timber and timberlands. The Company believes that it is more likely than not that this net deferred income tax asset will be realized, based primarily upon the estimated value of its timber and timberlands which is well in excess of its tax basis. Also included in net deferred income tax assets as of December 31, 1994 is approximately $35,263 which relates to the benefit of loss and credit carryforwards, net of valuation allowances. The Company evaluated all appropriate factors to determine the proper valuation allowances for loss and credit carryforwards. These factors included any limitations concerning use of the carryforwards, the year the carryforwards expire and the levels of taxable income necessary for utilization. The Company has concluded that it will more likely than not generate sufficient taxable income to realize the benefit attributable to the loss and credit carryforwards for which valuation allowances were not provided. Included in the net deferred income tax assets listed above are $44,351 and $42,752 at December 31, 1994 and 1993, respectively, which are recorded pursuant to the tax allocation agreements with MAXXAM. The following table presents the estimated tax attributes for federal income tax purposes for the Company and its subsidiaries as of December 31, 1994, under the terms of the respective tax allocation agreements. The utilization of certain of these attributes is subject to limitations.
Expiring Through Regular Tax Attribute Carryforwards: Prior year net operating losses $ 231,714 2008 Net capital losses 8,765 1997 Alternative Minimum Tax Attribute Carryforwards: Current year net operating loss $ 7,785 2009 Prior year net operating losses 185,776 2008
7. EMPLOYEE BENEFIT PLANS The Company has a defined benefit plan which covers all employees of Pacific Lumber. Under the plan, employees are eligible for benefits at age 65 or earlier, if certain provisions are met. The benefits are determined under a career average formula based on each year of service with Pacific Lumber and the employee's compensation for that year. Pacific Lumber's funding policy is to contribute annually an amount at least equal to the minimum cash contribution required by The Employee Retirement Income Security Act of 1974, as amended. A summary of the components of net periodic pension cost is as follows:
Years Ended December 31, 1994 1993 1992 Service cost - benefits earned during the year $ 1,643 $ 1,600 $ 1,546 Interest cost on projected benefit obligation 1,263 918 749 Actual loss (gain) on plan assets 10 (2,128) (1,013) Net amortization and deferral (859) 1,359 352 ---------- ---------- ---------- Net periodic pension cost $ 2,057 $ 1,749 $ 1,634 ========== ========== ==========
The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheet:
December 31, 1994 1993 Actuarial present value of accumulated plan benefits: Vested benefit obligation $ 11,809 $ 11,047 Non-vested benefit obligation 779 1,183 --------- ---------- Total accumulated benefit obligation $ 12,588 $ 12,230 ========== ========== Projected benefit obligation $ 15,047 $ 15,303 Plan assets at fair value, primarily equity and debt securities (13,184) (12,216) ---------- ---------- Projected benefit obligation in excess of plan assets 1,863 3,087 Unrecognized net transition asset 29 35 Unrecognized net gain (loss) 1,475 (582) Unrecognized prior service cost (50) (89) ---------- ---------- Accrued pension liability $ 3,317 $ 2,451 ========== ==========
The assumptions used in accounting for the defined benefit plan were as follows:
1994 1993 1992 Rate of increase in compensation levels 5.0% 5.0% 5.0% Discount rate 8.5% 7.5% 8.0% Expected long-term rate of return on assets 8.0% 8.0% 9.0%
The Company has an unfunded defined benefit plan for certain postretirement and other benefits which covers substantially all employees of Pacific Lumber. Participants of the plan are eligible for certain health care benefits upon termination of employment and retirement and commencement of pension benefits. Participants make contributions for a portion of the cost of their health care benefits. The Company adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106") as of January 1, 1993. The costs of postretirement benefits other than pensions are now accrued over the period the employees provide services to the date of their full eligibility for such benefits. Previously, such costs were expensed as actual claims were incurred. The cumulative effect of the change in accounting principle for the adoption of SFAS 106 was recorded as a charge to results of operations of $2,348, net of related income taxes of $1,566. The deferred income tax benefit related to the adoption of SFAS 106 was recorded at the federal and state statutory rates in effect on the date SFAS 106 was adopted. A summary of the components of net periodic postretirement benefit cost is as follows:
Years Ended December 31, 1994 1993 Service cost - benefits earned during the year $ 216 $ 153 Interest cost on accumulated postretirement benefit obligation 294 315 Net amortization and deferral (7) - ------------ ------------ Net periodic postretirement benefit cost $ 503 $ 468 ============ ============
The adoption of SFAS 106 increased the Company's loss from continuing operations before extraordinary item and cumulative effect of changes in accounting principles by $212 ($360 before tax) for the year ended December 31, 1993. The postretirement benefit liability recognized in the Company's Consolidated Balance Sheet is as follows:
December 31, 1994 1993 Retirees $ 860 $ 963 Actives eligible for benefits 656 696 Actives not eligible for benefits 2,355 2,549 ---------- ---------- Accumulated postretirement benefit obligation 3,871 4,208 Unrecognized net gain 972 71 ---------- ---------- Postretirement benefit liability $ 4,843 $ 4,279 ========== ==========
The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 13.0% for 1995 and is assumed to decrease gradually to 5.5% for 2008 and remain at that level thereafter. Each one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1994 by approximately $512 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $85. The discount rates used in determining the accumulated postretirement benefit obligation were 8.5% and 7.5% at December 31, 1994 and 1993, respectively. Subsequent to December 31, 1993, Pacific Lumber's employees were eligible to participate in a defined contribution savings plan sponsored by MAXXAM. This plan is designed to enhance the existing retirement programs of participating employees. Employees may elect to contribute up to 16% of their compensation to the plan. For those participants who have elected to make voluntary contributions to the plan, Pacific Lumber's contributions consist of a matching contribution of up to 4% of the compensation of participants for each calendar quarter. The cost to the Company of this plan was $1,215 for the year ended December 31, 1994. Pacific Lumber is self-insured for workers' compensation benefits. Included in accrued compensation and related benefits and other noncurrent liabilities are accruals for workers' compensation claims amounting to $9,233 and $7,008 at December 31, 1994 and 1993, respectively. Workers' compensation expenses amounted to $4,069, $3,776 and $3,288 for the years ended December 31, 1994, 1993 and 1992, respectively. 8. RELATED PARTY TRANSACTIONS MAXXAM provides the Company and certain of the Company's subsidiaries with accounting and data processing services. In addition, MAXXAM provides the Company with office space and various office personnel, insurance, legal, operating, financial and certain other services. MAXXAM's expenses incurred on behalf of the Company are reimbursed by the Company through payments consisting of (i) an allocation of the lease expense for the office space utilized by or on behalf of the Company and (ii) a reimbursement of actual out-of-pocket expenses incurred by MAXXAM, including, but not limited to, labor costs (including costs associated with phantom share and stock appreciation rights) of MAXXAM personnel rendering services to the Company. Charges by MAXXAM for such services included in continuing operations were $2,254, $3,347 and $3,735 for the years ended December 31, 1994, 1993 and 1992, respectively. The Company believes that the services being rendered are on terms not less favorable to the Company than those which would be obtainable from unaffiliated third parties. In 1994, in connection with the litigation settlement described in Note 9, Pacific Lumber paid approximately $3,185 to a law firm in which a director of Pacific Lumber is also a partner. In 1993, Pacific Lumber paid approximately $1,931 in connection with the offering of the Pacific Lumber Senior Notes and the Timber Notes to this same law firm. 9. LOSS ON LITIGATION SETTLEMENT AND CONTINGENCIES During 1994, MAXXAM, Pacific Lumber and others agreed to a settlement, subsequently approved by the Court, of class and related individual claims brought by former stockholders of Pacific Lumber against MAXXAM, the Company, Pacific Lumber, former directors of Pacific Lumber and others concerning the Company's acquisition of Pacific Lumber. Of the approximately $52,000 settlement, approximately $33,000 was paid by insurance carriers of MAXXAM and Pacific Lumber, approximately $14,800 was paid by Pacific Lumber and the balance was paid by other defendants and through the assignment of certain claims. In 1994, the Company recorded an extraordinary loss of $14,866 related to the settlement and associated costs, 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 or financial position. 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 Pacific Lumber'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. 10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summary quarterly financial information for the years ended December 31, 1994 and 1993 is as follows:
Three Months Ended March 31 June 30 September 30 December 31 1994: Net sales $ 56,713 $ 62,976 $ 60,699 $ 69,241 Operating income 13,206 22,644 19,362 22,623 Income before extraordinary item 964 3,146 8,263 6,062 Extraordinary item, net - (14,866) - - Net income (loss) 964 (11,720) 8,263 6,062 1993: Net sales $ 52,737 $ 58,007 $ 58,803 $ 63,892 Operating income 16,233 14,997 9,185 12,542 Loss from continuing operations before extraordinary item and cumulative effect of changes in accounting principles (2,141) (3,593) (5,420) (3,155) Loss from net assets transferred to MAXXAM, net (480,370) (20,900) (11,700) - Extraordinary item, net (10,802) - (6,387) - Cumulative effect of changes in accounting principles, net 12,568 - - - Net loss (480,745) (24,493) (23,507) (3,155)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) INDEX TO FINANCIAL STATEMENTS PAGE 1. FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8): Report of Independent Public Accountants 22 Consolidated balance sheet at December 31, 1994 and 1993 23 Consolidated statement of operations for the years ended December 31, 1994, 1993 and 1992 24 Consolidated statement of cash flows for the years ended December 31, 1994, 1993 and 1992 25 Consolidated statement of stockholder's equity (deficit) for the years ended December 31, 1994, 1993 and 1992 26 Notes to consolidated financial statements 27 2. FINANCIAL STATEMENT SCHEDULES: Schedule III - Condensed financial information of Registrant at December 31, 1994 and 1993 and for the years ended December 31, 1994, 1993 and 1992 46
The consolidated financial statements and notes thereto of Kaiser Aluminum Corporation and The Pacific Lumber Company are incorporated herein by reference and included as Exhibits 99.1 and 99.2 hereto, respectively. All other schedules are inapplicable or the required information is included in the consolidated financial statements or the notes thereto. (B) REPORTS ON FORM 8-K None. (C) EXHIBITS Reference is made to the Index of Exhibits immediately preceding the exhibits hereto (beginning on page 51), which index is incorporated herein by reference. SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET (UNCONSOLIDATED)
December 31, 1994 1993 (In thousands of dollars) ASSETS Current assets: Cash and cash equivalents $ 24,214 $ 92 Marketable securities 19,514 11,584 Other current assets 1,766 380 ------------ ------------ Total current assets 45,494 12,056 Investments in and advances from subsidiaries 17,083 39,405 Deferred financing costs and other assets 5,593 6,238 Deferred income taxes 13,609 6,369 ------------ ------------ $ 81,779 $ 64,068 ============ ============ LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Accounts payable and accrued liabilities $ 178 $ 2,058 Accrued interest 4,656 4,562 ------------ ------------ Total current liabilities 4,834 6,620 Long-term debt 182,779 173,499 Margin borrowings for marketable securities 6,648 - ------------ ------------ Total liabilities 194,261 180,119 ------------ ------------ Stockholder's deficit: Common stock, $.08-1/3 par value; 1,000 shares authorized; 100 shares issued - - Additional capital 81,287 81,287 Accumulated deficit (193,769) (197,338) ------------ ------------ Total stockholder's deficit (112,482) (116,051) ------------ ------------ $ 81,779 $ 64,068 ============ ============ See notes to consolidated financial statements and accompanying notes.
STATEMENT OF OPERATIONS (UNCONSOLIDATED)
Years Ended December 31, 1994 1993 1992 (In thousands of dollars) Investment, interest and other income (expense) $ (2,159) $ (718) $ (2,607) Interest expense (21,180) (20,917) (21,592) General and administrative expenses (598) (720) (1,000) Equity in earnings (losses) of subsidiaries 18,790 6,534 (776) ---------- ---------- ---------- Loss from continuing operations before income taxes, extraordinary item and cumulative effect of change in accounting principle (5,147) (15,821) (25,975) Credit in lieu of income taxes 8,716 3,334 - ---------- ---------- ---------- Income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle 3,569 (12,487) (25,975) Income (loss) from net assets transferred to MAXXAM, net of minority interests and related income taxes - (512,970) 33,691 ---------- ---------- ---------- Income (loss) before extraordinary item and cumulative effect of change in accounting principle 3,569 (525,457) 7,716 Extraordinary item: Loss on early extinguishment of debt, net of related credit in lieu of income taxes of $3,290 - (6,387) - Cumulative effect of change in accounting principle for income taxes - (56) - ---------- ---------- ---------- Net income (loss) $ 3,569 $(531,900) $ 7,716 ========== ========== ========== See notes to consolidated financial statements and accompanying notes.
STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
Years Ended December 31, 1994 1993 1992 (In thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 3,569 $(531,900) $ 7,716 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Amortization of deferred financing costs and discounts on long-term debt 9,930 4,855 1,806 Equity in losses (earnings) of subsidiaries (18,790) (6,534) 776 Net sales (purchases) of marketable securities (1,808) (5,586) 42,725 Net losses (gains) on marketable securities (731) (2,551) 2,608 Loss (income) from net assets transferred to MAXXAM, net - 512,970 (33,691) Extraordinary loss on early extinguishment of debt, net - 6,387 - Cumulative effect of change in accounting principle - 56 - Incurrence of financing costs - (6,503) - Decrease (increase) in receivables 90 (380) 11,117 Increase in accrued and deferred income taxes (8,518) (3,356) - Increase (decrease) in accrued interest and other liabilities (911) 3,272 31 Increase (decrease) in accounts payable (53) 53 (111) Other 232 62 - ---------- ---------- ---------- Net cash provided by (used for) operating activities (16,990) (29,155) 32,977 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Net advances from subsidiaries 41,112 35,695 - Increase in net assets transferred to MAXXAM - (11,770) (22,356) ---------- ---------- ---------- Net cash provided by (used for) investing activities 41,112 23,925 (22,356) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt - 170,000 - Redemptions of long-term debt - (155,263) - Dividends paid - (20,000) (36) ---------- ---------- ---------- Net cash used for financing activities - (5,263) (36) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24,122 (10,493) 10,585 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 92 10,585 - ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 24,214 $ 92 $ 10,585 ========== ========== ========== SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Net margin borrowings for marketable securities $ 5,628 $ 1,020 Net assets transferred to MAXXAM 30,531 Dividend of notes receivable and marketable securities to parent $ 14,964 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 11,156 $ 13,975 $ 19,839 Tax allocation payments to (refunds from) MAXXAM (198) 22 - See notes to consolidated financial statements and accompanying notes.
NOTES TO FINANCIAL STATEMENTS A. BASIS OF PRESENTATION As described in Note 1 to the Company's Consolidated Financial Statements (contained in Item 8), the Forest Products Group Formation required the Company to restate its historical financial statements with respect to the net assets transferred to MAXXAM. Such restatement has been made with respect to all periods presented in a manner similar to that which would have been presented if the Company had discontinued the operations relating to such net assets. B. LONG-TERM DEBT The Forest Products Group Formation was done contemporaneously with the issuance of the MGI Notes and the retirement of the 12-3/4% Notes as described in Note 5 to the Consolidated Financial Statements. The MGI Notes are secured by the Company's pledge of 100% of the common stock of Pacific Lumber, Britt and MPI and by MAXXAM's pledge of 28 million shares of Kaiser's common stock it received as a result of the Forest Products Group Formation. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MAXXAM GROUP INC. Date: March 24, 1995 By: PAUL N. SCHWARTZ Paul N. Schwartz Vice President and Chief Financial Officer (Principal Financial Officer) Date: March 24, 1995 By: GARY L. CLARK Gary L. Clark Vice President (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 24, 1995 By: CHARLES E. HURWITZ Charles E. Hurwitz Chairman of the Board, President and Chief Executive Officer Date: March 24, 1995 By: PAUL N. SCHWARTZ Paul N. Schwartz Vice President, Chief Financial Officer and Director Date: March 24, 1995 By: JOHN A. CAMPBELL John A. Campbell Vice President and Director Date: March 24, 1995 By: JOHN T. LA DUC John T. La Duc Vice President and Director Date: March 24, 1995 By: ANTHONY R. PIERNO Anthony R. Pierno Vice President, General Counsel and Director Date: March 24, 1995 By: WILLIAM S. RIEGEL William S. Riegel Vice President and Director MAXXAM GROUP INC. INDEX OF EXHIBITS Exhibit Number Description 3.1 Certificate of Incorporation of MAXXAM Group Inc. (the "Company" or "MGI") (incorporated herein by reference to Exhibit 3.1E to the Company's definitive proxy statement dated October 24, 1984) 3.2 Certificate of Amendment of Certificate of Incorporation of the Company dated as of September 28, 1988 (incorporated herein by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988) 3.3 Certificate of Amendment of Certificate of Incorporation of the Company dated as of June 1, 1989 (incorporated herein by reference to Exhibit 3(c) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989) 3.4 By-laws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K dated July 10, 1986) 4.1 Indenture between the Company and Shawmut Bank, N.A., Trustee, regarding the Company's 12-3/4 Senior Secured Discount Notes due 2003 and 11-1/4% Senior Secured Notes due 2003 (incorporated herein by reference to Exhibit 4.1 to the Company's Annual Report on Form 10- K for the fiscal year ended December 31, 1993) 4.2 Indenture between The Pacific Lumber Company ("Pacific Lumber") and The First National Bank of Boston, as Trustee, regarding Pacific Lumber's 10-1/2% Senior Notes due 2003 (incorporated herein by reference to Exhibit 4.1 to the Annual Report on Form 10-K of Pacific Lumber for the fiscal year ended December 31, 1993, File No. 1-9204) 4.3 Indenture between Scotia Pacific Holding Company ("SPHC") and The First National Bank of Boston, as Trustee, regarding SPHC's 7.95% Timber Collateralized Notes due 2015 (incorporated herein by reference to Exhibit 4.1 to SPHC's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 55538; the "SPHC 1993 Form 10-K") 4.4 Revolving Credit Agreement dated as of June 23, 1993 between Pacific Lumber and Bank of America National Trust and Savings Association (incorporated herein by reference to Exhibit 4.19 to Amendment No. 6 to the Company's Registration Statement on Form S-2, Registration No. 33-64042; the "MGI Registration Statement") 4.5 Letter Amendment to the Revolving Credit Agreement, dated October 5, 1993 (incorporated herein by reference to Exhibit 4.1 to Pacific Lumber's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-9204) 4.6 Second Amendment, dated as of May 26, 1994, to the 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) Note: Pursuant to Regulation Section 229.601, Item 601 (b)(4)(iii) of Regulation S-K, upon request of the Securities and Exchange Commission, the Company hereby agrees to furnish a copy of any unfiled instrument which defines the rights of holders of long-term debt of the Company and its consolidated subsidiaries (and for any of its unconsolidated subsidiaries for which financial statements are required to be filed) wherein the total amount of securities authorized thereunder does not exceed 10 percent of the total consolidated assets of the Company 10.1 Tax Allocation Agreement between the Company and MAXXAM Inc. dated August 4, 1993 (incorporated herein by reference to Exhibit 10.6 to the MGI Registration Statement) 10.2 Tax Allocation Agreement dated as of May 21, 1988 among MAXXAM Inc., the Company, Pacific Lumber and the corporations signatory thereto (incorporated herein by reference to Exhibit 10.8 to Pacific Lumber's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-9204) 10.3 Tax Allocation Agreement among Pacific Lumber, SPHC, Salmon Creek Corporation and MAXXAM Inc. dated March 23, 1993 (incorporated herein by reference to Exhibit 10.1 to Amendment No. 3 to the Form S-1 Registration Statement of SPHC, Registration No. 33-55538) 10.4 Tax Allocation Agreement between MAXXAM Inc. and Britt Lumber Co., Inc., dated as of July 3, 1990 (incorporated herein by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993) 10.5 Agreement dated December 20, 1985 between Pacific Lumber and General Electric Company (incorporated herein by reference to Exhibit 10(m) to Pacific Lumber's Registration Statement on Form S-1, Registration No. 33-5549; the "1985 GE Agreement") 10.6 Amendment No. 1 to Agreement between Pacific Lumber and General Electric Company dated July 29, 1986 relating to the 1985 GE Agreement (incorporated herein by reference to Exhibit 10.4 to Pacific Lumber's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-9204) 10.7 Power Purchase Agreement dated January 17, 1986 between Pacific Lumber and Pacific Gas and Electric Company (incorporated herein by reference to Exhibit 10(n) to Pacific Lumber's Registration Statement on Form S-1, Registration No. 33-5549) 10.8 Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment among SPHC, The First National Bank of Boston, as Trustee, and The First National Bank of Boston, as the Collateral Agent (incorporated herein by reference to Exhibit 4.2 to the SPHC 1993 Form 10-K) 10.9 Master Purchase Agreement between Pacific Lumber and SPHC (incorporated herein by reference to Exhibit 10.1 to the SPHC 1993 Form 10-K) 10.10 Services Agreement between Pacific Lumber and SPHC (incorporated herein by reference to Exhibit 10.2 to the SPHC 1993 Form 10-K) 10.11 Additional Services Agreement between Pacific Lumber and SPHC (incorporated herein by reference to Exhibit 10.3 to the SPHC 1993 Form 10-K) 10.12 Reciprocal Rights Agreement among Pacific Lumber, SPHC and Salmon Creek Corporation (incorporated herein by reference to Exhibit 10.4 to the SPHC 1993 Form 10-K) 10.13 Environmental Indemnification Agreement between Pacific Lumber and SPHC (incorporated herein by reference to Exhibit 10.5 to the SPHC 1993 Form 10-K) 10.14 Purchase and Services Agreement between Pacific Lumber and Britt Lumber Co., Inc. (incorporated herein by reference to Exhibit 10.17 to Amendment No. 2 to the Form S-2 Registration Statement of Pacific Lumber; Registration Statement No. 33-56332) 10.15 Put and Call Agreement dated November 16, 1987 between Charles E. Hurwitz and MPI (incorporated herein by reference to Exhibit C to Schedule 13D dated November 24, 1987, filed by the Company with respect to MAXXAM Inc.'s common stock; the "Put and Call Agreement") 10.16 Amendment to Put and Call Agreement, dated May 18, 1988 (incorporated herein by reference to Exhibit D to the Final Amendment to Schedule 13D dated May 20, 1988, filed by the Company relating to MAXXAM Inc.'s common stock) 10.17 Amendment to Put and Call Agreement, dated as of February 17, 1989 (incorporated herein by reference to Exhibit 10.35 to MAXXAM Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-3924) 10.18 Unconditional Guarantee of Payment and Performance dated June 17, 1991, by the Company and MAXXAM Inc. to and for the benefit of General Electric Capital Corporation ("GECC") (incorporated herein by reference to Exhibit 10(ee) to Amendment No. 4 to MGI's Registration Statement on Form S-4 on Form S-2, Registration No. 33-42300) 10.19 First Renewal, Extension and Modification Agreement, dated as of June 17, 1992 among GECC, MXM Mortgage Corp. and the Company (incorporated herein by reference to Exhibit 4.3 to MAXXAM Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-3924) 10.20 Loan Increase, Extension and Modification Agreement, dated as of December 30, 1992, among GECC, MXM Mortgage Corp. and MAXXAM Inc.(incorporated herein by reference to Exhibit 4.23 to MAXXAM Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-3924) 10.21 Consent and Assumption Agreement, dated as of December 10, 1993, among GECC, MXM Mortgage Corp., MXM Mortgage L.P., the Company and MAXXAM Inc. (incorporated herein by reference to MAXXAM Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-3924) 10.22 Release and Termination of Unconditional Guarantee of Payment and Performance, dated as of December 30, 1993, executed by GECC (incorporated herein by reference to MAXXAM Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-3924) 10.23 Investment Management Agreement, dated as of December 1, 1991, by and among the Company, MAXXAM Inc. and certain related corporations (incorporated herein by reference to Exhibit 10.23 to Amendment No. 5 to the MGI Registration) 10.24 Undertaking, dated August 4, 1993, executed by MAXXAM in favor of the Company *27 Financial Data Schedule *99.1 The consolidated financial statements and notes thereto of Kaiser Aluminum Corporation for the fiscal year ended December 31, 1994 *99.2 The consolidated financial statements and notes thereto of The Pacific Lumber Company for the fiscal year ended December 31, 1994 * Included with this filing. EX-27 2 EXHIBIT 27
5 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. 1,000 U.S. DOLLARS YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 1 48,575 19,514 23,170 0 70,098 172,509 162,264 59,081 756,681 70,012 782,456 0 0 0 (112,482) 756,681 249,629 249,629 129,598 129,598 42,196 0 77,383 14,819 (3,616) 18,435 0 (14,866) 0 3,569 0 0
EX-99 3 EXHIBIT 99.1 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and the Board of Directors of Kaiser Aluminum Corporation: We have audited the accompanying consolidated balance sheets of Kaiser Aluminum Corporation (a Delaware corporation) and subsidiaries as of December 31, 1994 and 1993, and the related statements of consolidated income and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kaiser Aluminum Corporation and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As explained in Note 1 of the Notes to Consolidated Financial Statements, effective January 1, 1993, the Company changed its methods of accounting for postretirement benefits other than pensions, postemployment benefits, and income taxes. ARTHUR ANDERSEN LLP Houston, Texas February 17, 1995 28 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS
December 31, ------------------- (In millions of dollars, except share amounts) 1994 1993 -------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 17.6 $ 14.7 Receivables: Trade, less allowance for doubtful receivables of $4.2 in 1994 and $2.9 in 1993 150.7 156.1 Other 48.5 78.6 Inventories 468.0 426.9 Prepaid expenses and other current assets 158.0 60.7 -------- -------- Total current assets 842.8 737.0 Investments in and advances to unconsolidated affiliates 169.7 183.2 Property, plant, and equipment - net 1,133.2 1,163.7 Deferred income taxes 271.2 210.8 Other assets 281.2 233.2 -------- -------- Total $2,698.1 $2,527.9 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 152.1 $ 126.3 Accrued interest 32.6 23.6 Accrued salaries, wages, and related expenses 77.7 56.1 Accrued postretirement medical benefit obligation - current portion 47.0 47.6 Other accrued liabilities 176.9 133.2 Payable to affiliates 85.3 62.4 Short-term borrowings .5 Long-term debt - current portion 11.5 8.7 -------- -------- Total current liabilities 583.1 458.4 Long-term liabilities 495.5 501.8 Accrued postretirement medical benefit obligation 734.9 713.1 Long-term debt 751.1 720.2 Minority interests 116.2 105.0 Stockholders' equity: Preferred stock, par value $.05, authorized 20,000,000 shares; Series A Convertible, stated value $.10, issued and outstanding, 1,938,295 in 1994 and 1993 .2 .2 PRIDES Convertible, par value $.05, issued and outstanding, 8,855,550 and nil in 1994 and 1993 .4 Common stock, par value $.01, authorized 100,000,000 shares; issued and outstanding, 58,205,083 and 58,095,599 shares in 1994 and 1993 .6 .6 Additional capital 527.8 425.9 Accumulated deficit (502.6) (375.7) Additional minimum pension liability (9.1) (21.6) -------- -------- Total stockholders' equity 17.3 29.4 -------- -------- Total $2,698.1 $2,527.9 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 29 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED INCOME (LOSS)
Year Ended December 31, ------------------------------ (In millions of dollars, except share amounts) 1994 1993 1992 -------------------------------------------------------------------------------------------------------------- Net sales $1,781.5 $1,719.1 $1,909.1 -------- -------- -------- Costs and expenses: Cost of products sold 1,625.5 1,587.7 1,619.3 Depreciation 95.4 97.1 80.3 Selling, administrative, research and development, and general 116.8 121.9 119.6 Restructuring of operations 35.8 -------- -------- -------- Total costs and expenses 1,837.7 1,842.5 1,819.2 -------- -------- -------- Operating income (loss) (56.2) (123.4) 89.9 Other income (expense): Interest and other income - net (7.3) (.9) 20.9 Interest expense (88.6) (84.2) (78.7) -------- -------- -------- Income (loss) before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles (152.1) (208.5) 32.1 Credit (provision) for income taxes 53.8 86.9 (5.3) Minority interests (3.1) (1.5) .1 -------- -------- -------- Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles (101.4) (123.1) 26.9 Extraordinary loss on early extinguishment of debt, net of tax benefit of $2.9 and $11.2 for 1994 and 1993, respectively (5.4) (21.8) Cumulative effect of changes in accounting principles, net of tax benefit of $237.7 (507.3) -------- -------- -------- Net income (loss) (106.8) (652.2) 26.9 Dividends on preferred stock (20.1) (6.3) -------- -------- -------- Net income (loss) attributable to common shareholders $ (126.9) $ (658.5) $ 26.9 ======== ======== ======== Per common and common equivalent share: Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles $ (2.09) $ (2.25) $ .47 Extraordinary loss (.09) (.38) Cumulative effect of changes in accounting principles (8.84) -------- -------- -------- Net income (loss) $ (2.18) $ (11.47) $ .47 ======== ======== ======== Weighted average common and common equivalent shares outstanding (000) 58,139 57,423 57,250 ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 30 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended December 31, ------------------------- (In millions of dollars) 1994 1993 1992 -------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $(106.8) $(652.2) $ 26.9 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation 95.4 97.1 80.3 Amortization of deferred financing costs and discount on long-term debt 6.2 11.2 11.5 Non-cash postretirement medical benefit expenses 13.9 19.2 Restructuring of operations 35.8 Minority interests 3.1 1.5 (.1) Extraordinary loss on early extinguishment of debt - net 5.4 21.8 Cumulative effect of changes in accounting principles - net 507.3 (Decrease) increase in accrued and deferred income taxes (68.8) (96.4) 3.5 Equity in losses of unconsolidated affiliates 1.9 3.3 1.9 Recognition of previously deferred income from a forward alumina sale (.6) (25.7) Increase (decrease) in accrued interest 9.3 19.2 (.3) Incurrence of financing costs (19.2) (12.7) (5.5) Decrease (increase) in receivables 36.4 (6.1) (57.8) (Increase) decrease in inventories (41.1) 13.0 58.7 (Increase) decrease in prepaid expenses and other current assets (49.7) 7.4 7.6 Increase (decrease) in accounts payable 25.8 (10.3) (5.2) Increase (decrease) in payable to affiliates and accrued liabilities 36.9 57.7 (88.7) Other 10.0 8.0 19.2 ------- ------- ------- Net cash (used for) provided by operating activities (41.3) 24.2 26.3 ------- ------- ------- Cash flows from investing activities: Net proceeds from disposition of property and investments 4.1 13.1 26.1 Capital expenditures (70.0) (67.7) (114.4) ------- ------- ------- Net cash used for investing activities (65.9) (54.6) (88.3) ------- ------- ------- Cash flows from financing activities: Repayments of long-term debt, including revolving credit (345.1) (1,134.5) (221.4) Borrowings of long-term debt, including revolving credit 378.9 1,068.1 303.8 Borrowings from MAXXAM Group Inc. (see supplemental disclosure below) 15.0 2.5 Tender premiums and other costs of early extinguishment of debt (27.1) Net short-term debt repayments (.5) (4.3) (1.5) Dividends paid (14.8) (6.3) (11.4) Capital stock issued 100.1 119.3 .6 Redemption of minority interests' preference stock (8.5) (4.2) (7.3) ------- ------- ------- Net cash provided by financing activities 110.1 26.0 65.3 ------- ------- ------- Net increase (decrease) in cash and cash equivalents during the year 2.9 (4.4) 3.3 Cash and cash equivalents at beginning of year 14.7 19.1 15.8 ------- ------- ------- Cash and cash equivalents at end of year $ 17.6 $ 14.7 $ 19.1 ======= ======= ======= Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest $ 73.1 $ 53.7 $ 68.1 Income taxes paid 16.0 13.5 1.8 Tax allocation payments to (from) MAXXAM Inc. (3.9) 28.0 Supplemental disclosure of non-cash financing activities: Exchange of the borrowings from MAXXAM Group Inc. for capital stock $ 15.0
The accompanying notes to consolidated financial statements are an integral part of these statements. 31 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions of dollars, except share amounts) 1. Summary of Significant Accounting Policies ---------------------------------------------- Principles of Consolidation The consolidated financial statements include the statements of Kaiser Aluminum Corporation ("Kaiser" or the "Company") and its majority- owned subsidiaries. Investments in 50%-or-less-owned entities are accounted for primarily by the equity method. Intercompany balances and transactions are eliminated. The Company is a subsidiary of MAXXAM Inc. ("MAXXAM") and conducts its operations through its wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). Certain reclassifications of prior-year information were made to conform to the current presentation. Changes in Accounting Principles The Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), and Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112"), as of January 1, 1993. The costs of postretirement benefits other than pensions and postemployment benefits are now accrued over the period employees provide services to the date of their full eligibility for such benefits. Previously, such costs were expensed as actual claims were incurred. The cumulative effect of the changes in accounting principles for the adoption of SFAS 106 and SFAS 112 were recorded as charges to results of operations of $497.7 and $7.3, net of related income taxes of $234.2 and $3.5, respectively. These deferred income tax benefits were recorded at the federal statutory rate in effect on the date the accounting standards were adopted, before giving effect to certain valuation allowances. The new accounting standards had no effect on the Company's cash outlays for postretirement or postemployment benefits, nor did these one-time charges affect the Company's compliance with its existing debt covenants. The Company reserves the right, subject to applicable collective bargaining agreements and applicable legal requirements, to amend or terminate these benefits. The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), as of January 1, 1993. The adoption of SFAS 109 changes the Company's method of accounting for income taxes to an asset and liability approach from the deferral method prescribed by Accounting Principles Board Opinion No. 11, "Accounting for Income Taxes" ("APB 11"). The asset and liability approach requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred income tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. The cumulative effect of the change in accounting principle reduced the Company's results of operations by $2.3. The adoption of SFAS 109 required the Company to restate certain assets and liabilities to their pre-tax amounts from their net-of-tax amounts originally recorded in connection with the acquisition by MAXXAM in October 1988. As a result of restating the assets and liabilities, the loss before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles for the year ended December 31, 1993, was increased by $9.3. Cash and Cash Equivalents The Company considers only those short-term, highly liquid investments with original maturities of 90 days or less to be cash equivalents. Inventories Substantially all product inventories are stated at last-in, first-out ("LIFO") cost, not in excess of market value. Replacement cost is not in excess of LIFO cost. Other inventories, principally operating supplies and repair and maintenance parts, are stated at the lower of average cost or market. Inventory costs consist of material, labor, and manufacturing overhead, including depreciation. Inventories consist of the following: 32 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts)
December 31, --------------- 1994 1993 ------ ------ Finished fabricated products $ 49.4 $ 83.7 Primary aluminum and work in process 203.1 141.4 Bauxite and alumina 102.3 94.0 Operating supplies and repair and maintenance parts 113.2 107.8 ------ ------ $468.0 $426.9 ====== ======
Depreciation Depreciation is computed principally by the straight-line method at rates based on the estimated useful lives of the various classes of assets. The principal estimated useful lives by class of assets are:
--------------------------------------------------------------------- Land improvements 8 to 25 years Buildings 15 to 45 years Machinery and equipment 10 to 22 years
Other Income Other income in 1994 and 1993 includes $10.3 and $10.8 of pre-tax charges related principally to establishing additional litigation and environmental reserves in the fourth quarters, respectively. Other income in 1992 includes $14.0 of pre-tax income for non-recurring adjustments to previously recorded liabilities and reserves in the fourth quarter. Deferred Financing Costs Costs incurred to obtain debt financing are deferred and amortized over the estimated term of the related borrowing. Amortization of deferred financing costs of $6.0, $11.2, and $10.9 for the years ended December 31, 1994, 1993, and 1992, respectively, are included in interest expense. Foreign Currency The Company uses the United States dollar as the functional currency for its foreign operations. Derivative Financial Instruments Gains and losses arising from the use of derivative financial instruments are reflected in the Company's operating results concurrently with the consummation of the underlying hedged transactions. Deferred gains or losses as of December 31, 1994, are included in Prepaid expenses and other current assets and Other accrued liabilities. The Company does not hold or issue derivative financial instruments for trading purposes (see Note 10). Fair Value of Financial Instruments The following table presents the estimated fair value of the Company's financial instruments, together with the carrying amounts of the related assets or liabilities. Unless otherwise noted, the carrying amount of all financial instruments is a reasonable estimate of fair value.
December 31, 1994 December 31, 1993 ------------------ -------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value --------- --------- -------- --------- Debt $762.6 $747.6 $728.9 $734.1 Foreign currency contracts 3.5
33 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Debt - The quoted market prices were used for the Senior Notes and 12-3/4% Notes (see Note 5). The fair value of all other debt is based on discounting the future cash flows using the current rate for debt of similar maturities and terms. Foreign Currency Contracts - The fair value generally reflects the estimated amounts that the Company would receive to enter into similar contracts at the reporting date, thereby taking into account unrealized gains or losses on open contracts (see Note 10). Net Income (Loss) per Common and Common Equivalent Share Net income (loss) per common and common equivalent share is computed based on the weighted average number of common and common equivalent shares outstanding during each period. For the year ended December 31, 1994, common stock equivalents of 19,382,950 attributable to the Series A Shares, 8,855,550 shares attributable to the PRIDES, and 1,122,380 attributable to nonqualified stock options and for the year ended December 31, 1993, common stock equivalents of 19,382,950 attributable to the Series A Shares and 664,400 attributable to nonqualified stock options were excluded from the calculation of weighted average shares because they were antidilutive (see Notes 7 and 8). Dividends declared on the Series A Shares and the PRIDES ($20.1 and $6.3 for the years ended December 31, 1994 and 1993) are added to net loss for the purpose of calculating loss per common and common equivalent share. 2. Restructuring of Operations ------------------------------- In 1993, KACC implemented a restructuring plan primarily for its flat- rolled products operation at its Trentwood plant in response to overcapacity in the aluminum rolling industry, flat demand in the U.S. can stock markets, and declining demand for aluminum products sold to customers in the commercial aerospace industry, all of which had resulted in declining prices in Trentwood's key markets. As of December 31, 1994, the costs related to the 1993 pre-tax charge for this restructuring of $35.8 have been substantially incurred. 3. Investments In and Advances To Unconsolidated Affiliates ------------------------------------------------------------ Summary combined financial information is provided below for unconsolidated aluminum investments, most of which supply and process raw materials. The investees are Queensland Alumina Limited ("QAL") (28.3% owned), Anglesey Aluminium Limited ("Anglesey") (49.0% owned), and Kaiser Jamaica Bauxite Company (49.0% owned). The equity in earnings (losses) before income taxes of such operations is treated as a reduction (increase) in cost of products sold. At December 31, 1994 and 1993, KACC's net receivables from these affiliates were not material. Summary of Combined Operations
Year Ended December 31, --------------------------- 1994 1993 1992 ------------------------------------------------------------------- Net sales $ 489.8 $ 510.3 $ 586.6 Costs and expenses (494.8) (527.2) (586.7) Provision (credit) for income taxes (6.3) 1.9 6.9 ------- ------- ------- Net income (loss) $ (11.3) $ (15.0) $ 6.8 ======= ======= ======= Company's equity in losses $ (1.9) $ (3.3) $ (1.9) ======= ======= =======
34 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) Summary of Combined Financial Position
December 31, --------------- 1994 1993 ---------------------------------------------------------------------- Current assets $342.3 $312.3 Property, plant, and equipment - net 349.4 371.1 Other assets 42.4 46.3 ------ ------ Total assets $734.1 $729.7 ====== ====== Current liabilities $122.4 $130.4 Long-term debt 307.6 290.0 Other liabilities 31.0 17.8 Stockholders' equity 273.1 291.5 ------ ------ Total liabilities and stockholders' equity $734.1 $729.7 ====== ======
The Company's equity in losses differs from the summary net income (loss) due to various percentage ownerships in the entities and equity method accounting adjustments. At December 31, 1994, KACC's investment in its unconsolidated affiliates exceeded its equity in their net assets by approximately $67.9. The Company is amortizing this amount over a 12-year period, which results in an annual amortization charge of approximately $11.6. The Company and its affiliates have interrelated operations. KACC provides some of its affiliates with services such as financing, management, and engineering. Significant activities with affiliates include the acquisition and processing of bauxite, alumina, and primary aluminum. Purchases from these affiliates were $219.7, $206.6, and $219.4 in the years ended December 31, 1994, 1993, and 1992, respectively. No dividends were received from investees in the three years ended December 31, 1994. 4. Property, Plant, and Equipment ---------------------------------- The major classes of property, plant, and equipment are as follows:
December 31, ------------------- 1994 1993 ------------------------------------------------------------------ Land and improvements $ 153.5 $ 135.1 Buildings 196.8 194.8 Machinery and equipment 1,285.0 1,223.0 Construction in progress 45.0 64.9 -------- -------- 1,680.3 1,617.8 Accumulated depreciation 547.1 454.1 -------- -------- Property, plant, and equipment - net $1,133.2 $1,163.7 ======== ========
35 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) 5. Long-Term Debt ------------------ Long-term debt and its maturity schedule are as follows:
December 31, 2000 ------------- and 1994 1993 1995 1996 1997 1998 1999 After Total Total --------------------------------------------------------------------------------------------------------- 1994 Credit Agreement (10% at December 31, 1994) $6.7 $ 6.7 1989 Credit Agreement (6.59% at December 31, 1993) $188.0 9-7/8% Senior Notes, net $223.6 223.6 Pollution Control and Solid Waste Disposal Facilities Obligations (6.00%-7.75%) $ 1.2 $1.2 $1.3 $1.4 .2 32.8 38.1 39.2 Alpart CARIFA Loan (fixed and variable rates) 60.0 60.0 60.0 Alpart Term Loan (8.95%) 6.2 6.3 6.2 18.7 25.0 12-3/4% Senior Subordinated Notes 400.0 400.0 400.0 Other borrowings (fixed and variable rates) 4.1 1.5 1.7 7.4 .4 .4 15.5 16.7 ----- ---- ---- ---- ---- ------ ------ ------ Total $11.5 $9.0 $9.2 $8.8 $7.3 $716.8 762.6 728.9 Less current portion ===== ==== ==== ==== ==== ====== 11.5 8.7 ------ ------ Long-term debt $751.1 $720.2 ====== ======
1994 Credit Agreement On February 17, 1994, the Company and KACC entered into a credit agreement with BankAmerica Business Credit, Inc. (as agent for itself and other lenders), Bank of America National Trust and Savings Association, and certain other lenders (as amended, the "1994 Credit Agreement"). The 1994 Credit Agreement consists of a $275.0 five-year secured, revolving line of credit, scheduled to mature in 1999, and replaced the credit agreement entered into in December 1989 by the Company and KACC with a syndicate of commercial banks and other financial institutions (as amended, the "1989 Credit Agreement"). KACC is able to borrow under the facility by means of revolving credit advances and letters of credit (up to $125.0) in an aggregate amount equal to the lesser of $275.0 or a borrowing base relating to eligible accounts receivable plus eligible inventory. The Company recorded a pre-tax extraordinary loss of $8.3 ($5.4 after taxes) in the first quarter of 1994, consisting primarily of the write-off of unamortized deferred financing costs related to the 1989 Credit Agreement. As of December 31, 1994, $202.5 (of which $59.3 could have been used for letters of credit) was available to KACC under the 1994 Credit Agreement. The 1994 Credit Agreement is unconditionally guaranteed by the Company and by certain significant subsidiaries of KACC. Loans under the 1994 Credit Agreement bear interest at a rate per annum, at KACC's election, equal to a Reference Rate (as defined) plus 1-1/2% or LIBO Rate (Reserve Adjusted) (as defined) plus 3-1/4%. After June 30, 1995, the interest rate margins applicable to borrowings under the 1994 Credit Agreement may be reduced by up to 1-1/2% (non- cumulatively), based on a financial test, determined quarterly. The 1994 Credit Agreement requires KACC to maintain certain financial covenants and places restrictions on the Company's and KACC's ability to, among other things, incur debt and liens, make investments, pay dividends, undertake transactions with affiliates, make capital expenditures, and enter into unrelated lines of business. Neither the Company nor KACC currently is permitted to pay dividends on its common stock. The 1994 Credit Agreement is secured by, among other things, (i) mortgages on KACC's major domestic plants (excluding the Gramercy plant); (ii) subject to certain exceptions, liens on the accounts receivable, inventory, equipment, domestic patents and trademarks, and substantially all other personal property of KACC and certain of its subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser; and (iv) pledges of all of the stock of a number of KACC's wholly owned domestic subsidiaries, pledges of a portion of the stock of certain foreign subsidiaries, and pledges of a portion of the stock of certain partially owned foreign affiliates. 36 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) Senior Notes Concurrent with the offering by the Company of its 8.255% PRIDES, Convertible Preferred Stock (the "PRIDES") (see Note 8), KACC issued $225.0 of its 9-7/8% Senior Notes due 2002 (the "Senior Notes"). The net proceeds of the offering of the Senior Notes were used to reduce outstanding borrowings under the revolving credit facility of the 1989 Credit Agreement immediately prior to the effectiveness of the 1994 Credit Agreement and for working capital and general corporate purposes. Senior Subordinated Notes On February 1, 1993, KACC issued $400.0 of 12-3/4% Senior Subordinated Notes due 2003 (the "12-3/4% Notes"). The net proceeds from the sale of the 12-3/4% Notes were used to retire the 14-1/4% Senior Subordinated Notes due 1995 (the "14-1/4% Notes"), to prepay $18.0 of the term loan, and to reduce outstanding borrowings under the revolving credit facility of the 1989 Credit Agreement. These transactions resulted in a pre-tax extraordinary loss of $33.0 in the first quarter of 1993, consisting primarily of the write-off of unamortized discount and deferred financing costs related to the 14-1/4% Notes and the payment of premiums on the 14-1/4% Notes. The obligations of KACC with respect to the Senior Notes and the 12-3/4% Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC. The indentures governing the Senior Notes and the 12-3/4% Notes restrict, among other things, KACC's ability, and the 1994 Credit Agreement restricts, among other things, Kaiser's and KACC's ability, to incur debt, undertake transactions with affiliates, and pay dividends. Gramercy Revenue Bonds In December 1992, KACC entered into an installment sale agreement (the "Sale Agreement") with the Parish of St. James, Louisiana (the "Louisiana Parish"), pursuant to which the Louisiana Parish issued $20.0 aggregate principal amount of its 7-3/4% Bonds due August 1, 2022 (the "Bonds") to finance the construction of certain solid waste disposal facilities at KACC's Gramercy plant. The proceeds from the sale of the Bonds were deposited into a construction fund and may be withdrawn, from time to time, pursuant to the terms of the Sale Agreement and the Bond indenture. At December 31, 1994, $6.4 remained in the construction fund. The Sale Agreement requires KACC to make payments to the Louisiana Parish in installments due on the dates and in the amounts required to permit the Louisiana Parish to satisfy all of its payment obligations under the Bonds. Alpart CARIFA Loan In December 1991, Alpart entered into a loan agreement with the Caribbean Basin Projects Financing Authority ("CARIFA") under which CARIFA loaned Alpart the proceeds from the issuance of CARIFA's industrial revenue bonds. The terms of the loan parallel the bonds' repayment terms. The $38.0 aggregate principal amount of Series A bonds matures on June 1, 2008. The Series A bonds bear interest at a floating rate of 87% of the applicable LIBID Rate (LIBOR less 1/8 of 1%) on $37.5 of the principal amount (5.2% at December 31, 1994) with the remaining $.5 bearing interest at a fixed rate of 6.35%. The $22.0 aggregate principal amount of Series B bonds matures on June 1, 2007, and bears interest at a fixed rate of 8.25%. Proceeds from the sale of the bonds were used by Alpart to refinance interim loans from the partners in Alpart, to pay eligible project costs for the expansion and modernization of its alumina refinery and related port and bauxite mining facilities, and to pay certain costs of issuance. Under the terms of the loan agreement, Alpart must remain a qualified recipient for Caribbean Basin Initiative funds as defined in applicable laws. Alpart has agreed to indemnify bondholders of CARIFA for certain tax payments that could result from events, as defined, that adversely affect the tax treatment of the interest income on the bonds. Alpart's obligations under the loan agreement are secured by a $64.2 letter of credit guaranteed by the partners in Alpart (of which $22.5 is guaranteed by the Company's minority partner in Alpart). 37 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) Capitalized Interest Interest capitalized in 1994, 1993, and 1992 was $2.7, $3.4, and $4.4, respectively. Restricted Net Assets of Subsidiary Certain debt instruments restrict the ability of KACC to transfer assets, make loans and advances, and pay dividends to the Company. The assets of KACC, which are substantially all of the Company's assets, are restricted. 6. Income Taxes ---------------- Income (loss) before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles by geographic area is as follows:
Year Ended December 31, --------------------------- 1994 1993 1992 ------------------------------------------------------------------- Domestic $(168.4) $(232.0) $ (77.6) Foreign 16.3 23.5 109.7 ------- ------- ------- Total $(152.1) $(208.5) $ 32.1 ======= ======= =======
Income taxes are classified as either domestic or foreign, based on whether payment is made or due to the United States or a foreign country. Certain income classified as foreign is also subject to domestic income taxes. The credit (provision) for income taxes on income (loss) before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles consists of:
Federal Foreign State Total --------------------------------------------------------------- 1994 Current $(18.0) $(.1) $(18.1) Deferred $71.2 .6 .1 71.9 ----- ------ ---- ------ Total $71.2 $(17.4) $ 53.8 ===== ====== ==== ====== 1993 Current $12.6 $ (7.9) $(.1) $ 4.6 Deferred 68.5 12.0 1.8 82.3 ----- ------ ---- ------ Total $81.1 $ 4.1 $1.7 $ 86.9 ===== ====== ==== ====== 1992 Current $(9.7) $(11.4) $(.1) $(21.2) Deferred 13.1 3.3 (.5) 15.9 ----- ------ ---- ------ Total $ 3.4 $ (8.1) $(.6) $ (5.3) ===== ====== ==== ======
The 1994 federal deferred credit for income taxes of $71.2 includes $29.3 for the benefit of operating loss carryforwards generated in 1994. The 1993 federal deferred credit for income taxes of $68.5 includes $29.2 for the benefit of operating loss carryforwards generated in 1993 and a $3.4 benefit for increasing net deferred income tax assets (liabilities) as of the date of enactment (August 10, 1993) of the Omnibus Budget Reconciliation Act of 1993, which retroactively increased the federal statutory income tax rate from 34% to 35% for periods beginning on or after January 1, 1993. A reconciliation between the credit (provision) for income taxes and the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles is as follows: 38 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts)
Year Ended December 31, ------------------------- 1994 1993 1992 -------------------------------------------------------------------------------------------------------------- Amount of federal income tax based on the statutory rate $53.2 $73.0 $(10.9) Percentage depletion 5.6 6.4 6.3 Increase in net deferred income tax assets due to tax rate change 1.8 3.4 Revision of prior years' tax estimates and other changes in valuation allowances .2 3.9 2.9 Foreign taxes, net of federal tax benefit (5.3) (2.6) (.4) Financial reporting/tax basis differences (3.0) Other (1.7) 2.8 (.2) ----- ----- ------ Credit (provision) for income taxes $53.8 $86.9 $ (5.3) ===== ===== ======
As shown in the Statements of Consolidated Income (Loss) for the years ended December 31, 1994 and 1993, the Company reported extraordinary losses related to the early extinguishment of debt. The Company reported the 1994 extraordinary loss net of related deferred federal income taxes of $2.9 and reported the 1993 extraordinary loss net of related current federal income taxes of $11.2, which approximated the federal statutory rate in effect on the dates the transactions occurred. The Company adopted SFAS 109 as of January 1, 1993, as discussed in Note 1. The components of the Company's net deferred income tax assets are as follows:
December 31, December 31, 1994 1993 ---------------------------------------------------------------------------------------------- Deferred income tax assets: Postretirement benefits other than pensions $ 293.7 $ 285.4 Loss and credit carryforwards 187.6 142.6 Other liabilities 109.6 105.2 Pensions 51.0 60.6 Foreign and state deferred income tax liabilities 28.1 33.0 Property, plant, and equipment 23.1 23.1 Other 3.5 10.5 Valuation allowances (133.9) (133.5) ------- ------- Total deferred income tax assets - net 562.7 526.9 ======= ======= Deferred income tax liabilities: Property, plant, and equipment (203.2) (224.4) Investments in and advances to unconsolidated affiliates (63.8) (60.6) Inventories (8.3) (14.8) Other (6.4) (20.3) ------- ------- Total deferred income tax liabilities (281.7) (320.1) ------- ------- Net deferred income tax assets $ 281.0 $ 206.8 ======= =======
The valuation allowances listed above relate primarily to loss and credit carryforwards and postretirement benefits other than pensions. As of December 31, 1994, approximately $125.1 of the net deferred income tax assets listed above relate to the benefit of loss and credit carryforwards, net of valuation allowances. The Company evaluated all appropriate factors to determine the proper valuation allowances for these carryforwards, including any limitations concerning their use and the year the carryforwards expire, as well as the levels of taxable income necessary for utilization. For example, full valuation allowances were provided for certain credit carryforwards that expire in the near term. With regard to future levels of income, the Company believes, based on the cyclical nature of its business, its history of prior operating earnings, and its 39 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) expectations for future years, that it will more likely than not generate sufficient taxable income to realize the benefit attributable to the loss and credit carryforwards for which valuation allowances were not provided. The remaining portion of the Company's net deferred income tax assets at December 31, 1994, is approximately $155.9. A principal component of this amount is the tax benefit associated with the accrual for postretirement benefits other than pensions. The future tax deductions with respect to the turnaround of this accrual will occur over a 30- to 40-year period. If such deductions create or increase a net operating loss in any one year, the Company has the ability to carry forward such loss for 15 taxable years. For these reasons, the Company believes a long-term view of profitability is appropriate and has concluded that this net deferred income tax asset will more likely than not be realized despite the operating losses incurred in recent years. Certain of the deferred income tax assets and liabilities listed above are included on the Consolidated Balance Sheet in the captions entitled Receivables, Prepaid expenses and other current assets, Other accrued liabilities, and Long-term liabilities. The Company and its subsidiaries were included in the consolidated federal income tax returns of MAXXAM for the period from October 28, 1988, through June 30, 1993. As a consequence of the issuance of the Depositary Shares on June 30, 1993, as discussed in Note 8, the Company and its subsidiaries are no longer included in the consolidated federal income tax returns of MAXXAM. The Company and its subsidiaries have become members of a new consolidated return group of which the Company is the common parent corporation (the "New Kaiser Tax Group"). The New Kaiser Tax Group files consolidated federal income tax returns for taxable periods beginning on or after July 1, 1993. The tax allocation agreement between the Company and MAXXAM (the "Company Tax Allocation Agreement") and the tax allocation agreement between KACC and MAXXAM (the "KACC Tax Allocation Agreement") (collectively, the "Tax Allocation Agreements"), terminated pursuant to their terms, effective for taxable periods beginning after June 30, 1993. Any unused federal income tax attribute carryforwards under the terms of the Tax Allocation Agreements were eliminated and are not available to offset federal income tax liabilities for taxable periods beginning on or after July 1, 1993. Upon the filing of MAXXAM's 1993 consolidated federal income tax return, the tax attribute carryforwards of the MAXXAM consolidated return group as of December 31, 1993, were apportioned in part to the New Kaiser Tax Group, based on the provisions of the relevant consolidated return regulations. The benefit of such tax attribute carryforwards apportioned to the New Kaiser Tax Group approximated the benefit of tax attribute carryforwards eliminated under the Tax Allocation Agreements. To the extent the New Kaiser Tax Group generates unused tax losses or tax credits for periods beginning on or after July 1, 1993, such amounts will not be available to obtain refunds of amounts paid by the Company or KACC to MAXXAM for periods ending on or before June 30, 1993, pursuant to the Tax Allocation Agreements. KACC and MAXXAM entered into the KACC Tax Allocation Agreement, which became effective as of October 28, 1988. Under the terms of the KACC Tax Allocation Agreement, MAXXAM computed the federal income tax liability for KACC and its subsidiaries (collectively, the "Subgroup") as if the Subgroup were a separate affiliated group of corporations which was never connected with MAXXAM. During 1991, the Company and MAXXAM entered into the Company Tax Allocation Agreement, which became effective as of January 1, 1991. Under the terms of the Company Tax Allocation Agreement, MAXXAM computed a tentative federal income tax liability for the Company as if it and its subsidiaries, including KACC and its subsidiaries, were a separate affiliated group of corporations which was never connected with MAXXAM. The federal income tax liability of the Company was the difference between the tentative federal income tax liability and the liability computed under the KACC Tax Allocation Agreement. The provisions of the Tax Allocation Agreements will continue to govern for periods ended prior to July 1, 1993. Therefore, payments or refunds may still be required by or payable to the Company or KACC under the terms of their respective tax allocation agreements for these periods due to the final resolution of audits, amended returns, and related matters. However, the 1994 Credit Agreement prohibits the payment by KACC to MAXXAM of any amounts due under the KACC Tax 40 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) Allocation Agreement, except for certain payments that are required as a result of audits and only to the extent of any amounts paid after February 17, 1994, by MAXXAM to KACC under the KACC Tax Allocation Agreement. The following table presents the Company's tax attributes for federal income tax purposes as of December 31, 1994. The utilization of certain of these tax attributes is subject to limitations:
Expiring Through --------------------------------------------------------------------------- Regular tax attribute carryforwards: Current year net operating loss $ 83.7 2009 Prior year net operating losses 135.4 2008 General business tax credits 37.4 2006 Foreign tax credits 42.2 1999 Alternative minimum tax credits 15.3 Indefinite Alternative minimum tax attribute carryforwards: Current year net operating loss $ 64.3 2009 Prior year net operating losses 84.4 2008 Foreign tax credits 33.8 1999
7. Employee Benefit and Incentive Plans ---------------------------------------- Retirement Plans Retirement plans are non-contributory for salaried and hourly employees and generally provide for benefits based on a formula which considers length of service and earnings during years of service. The Company's funding policies meet or exceed all regulatory requirements. The funded status of the employee pension benefit plans and the corresponding amounts that are included in the Company's Consolidated Balance Sheets are as follows:
Plans with Accumulated Benefits Exceeding Assets December 31, 1994 1993 ----------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation: Vested employees $(663.9) $(705.0) Nonvested employees (41.1) (40.1) ------- ------- Accumulated benefit obligation (705.0) (745.1) Additional amounts related to projected salary increases (30.0) (45.5) ------- ------- Projected benefit obligation (735.0) (790.6) Plan assets (principally common stocks and fixed income obligations) at fair value 524.6 569.8 ------- ------- Plan assets less than projected benefit obligation (210.4) (220.8) Unrecognized net losses 42.5 75.7 Unrecognized net obligations .8 1.6 Unrecognized prior-service cost 30.9 16.9 Adjustment required to recognize minimum liability (42.9) (47.7) ------- ------- Accrued pension obligation included in the Consolidated Balance Sheets (principally in long-term liabilities) $(179.1) $(174.3) ======= ======= Includes plans with assets exceeding accumulated benefits by approximately $.3 and $.1 in 1994 and 1993, respectively.
41 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) As required by Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions, the Company recorded an after-tax credit (charge) to equity of $12.5 and $(14.9) at December 31, 1994 and 1993, respectively, for the reduction (excess) of the minimum liability over the unrecognized net obligation and prior-service cost. These amounts were recorded net of the related income tax (provision) credit of $(7.3) and $8.7 as of December 31, 1994 and 1993, respectively, which approximated the federal and state statutory rates. The components of net periodic pension cost are:
Year Ended December 31, --------------------------- 1994 1993 1992 ------------------------------------------------------------------------------ Service cost - benefits earned during the period $ 11.2 $ 10.8 $ 11.0 Interest cost on projected benefit obligation 57.3 59.2 58.8 Return on assets: Actual gain (.8) (70.3) (26.3) Deferred gain (loss) (53.0) 15.9 (31.2) Net amortization and deferral 4.1 2.3 2.1 ------ ------ ------ Net periodic pension cost $ 18.8 $ 17.9 $ 14.4 ====== ====== ======
Assumptions used to value obligations at year-end, and to determine the net periodic pension cost in the subsequent year are:
1994 1993 1992 --------------------------------------------------------------------------- Discount rate 8.50% 7.50% 8.25% Expected long-term rate of return on assets 9.50% 10.00% 10.00% Rate of increase in compensation levels 5.00% 5.00% 5.00%
Postretirement Benefits Other Than Pensions Kaiser adopted SFAS 106 to account for postretirement benefits other than pensions effective January 1, 1993 (see Note 1). The Company and its subsidiaries provide postretirement health care and life insurance benefits to eligible retired employees and their dependents. Substantially all employees may become eligible for those benefits if they reach retirement age while still working for the Company or its subsidiaries. These benefits are provided through contracts with various insurance carriers. The Company has not funded the liability for these benefits. The Company's accrued postretirement benefit obligation is composed of the following:
December 31, ----------------- 1994 1993 ---------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $(566.2) $(629.3) Active employees eligible for postretirement benefits (30.2) (35.1) Active employees not eligible for postretirement benefits (98.7) (128.3) ------- ------- Accumulated postretirement benefit obligation (695.1) (792.7) Unrecognized net (gains) losses (55.0) 67.0 Unrecognized prior-service costs (31.8) (35.0) ------- ------- Accrued postretirement benefit obligation $(781.9) $(760.7) ======= =======
42 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) The components of net periodic postretirement benefit cost are:
Year Ended December 31, ------------- 1994 1993 ------------------------------------------------------------------ Service cost $ 8.2 $ 7.1 Interest cost 56.9 58.5 Amortization of prior service cost (3.2) ----- ----- Net periodic postretirement benefit cost $61.9 $65.6 ===== =====
The 1995 annual assumed rates of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) are 9.5% and 8.0% for retirees under 65 and over 65, respectively, and are assumed to decrease gradually to 5.5% in 2007 and remain at that level thereafter. The health care cost trend rate has a significant effect on the amounts reported. A one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1994, by approximately $79.8 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1994 by approximately $9.5. The weighted average discount rate used to determine the accumulated postretirement benefit obligation at December 31, 1994 and 1993, was 8.5% and 7.5%, respectively. Postemployment Benefits Kaiser adopted the new accounting standard on postemployment benefits effective January 1, 1993 (see Note 1). The Company provides certain benefits to former or inactive employees after employment but before retirement. Incentive Plans Effective January 1, 1989, the Company and KACC adopted an unfunded Long-Term Incentive Plan (the "LTIP") for certain key employees of the Company, KACC, and their consolidated subsidiaries. All compensation vested as of December 31, 1992, under the LTIP, as amended in 1991 and 1992, has been paid to the participants in cash or common stock of the Company as of December 31, 1993. Under the LTIP, as amended, 764,092 restricted shares were distributed to six Company executives during 1993 for benefits generally earned but not vested as of December 31, 1992. These shares generally will vest at the rate of 25% per year. The Company will record the related expense of $6.5 over the four-year period ending December 31, 1996. In 1993, the Company adopted the Kaiser 1993 Omnibus Stock Incentive Plan. A total of 2,500,000 shares of Kaiser common stock were reserved for awards or for payment of rights granted under the Plan, of which 504,044 shares were available to be awarded at December 31, 1994. Under the Kaiser 1993 Omnibus Stock Incentive Plan, 102,564 restricted shares were distributed to two Company executives during 1994, which will vest at the rate of 25% per year. The Company will record the related expense of $1.0 over the four-year period ending December 31, 1998. In 1993 and 1994, the Compensation Committee of the Board of Directors approved the award of "nonqualified stock options" to members of management other than those participating in the LTIP. These options generally will vest at the rate of 20-25% per year. Information relating to nonqualified stock options is shown below:
1994 1993 --------------------------------------------------------------------------------------------------- Outstanding at beginning of year 664,400 Granted 494,800 664,400 Exercised (at $7.25 per share) (6,920) Expired or forfeited (29,900) --------- ------- Outstanding at end of year (prices ranging from $7.25 to $12.75 per share) 1,122,380 664,400 ========= ======= Exercisable at end of year 119,980 =========
43 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) Effective January 1, 1990, KACC adopted an unfunded Middle Management Long-Term Incentive Plan. KACC also has a supplemental savings and retirement plan for salaried employees, under which the participants contribute a percentage of their base salaries. The Company's expense for the above plans was $6.1, $5.3, and $6.6 for the years ended December 31, 1994, 1993, and 1992, respectively. 8. Stockholders' Equity and Minority Interests ----------------------------------------------- Changes in stockholders' equity and minority interests were:
Minority Interests Stockholders' Equity ------------------ ------------------------------------------------ Retained Earnings Additional Redeemable (Accu- Minimum Preference Preferred Common Additional mulated Pension Stock Other Stock Stock Capital Deficit) Liability ------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1992 $34.8 $74.1 $ .6 $287.9 $ 267.3 Net income 26.9 Redeemable preference stock: Accretion 5.1 Stock redemption (7.1) Dividends on common stock (11.4) Conversions (2,405 preference shares into cash) (.2) Common stock issued .6 Minority interest in majority-owned subsidiaries (1.8) Additional minimum pension liability $(6.7) ----- ----- ----- ------ ------- ----- BALANCE, DECEMBER 31, 1992 32.8 72.1 .6 288.5 282.8 (6.7) Net loss (652.2) Redeemable preference stock: Accretion 4.8 Stock redemption (4.0) Conversions (1,967 preference shares into cash) (.2) Common stock issued 3.3 Preferred stock issued $ .2 134.1 Dividends on preferred stock (6.3) Minority interest in majority-owned subsidiaries (.5) Additional minimum pension liability (14.9) ----- ----- ----- ----- ------ ------- ------ BALANCE, DECEMBER 31, 1993 33.6 71.4 .2 .6 425.9 (375.7) (21.6) Net loss (106.8) Redeemable preference stock: Accretion 4.0 Stock redemption (8.5) Common stock issued 2.2 Preferred stock issued .4 99.7 Dividends on preferred stock (20.1) Minority interest in majority-owned subsidiaries 15.7 Reduction of minimum pension liability 12.5 ----- ----- ----- ----- ------ ------ ------ BALANCE, DECEMBER 31, 1994 $29.1 $87.1 $ .6 $ .6 $527.8 $(502.6) $ (9.1) ===== ===== ===== ===== ====== ======= ======
44 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) Redeemable Preference Stock In March 1985, KACC entered into a three-year agreement with the United Steelworkers of America (USWA) whereby shares of a new series of "Cumulative (1985 Series A) Preference Stock" would be issued to an employee stock ownership plan in exchange for certain elements of wages and benefits. Concurrently, a similar plan was established for certain nonbargaining employees which provided for the issuance of "Cumulative (1985 Series B) Preference Stock." Series A Stock and Series B Stock ("Series A and B Stock") each have a par value of $1 per share and a liquidation and redemption value of $50 per share plus accrued dividends, if any. For financial reporting purposes, Series A and B Stock were recorded at fair market value when issued, based on independent appraisals, with a corresponding charge to compensation cost. Carrying values have been increased each year to recognize accretion of redemption values and, in certain years, there have been other increases for reasons described below. Changes in Series A and B Stock are shown below.
1994 1993 1992 ---------------------------------------------------------------- Shares: Beginning of year 1,081,548 1,163,221 1,305,550 Redeemed (169,381) (81,673) (142,329) --------- --------- --------- End of year 912,167 1,081,548 1,163,221 ========= ========= =========
No additional Series A or B Stock will be issued based on compensation earned in 1992 or subsequent years. While held by the plan trustee, Series B Stock is entitled to cumulative annual dividends, when and as declared by the Board of Directors, payable in stock or in cash at the option of KACC on or after March 1, 1991, in respect to years commencing January 1, 1990, based on a formula tied to KACC's income before tax from aluminum operations. When distributed to plan participants (generally upon separation from KACC), the Series A and B Stocks are entitled to an annual cash dividend of $5 per share, payable quarterly, when and as declared by the Board of Directors. Redemption fund agreements require KACC to make annual payments by March 31 each year based on a formula tied to consolidated net income until the redemption funds are sufficient to redeem all Series A and B Stock. On an annual basis, the minimum payment is $4.3 and the maximum payment is $7.3. In March 1993 and 1994, KACC contributed $4.3 for each of the years 1992 and 1993, and will contribute $4.3 in March 1995 for 1994. Under the USWA labor contract effective November 1, 1990, KACC was obligated to offer to purchase up to 80 shares of Series A Stock from each active participant in 1991 at a price equal to its redemption value of $50 per share. KACC also agreed to offer to purchase up to an additional 40 shares from each participant in 1994. The employees could elect to receive their shares, accept cash, or place the proceeds into KACC's 401(k) savings plan. Under separate action, KACC also offered to purchase 80 shares of Series B Stock from active participants in 1991 and 40 shares in 1994. Under the provisions of these contracts, in February 1994, KACC purchased $4.6 and $.8 of the Series A and B Stock, respectively. Under the USWA labor contract effective November 1, 1994, KACC is obligated to offer to purchase up to 40 shares of Series A Stock from each active participant in 1995 at a price equal to its redemption value of $50 per share. KACC also agreed to offer to purchase up to an additional 80 shares from each participant in 1998. In addition, if a profitability test is satisfied for either 1995 or 1996, KACC will offer to purchase from each active participant an additional 20 shares of such preference stock held in the stock ownership plan for the benefit of substantially the same employees in either 1996 or 1997. The employees could elect to receive their shares, accept cash, or place the proceeds into KACC's 401(k) savings plan. KACC will provide comparable purchases of Series B Stock from active participants. 45 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) The Series A and B Stock is distributed in the event of death, retirement, or in other specified circumstances. KACC also may redeem such stock at $50 per share plus accrued dividends, if any. At the option of the plan participant, the trustee shall redeem stock distributed from the plans at redemption value to the extent funds are available in the redemption fund. Under the Tax Reform Act of 1986, at the option of the plan participant, KACC must purchase distributed shares earned after December 31, 1985, at redemption value on a five- year installment basis, with interest at market rates. The obligation of KACC to make such installment payments must be secured. The Series A and B Stock is entitled to the same voting rights as KACC common stock and to certain additional voting rights under certain circumstances, including the right to elect, along with other KACC preference stockholders, two directors whenever accrued dividends have not been paid on two annual dividend payment dates or when accrued dividends in an amount equivalent to six full quarterly dividends are in arrears. The Series A and B Stock restricts the ability of KACC to redeem or pay dividends on common stock if KACC is in default on any dividends payable on the Series A and B Stock. Preference Stock KACC Cumulative Convertible Preference Stock, $100 par value ("$100 Preference Stock"), restricts acquisition of junior stock and payment of dividends. At December 31, 1994, such provisions were less restrictive as to the payment of cash dividends than the 1994 Credit Agreement provisions. KACC has the option to redeem the $100 Preference Stocks at par value plus accrued dividends. KACC does not intend to issue any additional shares of the $100 Preference Stocks. The 4-1/8% and 4-3/4% (1957 Series, 1959 Series, and 1966 Series) $100 Preference Stock can be exchanged for per share cash amounts of $69.30, $77.84, $78.38, and $76.46, respectively. KACC records the $100 Preference Stock at their exchange amounts for financial statement presentation and the Company includes such amounts in minority interests. The outstanding shares of KACC preference stock were:
December 31, -------------- 1994 1993 ---------------------------------------------------------------- 4-1/8% 3,657 3,921 4-3/4% (1957 Series) 2,605 2,623 4-3/4% (1959 Series) 13,534 13,605 4-3/4% (1966 Series) 3,640 3,890
Preferred Stock Series A Convertible - On June 30, 1993, Kaiser issued 17,250,000 of its $.65 Depositary Shares (the "Depositary Shares"), each representing one-tenth of a share of Series A Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares"). In connection with the issuance of the Depositary Shares, MAXXAM Group Inc. ("MGI"), a wholly owned subsidiary of MAXXAM, exchanged a $15.0 promissory note of KACC (the "MAXXAM Note") for an additional 2,132,950 Depositary Shares. On August 4, 1993, MGI transferred the 2,132,950 Depositary Shares to MAXXAM in exchange for satisfaction of a $15.0 promissory note evidencing a cash loan made to MGI by MAXXAM in January 1993. MAXXAM sold 1,239,400 of the Depositary Shares during 1994. The net cash proceeds from the sale of Depositary Shares were approximately $119.3. Kaiser used $37.8 of such net proceeds to make a non-interest-bearing loan to KACC evidenced by an intercompany note, which matures on June 29, 1996, and is payable in quarterly installments. The intercompany note is designed to provide sufficient funds to Kaiser to enable it to make dividend payments on the Series A Shares until June 30, 1996, the date on which the outstanding Series A Shares are mandatorily converted into shares of the Company's common stock. Kaiser used $81.5 of such net proceeds and the MAXXAM Note to make a capital contribution to KACC. KACC used $13.7 of the funds it received from Kaiser to prepay the remaining balance of the term loan 46 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) under the 1989 Credit Agreement and $105.6 of such funds to reduce outstanding borrowings under the revolving credit facility of the 1989 Credit Agreement. The owners of Depositary Shares are entitled to receive (when, as, and if the Board of Directors declares dividends on the Series A Shares) cumulative preferential cash dividends from the date of issue, accruing at the rate of $.65 per annum for each of the Depositary Shares, payable quarterly in arrears on the last day of each March, June, September, and December, commencing September 30, 1993. Holders of Depositary Shares (based on the voting rights of the Series A Shares) have one vote for each Depositary Share held of record, except as required by law, and are entitled to vote with the holders of common stock on all matters submitted to a vote of common stockholders. On June 30, 1996, each of the outstanding Depositary Shares automatically will convert (upon the automatic conversion of the Series A Shares) into one share of common stock, plus the right to receive an amount in cash equal to the accrued and unpaid dividends payable with respect to such Depositary Share. Automatic conversion of the outstanding Depositary Shares (and the Series A Shares) will occur upon certain mergers or consolidations of the Company (as defined). At any time or from time to time prior to June 30, 1996, the Company may call the outstanding Depositary Shares (by calling the Series A Shares) for redemption, in whole or in part, at a call price per Depositary Share initially equal to $12.46, declining by $.0018 on each day following the date of issue to $10.624 on April 30, 1996, and equal to $10.51 thereafter, payable in shares of common stock having an aggregate Current Market Price (as defined) equal to the applicable call price, plus an amount in cash equal to all accrued and unpaid dividends payable with respect to such Depositary Share. PRIDES Convertible - In the first quarter of 1994, the Company consummated the public offering of 8,855,550 shares of the PRIDES. The net proceeds from the sale of the shares of PRIDES were approximately $100.1. The Company used such net proceeds to make non-interest- bearing loans to KACC in the aggregate principal amount of $33.2 (the aggregate dividends scheduled to accrue on the shares of PRIDES from the issuance date until December 31, 1997, the date on which the outstanding PRIDES will be mandatorily converted into shares of the Company's common stock), evidenced by intercompany notes, and used the balance of such net proceeds to make capital contributions to KACC in the aggregate amount of $66.9. Holders of shares of PRIDES are entitled to receive (when, as, and if the Board of Directors declares dividends on the PRIDES) cumulative preferential cash dividends at a rate per annum of 8.255% of the per share offering price (equivalent to $.97 per annum for each share of PRIDES), from the date of initial issuance, payable quarterly in arrears on the last day of March, June, September, and December of each year. Holders of shares of PRIDES have a 4/5 vote for each share held of record and, except as required by law, are entitled to vote together with the holders of common stock and together with the holders of any other classes or series of stock (including the Series A Shares) who are entitled to vote in such manner on all matters submitted to a vote of common stockholders. On December 31, 1997, unless either previously redeemed or converted at the option of the holder, each of the outstanding shares of PRIDES will mandatorily convert into one share of the Company's common stock, subject to adjustment in certain events, and the right to receive an amount in cash equal to all accrued and unpaid dividends thereon (other than previously declared dividends payable to a holder of record on a prior date). Shares of PRIDES are not redeemable prior to December 31, 1996. At any time and from time to time on or after December 31, 1996, the Company may redeem any or all of the outstanding shares of PRIDES. Upon any such redemption, each holder will receive, in exchange for each share of PRIDES, the number of shares of common stock equal to (A) the sum of $11.9925, declining after December 31, 1996, to $11.75 until December 31, 1997, plus, in the event the Company does not elect to pay cash dividends to the redemption date, all accrued and unpaid dividends thereon divided by (B) the Current Market Price (as defined) 47 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) on the applicable date of determination, but in no event less than .8333 of a share of common stock, subject to adjustment in certain events. At any time prior to December 31, 1997, unless previously redeemed, each share of PRIDES is convertible at the option of the holder thereof into .8333 of a share of common stock (equivalent to a conversion price of $14.10 per share of common stock), subject to adjustment in certain events. The number of shares of common stock a holder will receive upon redemption, and the value of the shares received upon conversion, will vary depending on the market price of the common stock from time to time. Dividends on Common Stock The Company paid cash dividends on common stock of $2.9 in each quarter of 1992. As required under the 1989 Credit Agreement, on December 15, 1992, KACC issued a Pay-in-Kind Note (the "PIK Note") to MGI in the principal amount of $2.5, representing the entire amount of the dividend received by MGI in respect of the shares of the Company's common stock which it owned. The PIK Note bears interest, compounded semiannually, at a rate equal to 12% per annum, and is due and payable, together with accrued interest thereon, on June 30, 1995. The indentures governing the Senior Notes and the 12-3/4% Notes restrict, among other things, KACC's ability, and the 1994 Credit Agreement restricts, among other things, Kaiser's and KACC's ability, to incur debt, undertake transactions with affiliates, and pay dividends. Under the most restrictive of these covenants, neither the Company nor KACC currently is permitted to pay dividends on its common stock. At December 31, 1994, 28,000,000 shares of the Company's common stock owned by MAXXAM were pledged as security for debt issued by MGI, consisting of $100.0 aggregate principal amount of 11-1/4% Senior Secured Notes due 2003 and $126.7 aggregate principal amount of 12-1/4% Senior Secured Discount Notes due 2003. 9. Commitments and Contingencies --------------------------------- Commitments KACC has financial commitments, including purchase agreements, tolling arrangements, forward foreign exchange and forward sales contracts (see Note 10), letters of credit, and guarantees. Such purchase agreements and tolling arrangements include long-term agreements for the purchase and tolling of bauxite into alumina in Australia by QAL. These obligations expire in 2008. Under the agreements, KACC is unconditionally obligated to pay its proportional share of debt, operating costs, and certain other costs of QAL. The aggregate minimum amount of required future principal payments at December 31, 1994, is $78.7, due in 1997. The KACC share of payments, including operating costs and certain other expenses under the agreement, was $85.6, $86.7, and $99.2 for the years ended December 31, 1994, 1993, and 1992, respectively. KACC also has agreements to supply alumina to and to purchase aluminum from Anglesey. Minimum rental commitments under operating leases at December 31, 1994, are as follows: years ending December 31, 1995 - $22.1; 1996 - $21.5; 1997 - $21.0; 1998 - $24.1; 1999 - $30.4; thereafter - $213.9. The future minimum rentals receivable under noncancelable subleases was $73.2 at December 31, 1994. Rental expenses were $26.8, $29.0, and $26.2 for the years ended December 31, 1994, 1993, and 1992, respectively. Environmental Contingencies The Company and KACC are subject to a wide variety of environmental laws and regulations and to fines or penalties assessed for alleged breaches of the environmental laws and to claims and litigation based upon such laws. KACC currently is subject to a number of lawsuits under the Comprehensive Environmental Response, Compensation and 48 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) Liability Act of 1980, as amended by the Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based on the Company's evaluation of these and other environmental matters, the Company has established environmental accruals primarily related to potential solid waste disposal and soil and groundwater remediation matters. The following table presents the changes in such accruals, which are primarily included in Long-term liabilities, for the years ended December 31, 1994, 1993, and 1992:
1994 1993 1992 ------------------------------------------------------------------- Balance at beginning of period $40.9 $46.4 $51.5 Additional amounts 2.8 1.7 4.5 Less expenditures (3.6) (7.2) (9.6) ----- ----- ----- Balance at end of period $40.1 $40.9 $46.4 ===== ===== =====
These environmental accruals represent the Company's estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology, and the Company's assessment of the likely remediation action to be taken. The Company expects that these remediation actions will be taken over the next several years and estimates that annual expenditures to be charged to these environmental accruals will be approximately $3.0 to $11.0 for the years 1995 through 1999 and an aggregate of approximately $11.0 thereafter. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established, or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. The Company believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to approximately $20.0. While uncertainties are inherent in the final outcome of these environmental matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties should not have a material adverse effect on the Company's consolidated financial position or results of operations. Asbestos Contingencies KACC is a defendant in a number of lawsuits in which the plaintiffs allege that certain of their injuries were caused by exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 15 years. At December 31, 1994, the number of such lawsuits pending was approximately 25,200 with approximately 14,300 received and 12,500 settled or dismissed in 1994. Based on prior experience, KACC estimates that annual future cash payments in connection with such litigation will be approximately $11.0 to $14.0 for the years 1995 through 1999, and an aggregate of approximately $95.0 thereafter through 2007. Based on past experience and reasonably anticipated future activity, the Company has established an accrual for estimated asbestos-related costs for claims filed and estimated to be filed and settled through 2007. The Company does not presently believe there is a reasonable basis for estimating such costs beyond 2007 and, accordingly, no accrual has been recorded for such costs which may be incurred. This accrual was calculated based on the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, the current state of case law related to asbestos claims, the advice of counsel, and the anticipated effects of inflation and discounting at 49 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) an estimated risk-free rate (8% at December 31, 1994). Accordingly, an asbestos-related cost accrual of $102.0 is included primarily in Long-term liabilities at December 31, 1994. The aggregate amount of the undiscounted liability at December 31, 1994 is $158.1, before considerations for insurance recoveries. The Company believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. While claims for recovery from some of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, the Company believes, based on prior insurance- related recoveries in respect of asbestos-related claims, existing insurance policies, and the advice of counsel, that substantial recoveries from the insurance carriers are probable. Accordingly, an estimated aggregate insurance recovery of $86.4, determined on the same basis as the asbestos-related cost accrual, is recorded primarily in Other assets at December 31, 1994. While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and the insurance recoveries that will be received, management currently believes that, based on the factors discussed in the preceding paragraphs, the resolution of the asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on the Company's consolidated financial position or results of operations. Other Contingencies The Company or KACC is involved in various other claims, lawsuits, and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position or results of operations. 10. Derivative Financial Instruments and Related Hedging Programs ------------------------------------------------------------------ KACC enters into a number of financial instruments with off-balance-sheet risk in the normal course of business that are designed to reduce its exposure to fluctuations in foreign exchange rates, alumina, primary aluminum, and fabricated aluminum products prices, and the cost of purchased commodities. KACC has significant expenditures which are denominated in foreign currencies related to long-term purchase commitments with its affiliates in Australia and the United Kingdom, which expose KACC to certain exchange rate risks. In order to mitigate its exposure, KACC periodically enters into forward foreign exchange and currency option contracts in Australian dollars and Pounds Sterling to hedge these commitments. The forward foreign currency exchange contracts are agreements to purchase or sell a foreign currency, for a price specified at the contract date, with delivery and settlement in the future. At December 31, 1994, KACC had net forward foreign exchange contracts totaling approximately $74.4 for the purchase of 102.0 Australian dollars through December 31, 1996. To mitigate its exposure to declines in the market prices of alumina, primary aluminum, and fabricated aluminum products, while retaining the ability to participate in favorable pricing environments that may materialize, KACC has developed strategies which include forward sales of primary aluminum at fixed prices and the purchase or sale of options for primary aluminum. Under the principal components of KACC's price risk management strategy, which can be modified at any time, (i) varying quantities of KACC's anticipated production are sold forward at fixed prices; (ii) call options are purchased to allow KACC to participate in certain higher market prices, should they materialize, for a portion of KACC's primary aluminum and alumina sold forward; (iii) option contracts are entered into to establish a price range 50 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) KACC will receive for a portion of its primary aluminum and alumina; and (iv) put options are purchased to establish minimum prices KACC will receive for a portion of its primary aluminum and alumina. In this regard, in respect of its 1995 anticipated production, as of December 31, 1994, KACC had sold forward 170,950 metric tons of primary aluminum at fixed prices, purchased call options in respect of 69,000 metric tons of primary aluminum, purchased put options to establish a minimum price for 193,500 metric tons of primary aluminum, and entered into option contracts that established a price range for 90,000 metric tons of primary aluminum. KACC will not receive the benefit of market price increases to the extent (i) the quantity of production sold forward is greater than the tonnage covered by the purchased call options; (ii) market prices exceed the prices at which primary aluminum is sold forward, but are less than the strike price of the purchased call options, on the tonnage covered by the options; or (iii) market prices exceed the maximum of the price range on the tonnage covered by the option contracts entered to establish a price range. In addition, KACC enters into forward fixed price arrangements with certain customers which provide for the delivery of a specific quantity of fabricated aluminum products over a specified future period of time. In order to establish the cost of primary aluminum for a portion of such sales, KACC may enter into forward and option contracts. In this regard, at December 31, 1994, KACC had purchased 4,500 metric tons of primary aluminum under forward purchase contracts at fixed prices that expire at various times through June 1995. KACC has also entered into a natural gas pricing contract to fix future prices of a portion (20,000 million BTUs per day) of a plant's natural gas supply through March 1995. At December 31, 1994, the net unrealized gain on KACC's position in forward foreign exchange was $3.5 and the net unrealized loss on aluminum forward sales and option contracts and the natural gas pricing contract was $80.4, based on a price of $1,955 per metric ton of aluminum and $1.59 per million BTUs of natural gas. The Company has established margin accounts with its counterparties related to aluminum forward sales and option contracts. The Company is entitled to receive advances from counterparties related to unrealized gains and, in turn, is required to make margin deposits with counterparties to cover unrealized losses related to these contracts. At December 31, 1994, the Company had $50.5 on deposit with various counterparties in respect of such unrealized losses. This amount is recorded in Prepaid expenses and other current assets. KACC is exposed to credit risk in the event of non-performance by other parties to these currency and commodity contracts, but KACC does not anticipate non-performance by any of these counterparties, given their credit worthiness. When appropriate, KACC arranges master netting agreements. 51 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) 11. Segment and Geographical Area Information Sales and transfers among geographic areas are made on a basis intended to reflect the market value of products. The aggregate foreign currency gain included in determining net income was $.8, $4.9, and $12.0 for the years ended December 31, 1994, 1993, and 1992, respectively. Sales of more than 10% of total revenue to a single customer were $58.2, $40.7, and $135.3 of bauxite and alumina and $147.7, $145.7, and $144.9 of aluminum processing for the years ended December 31, 1994, 1993, and 1992. Export sales were less than 10% of total revenue during the years ended December 31, 1994, 1993, and 1992, respectively. Geographical area information relative to operations is summarized as follows:
Year Ended Other December 31, Domestic Caribbean Africa Foreign Eliminations Total ------------------------------------------------------------------------------------------------------------------ Net sales to unaffiliated customers 1994 $1,263.2 $169.9 $180.0 $168.4 $1,781.5 1993 1,177.8 155.4 207.5 178.4 1,719.1 1992 1,285.0 170.1 263.5 190.5 1,909.1 Sales and transfers among 1994 $ 98.7 $139.4 $(238.1) geographic areas 1993 88.2 79.6 (167.8) 1992 90.1 86.5 (176.6) Equity in income (losses) of 1994 $ .2 $ (2.1) $ (1.9) unconsolidated affiliates 1993 (3.3) (3.3) 1992 (1.9) (1.9) Operating income (loss) 1994 $ (128.8) $ 9.9 $ 18.3 $ 44.4 $ (56.2) 1993 (145.9) (11.8) 21.9 12.4 (123.4) 1992 (36.9) 26.5 65.4 34.9 89.9 Investment in and advances to 1994 $ 1.2 $ 28.8 $139.7 $ 169.7 unconsolidated affiliates 1993 1.0 30.5 151.7 183.2 Identifiable assets 1994 $1,933.8 $364.8 $200.0 $199.5 $2,698.1 1993 1,758.0 360.4 223.0 186.5 2,527.9
52 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) Financial information by industry segment at December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993, and 1992, is as follows:
Year Ended Bauxite & Aluminum December 31, Alumina Processing Corporate Total ---------------------------------------------------------------------------------------------- Net sales to unaffiliated customers 1994 $432.5 $1,349.0 $1,781.5 1993 423.4 1,295.7 1,719.1 1992 466.5 1,442.6 1,909.1 Intersegment sales 1994 $146.8 $ 146.8 1993 129.4 129.4 1992 179.9 179.9 Equity in earnings (losses) of 1994 $ (4.7) $ 2.6 $ .2 $ (1.9) unconsolidated affiliates 1993 (2.5) (.8) (3.3) 1992 1.8 (3.7) (1.9) Operating income (loss) 1994 $ 19.8 $ (8.4) $(67.6) $ (56.2) 1993 (4.5) (46.3) (72.6) (123.4) 1992 62.6 104.9 (77.6) 89.9 Effect of changes in accounting principles on operating income (loss) SFAS 106 1993 $ (2.0) $ (16.1) $ (1.1) $ (19.2) SFAS 109 1993 (7.7) (7.8) .3 (15.2) Depreciation 1994 $ 33.5 $ 59.1 $ 2.8 $ 95.4 1993 35.3 59.9 1.9 97.1 1992 29.8 49.0 1.5 80.3 Capital expenditures 1994 $ 28.9 $ 39.9 $ 1.2 $ 70.0 1993 35.3 31.2 1.2 67.7 1992 50.8 39.4 24.2 114.4 Investment in and advances to 1994 $136.6 $ 31.9 $ 1.2 $ 169.7 unconsolidated affiliates 1993 151.5 30.7 1.0 183.2 Identifiable assets 1994 $749.6 $1,242.3 $706.2 $2,698.1 1993 734.0 1,214.9 579.0 2,527.9
53 EX-99 4 EXHIBIT 99.2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholder of The Pacific Lumber Company: We have audited the accompanying consolidated balance sheets of The Pacific Lumber Company (a Delaware corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, cash flows and stockholder's equity for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Pacific Lumber Company and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As explained in Notes 5 and 6 to the financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes and postretirement benefits other than pensions. ARTHUR ANDERSEN LLP San Francisco, California January 27, 1995 CONSOLIDATED BALANCE SHEET
December 31, 1994 1993 (In thousands of dollars) ASSETS Current assets: Cash and cash equivalents $ 24,330 $ 38,760 Marketable securities - 5,635 Receivables: Trade 23,258 14,750 Other 4,035 3,801 Inventories 68,168 66,241 Prepaid expenses and other current assets 3,660 2,939 ------------ ------------ Total current assets 123,451 132,126 Timber and timberlands, net of depletion of $188,003 and $171,007 at December 31, 1994 and 1993, respectively 350,871 365,511 Property, plant and equipment, net 96,960 96,541 Deferred financing costs, net 24,516 26,500 Deferred income taxes 50,142 52,066 Restricted cash 32,402 33,562 Other assets 5,925 6,630 ------------ ------------ $ 684,267 $ 712,936 ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable $ 3,309 $ 2,360 Accrued compensation and related benefits 10,285 7,782 Accrued interest 21,109 21,627 Deferred income taxes 12,986 14,132 Other accrued liabilities 2,105 1,377 Long-term debt, current maturities 13,670 13,191 ------------ ------------ Total current liabilities 63,464 60,469 Long-term debt, less current maturities 586,007 598,811 Other noncurrent liabilities 23,517 27,925 ------------ ------------ Total liabilities 672,988 687,205 ------------ ------------ Contingencies Stockholder's equity: Common stock, $.01 par value, 100 shares authorized and issued - - Additional capital 157,520 157,520 Accumulated deficit (146,241) (131,789) ------------ ------------ Total stockholder's equity 11,279 25,731 ------------ ------------ $ 684,267 $ 712,936 ============ ============ The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended December 31, 1994 1993 1992 (In thousands of dollars) Net sales: Lumber and logs $ 205,504 $ 193,227 $ 182,545 Other 21,875 17,407 21,746 ---------- ---------- ---------- 227,379 210,634 204,291 ---------- ---------- ---------- Operating expenses: Cost of goods sold (exclusive of depletion and depreciation) 116,316 115,175 98,454 Selling, general and administrative 15,190 18,869 15,695 Depletion and depreciation 25,485 25,374 30,038 ---------- ---------- ---------- 156,991 159,418 144,187 ---------- ---------- ---------- Operating income 70,388 51,216 60,104 Other income (expense): Investment, interest and other income 12,022 3,884 3,404 Interest expense (56,067) (59,145) (65,632) ---------- ---------- ---------- Income (loss) before income taxes, extraordinary items and cumulative effect of changes in accounting principles 26,343 (4,045) (2,124) Credit (provision) in lieu of income taxes (1,429) 1,683 - ---------- ---------- ---------- Income (loss) before extraordinary items and cumulative effect of changes in accounting principles 24,914 (2,362) (2,124) Extraordinary items: Loss on litigation settlement, net of related credit in lieu of income taxes of $6,312 (14,866) - - Loss on early extinguishment of debt, net of related credit in lieu of income taxes of $5,566 - (10,802) - Cumulative effect of changes in accounting principles: Postretirement benefits other than pensions, net of related credit in lieu of income taxes of $1,566 - (2,348) - Accounting for income taxes - 4,973 - ---------- ---------- ---------- Net income (loss) $ 10,048 $ (10,539) $ (2,124) ========== ========== ========== The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, 1994 1993 1992 (In thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 10,048 $ (10,539) $ (2,124) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion and depreciation 25,485 25,374 30,038 Net sales (purchases) of marketable securities 6,619 6,025 (5,419) Amortization of deferred financing costs 2,197 2,580 1,212 Net gains on marketable securities (984) (1,310) (840) Net loss (gain) on asset dispositions (830) 134 (153) Incurrence of financing costs (213) (28,235) (505) Extraordinary loss on early extinguishment of debt, net - 10,802 - Cumulative effect of changes in accounting principles, net - (2,625) - Decrease (increase) in accrued and deferred income taxes 1,627 (1,697) - Increase (decrease) in accounts payable 949 53 (3,588) Decrease (increase) in receivables (8,742) 9,991 (15,019) Increase (decrease) in other liabilities (2,027) (394) 1,408 Decrease (increase) in inventories, net of depletion (1,608) 987 9,968 Decrease (increase) in prepaid expenses and other current assets (721) 237 647 Decrease in accrued interest (518) (9,398) - Other 706 (74) (524) ---------- ---------- ---------- Net cash provided by operating activities 31,988 1,911 15,101 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sale of assets 1,119 229 573 Capital expenditures (10,962) (10,472) (8,257) ---------- ---------- ---------- Net cash used for investing activities (9,843) (10,243) (7,684) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Restricted cash released 1,160 1,438 - Dividends paid (24,500) (25,000) - Redemptions, repurchase of and principal payments on long-term debt (13,235) (557,883) (4,654) Proceeds from issuance of long-term debt - 620,000 - Restricted cash deposits - (35,000) - ---------- ---------- ---------- Net cash provided by (used for) financing activities (36,575) 3,555 (4,654) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (14,430) (4,777) 2,763 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 38,760 43,537 40,774 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 24,330 $ 38,760 $ 43,537 ========== ========== ========== SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Timber and timberlands acquired subject to loans from seller $ 910 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest $ 54,388 $ 65,963 $ 64,420 Income taxes paid 1,170 14 927 The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
Common Stock Additional Accumulated ($.01 Par) Capital Deficit Total (In thousands of dollars) Balance, January 1, 1992 $ - $ 157,520 $ (94,126) $ 63,394 Net loss - - (2,124) (2,124) ------------ ---------- ------------ ---------- Balance, December 31, 1992 - 157,520 (96,250) 61,270 Net loss - - (10,539) (10,539) Dividends - - (25,000) (25,000) ------------ ---------- ------------ ---------- Balance, December 31, 1993 - 157,520 (131,789) 25,731 Net income - - 10,048 10,048 Dividends - - (24,500) (24,500) ------------ ---------- ------------ ---------- Balance, December 31, 1994 $ - $ 157,520 $ (146,241) $ 11,279 ============ ========== ============ ========== The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of The Pacific Lumber Company and its wholly owned subsidiaries, collectively referred to herein as the "Company." The Company is an indirect wholly owned subsidiary of MAXXAM Group Inc. ("MGI"). MGI is a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents Cash equivalents consist of highly liquid money market instruments with original maturities of three months or less. Marketable Securities On December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"). In accordance with the provisions of SFAS 115, marketable securities are carried at fair value beginning on December 31, 1993. Prior to that date, marketable securities portfolios were carried at the lower of cost or market at the balance sheet date. The cost of the securities sold is determined using the first-in, first-out method. Included in investment, interest and other income for each of the three years ended December 31, 1994 were: 1994 - a decrease in net unrealized holding gains of $264 and net realized gains of $1,248; 1993 - net realized gains of $1,046 and net unrealized gains of $264; and 1992 - net realized gains of $717 and the recovery of $123 of net unrealized losses. Net unrealized losses represent the amount required to reduce the short-term marketable securities portfolios from cost to market value prior to December 31, 1993. Subsequent to the adoption of SFAS 115, purchases and sales of marketable securities are presented as cash flows from operating activities in the Consolidated Statement of Cash Flows. Inventories Inventories are stated at the lower of cost or market value. Cost is determined using the last-in, first-out (LIFO) method. Timber and Timberlands Depletion is computed utilizing the unit-of-production method based upon estimates of timber values and quantities. Property, Plant and Equipment Property, plant and equipment, including capitalized interest, is stated at cost, net of accumulated depreciation. Depreciation is computed utilizing the straight-line method at rates based upon the estimated useful lives of the various classes of assets. Deferred Financing Costs Costs incurred to obtain financing are deferred and amortized over the term of the related borrowing. Restricted Cash and Concentrations of Credit Risk Restricted cash represents the amount initially deposited into an account (the "Liquidity Account") held by the trustee under the indenture governing the 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes") as described in Note 4. The Liquidity Account is not available, except under certain limited circumstances, for working capital purposes; however, it is available to pay the Rated Amortization (as defined in Note 4) and interest on the Timber Notes if and to the extent that cash flows are insufficient to make such payments. The required Liquidity Account balance will generally decline as principal payments are made on the Timber Notes. Investment, interest and other income for the years ended December 31, 1994 and 1993 includes approximately $2,490 and $2,101, respectively, attributable to an investment rate agreement (at 7.95% per annum) with the financial institution which holds the Liquidity Account. At December 31, 1994 and 1993, cash and cash equivalents includes $19,439 and $20,280, respectively, (the "Payment Account") which is reserved for debt service payments on the Timber Notes (see Note 4). The Payment Account and the Liquidity Account are each held by a different financial institution. In the event of nonperformance by such financial institutions, the Company's exposure to credit loss is represented by the amounts deposited plus any unpaid accrued interest thereon. The Company mitigates its concentrations of credit risk with respect to these restricted cash deposits by maintaining them at high credit quality financial institutions and monitoring the credit ratings of these institutions. Investment, Interest and Other Income In February 1994, the Company received a franchise tax refund of $7,243, the substantial portion of which represents interest, from the State of California relating to tax years 1972 through 1985. This amount is included in investment, interest and other income for the year ended December 31, 1994. Items Related to 1992 Earthquake In 1993 and 1992, the Company recorded reductions in cost of sales of $1,200 and $3,300, respectively, from business interruption insurance claims for reimbursement of higher operating costs and the related loss of revenues resulting from the April 1992 earthquake. In 1992, the Company recorded a $1,600 gain in investment, interest and other income on a casualty insurance claim for the loss of certain commercial property due to the earthquake. Other receivables at December 31, 1994 and 1993 included $1,684 and $1,235, respectively, related to these and other earthquake related insurance claims. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents and restricted cash approximate fair value. The fair value of marketable securities is determined based on quoted market prices. The estimated fair value of long-term debt is determined based on the quoted market prices for the Timber Notes and the 10-1/2% Senior Notes due 2003 (the "Senior Notes"), and on the current rates offered for borrowings similar to the other debt. The Timber Notes and the Senior Notes are thinly traded financial instruments; accordingly, their market prices at any balance sheet date may not be representative of the prices which would be derived from a more active market. The estimated fair values of the Company's financial instruments, along with the carrying amounts of the related assets (liabilities), are as follows:
December 31, 1994 December 31, 1993 Carrying Fair Carrying Fair Amount Value Amount Value Cash and cash equivalents $ 24,330 $ 24,330 $ 38,760 $ 38,760 Marketable securities (held for trading purposes) - - 5,635 5,635 Restricted cash 32,402 32,402 33,562 33,562 Long-term debt (599,677) (558,801) (612,002) (637,700)
Reclassifications Certain reclassifications have been made to prior years' financial statements to be consistent with the presentation in the current year. 2. INVENTORIES Inventories consist of the following:
December 31, 1994 1993 Lumber $ 53,393 $ 50,906 Logs 14,775 15,335 ---------- ---------- $ 68,168 $ 66,241 ========== ==========
During 1993 and 1992, inventory quantities were reduced. These reductions resulted in the liquidation of LIFO inventory quantities carried at prevailing costs from prior years which were higher than the current cost of inventory in 1993 and lower than current costs in 1992. The effects of these inventory liquidations increased cost of goods sold by approximately $222 for the year ended December 31, 1993 and decreased cost of goods sold by approximately $372 for the year ended December 31, 1992. 3. PROPERTY, PLANT AND EQUIPMENT The major classes of property, plant and equipment are as follows:
Estimated December 31, Useful Lives 1994 1993 Machinery and equipment 5 - 15 years $ 119,280 $ 116,455 Buildings 33 years 27,666 21,932 Logging roads 15 years 7,102 6,857 ---------- ---------- 154,048 145,244 Less: accumulated depreciation (57,088) (48,703) ---------- ---------- $ 96,960 $ 96,541 ========== ==========
Depreciation expense for the years ended December 31, 1994, 1993 and 1992 was $8,808, $8,233 and $8,189, respectively. 4. LONG-TERM DEBT Long-term debt consists of the following:
December 31, 1994 1993 7.95% Timber Collateralized Notes due July 20, 2015 $ 363,811 $ 376,953 10-1/2% Senior Notes due March 1, 2003 235,000 235,000 Other 866 49 ---------- ---------- 599,677 612,002 Less: current maturities (13,670) (13,191) ---------- ---------- $ 586,007 $ 598,811 ========== ========== /TABLE On March 23, 1993, the Company issued $235,000 of the Senior Notes and its newly-formed wholly owned subsidiary, Scotia Pacific Holding Company ("SPHC"), issued $385,000 of the Timber Notes. The Company and SPHC used the net proceeds from the sale of the Senior Notes and the Timber Notes, together with the Company's cash and marketable securities, to (i) retire (a) $163,784 aggregate principal amount of the Company's 12% Series A Senior Notes due July 1, 1996 (the "Series A Notes"), (b) $299,725 aggregate principal amount of the Company's 12.2% Series B Senior Notes due July 1, 1996 (the "Series B Notes") and (c) $41,750 aggregate principal amount of the Company's 12-1/2% Senior Subordinated Debentures due July 1, 1998 (the "Debentures;" the Series A Notes, the Series B Notes and the Debentures are referred to collectively as the "Old Pacific Lumber Securities"); (ii) pay accrued interest on the Old Pacific Lumber Securities through the date of redemption thereof; (iii) pay the applicable redemption premiums on the Old Pacific Lumber Securities; (iv) repay the Company's $28,867 cogeneration facility loan; (v) fund the initial deposit of $35,000 to the Liquidity Account; and (vi) pay a $25,000 dividend to a subsidiary of MGI. These transactions resulted in a pre-tax extraordinary loss of $16,368, consisting primarily of the payment of premiums and the write-off of unamortized deferred financing costs on the Old Pacific Lumber Securities. The indenture governing the Timber Notes (the "Timber Note Indenture") prohibits SPHC from incurring any additional indebtedness for borrowed money and limits the business activities of SPHC to the ownership and operation of its timber and timberlands. The Timber Notes are senior secured obligations of SPHC and are not obligations of, or guaranteed by, the Company or any other person. The Timber Notes are secured by a lien on (i) SPHC's timber and timberlands (representing $192,445 of the Company's consolidated balance at December 31, 1994), (ii) substantially all of SPHC's property and equipment, (iii) SPHC's contract rights and certain other assets and (iv) the funds deposited in the Payment Account and the Liquidity Account. The Timber Notes are structured to link, to the extent of cash available, the deemed depletion of SPHC's timber (through the harvest and sale of logs) to required amortization of the Timber Notes. The required amount of amortization due on any Timber Note payment date is determined by various mathematical formulas set forth in the Timber Note Indenture. The minimum amount of principal which SPHC must pay (on a cumulative basis) through any Timber Note payment date in order to avoid an Event of Default (as defined in the Timber Note Indenture) is referred to as rated amortization ("Rated Amortization"). If all payments of principal are made in accordance with Rated Amortization, the payment date on which SPHC will pay the final installment of principal is July 20, 2015. The amount of principal which SPHC must pay through each Timber Note payment date in order to avoid payment of prepayment or deficiency premiums is referred to as scheduled amortization ("Scheduled Amortization"). If all payments of principal are made in accordance with Scheduled Amortization, the payment date on which SPHC will pay the final installment of principal is July 20, 2009. Scheduled Amortization on the Timber Notes is as follows: years ending December 31, 1995 - $13,578; 1996 - $14,103; 1997 - $16,165; 1998 - $19,335; 1999 - $21,651; thereafter - $278,979. Principal and interest on the Timber Notes is payable semi- annually on January 20 and July 20. The Timber Notes are redeemable at the option of SPHC, in whole but not in part, at any time. The redemption price of the Timber Notes is equal to the sum of the principal amount, accrued interest and a prepayment premium calculated based upon the yield of like term Treasury securities plus 50 basis points. Interest on the Senior Notes is payable semi-annually on March 1 and September 1. The Senior Notes are redeemable at the option of the Company, in whole or in part, on or after March 1, 1998 at a price of 103% of the principal amount plus accrued interest. The redemption price is reduced annually until March 1, 2000, after which time the Senior Notes are redeemable at par. The Company has a revolving credit agreement with a bank (the "Revolving Credit Agreement") which expires on May 31, 1997. Borrowings under the Revolving Credit Agreement are secured by the Company's trade receivables and inventories, with interest computed at the bank's reference rate plus 1-1/4% or the bank's offshore rate plus 2-1/4%. The Revolving Credit Agreement provides for borrowings of up to $30,000, of which $15,000 may be used for standby letters of credit. As of December 31, 1994, $19,742 of borrowings was available under the Revolving Credit Agreement, of which $4,742 was available for letters of credit. No borrowings were outstanding as of December 31, 1994, and letters of credit outstanding amounted to $10,258. 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 December 31, 1994, under the most restrictive of these covenants, approximately $20,800 of dividends could be paid by the Company. Scheduled maturities of long-term debt outstanding at December 31, 1994 are as follows: years ending December 31, 1995 - $13,670; 1996 - $14,195; 1997 - $16,258; 1998 - $19,429; 1999 - $21,745; thereafter - $514,380. 5. CREDIT (PROVISION) IN LIEU OF INCOME TAXES The Company and its subsidiaries are members of MAXXAM's consolidated return group for federal income tax purposes. The Company's tax allocation agreement with MAXXAM, as amended on March 23, 1993 (the "Amended Tax Allocation Agreement"), provides that The Pacific Lumber Company, excluding its wholly owned subsidiaries ("Pacific Lumber"), is liable to MAXXAM for the federal consolidated income tax liability of Pacific Lumber, SPHC and certain other subsidiaries of Pacific Lumber (but excluding Salmon Creek Corporation) (collectively, the "PL Subgroup") computed as if the PL Subgroup was a separate affiliated group of corporations which was never affiliated with MAXXAM. The Amended Tax Allocation Agreement further provides that Salmon Creek Corporation is liable to MAXXAM for its federal income tax liability computed as if Salmon Creek Corporation was a separate corporation which was never affiliated with MAXXAM. Under the tax allocation agreement with MAXXAM, prior to the effective date of its amendment on March 23, 1993, Pacific Lumber recorded tax liabilities or benefits computed as if it filed separate tax returns. The credit (provision) in lieu of income taxes on income (loss) before income taxes, extraordinary items and cumulative effect of changes in accounting principles for the two years ended December 31, 1994 consists of the following:
Years Ended December 31, 1994 1993 Current: Federal credit (provision) in lieu of income taxes $ - $ - State and local (50) - ----------- ------------ (50) - ----------- ------------ Deferred: Federal credit (provision) in lieu of income taxes (1,748) 1,913 State and local 369 (230) ----------- ------------ (1,379) 1,683 ----------- ------------ $ (1,429) $ 1,683 =========== ============
Pursuant to the principles of Accounting Principles Board Opinion No. 11, Accounting for Income Taxes ("APB 11"), the Company did not record a credit in lieu of income taxes for 1992 due to the uncertainty of realizing the benefit of the 1992 net operating loss in future periods. The 1994 deferred federal provision in lieu of income taxes of $1,748 includes a credit relating to reserves the Company no longer believes are necessary. The 1993 deferred federal credit in lieu of income taxes of $1,913 includes an $850 benefit for increasing net deferred income tax assets (liabilities) as of the date of enactment (August 10, 1993) of the Omnibus Budget Reconciliation Act of 1993 which retroactively increased the federal statutory income tax rate from 34% to 35% for periods beginning on or after January 1, 1993. A reconciliation between the credit (provision) in lieu of income taxes and the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes, extraordinary items and cumulative effect of changes in accounting principles is as follows:
Years Ended December 31, 1994 1993 1992 Income (loss) before income taxes, extraordinary items and cumulative effect of changes in accounting principles $ 26,343 $ (4,045) $ (2,124) ========== ========== ========== Amount of federal income tax based upon the statutory rate $ (9,220) $ 1,416 $ 722 Revision of prior years' tax estimates and other changes in valuation allowances 7,148 (566) - State and local taxes, net of federal tax benefit 207 (150) - Increase in net deferred income tax assets due to tax rate change - 850 - Losses and expenses for which no federal tax benefit was recognized - - (722) Other 436 133 - ---------- ---------- ---------- $ (1,429) $ 1,683 $ - ========== ========== ==========
As shown in the Consolidated Statement of Operations for the year ended December 31, 1994, the Company recorded an extraordinary loss related to the settlement of litigation in connection with MGI's acquisition of the Company (see Note 8). The Company reported the loss net of related deferred income taxes of $6,312 which is less than the federal and state statutory income tax rates due to expenses for which no tax benefit was recognized. As shown in the Consolidated Statement of Operations for the year ended December 31, 1993, the Company reported an extraordinary loss related to the early extinguishment of debt. The Company reported the loss net of related deferred income taxes of $5,566 which approximated the federal statutory income tax rate in effect on the date the transaction occurred. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The adoption of SFAS 109 changed the Company's method of accounting for income taxes to an asset and liability approach from the deferral method prescribed by APB 11. The asset and liability approach requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred income tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. The cumulative effect of the change in accounting principle, as of January 1, 1993, increased the Company's results of operations by $4,973. The implementation of SFAS 109 required the Company to restate certain assets and liabilities to their pre-tax amounts from their net-of-tax amounts originally recorded in connection with the acquisition of the Company in 1986. As a result of restating these assets and liabilities, the loss before income taxes, extraordinary item and cumulative effect of changes in accounting principles for the year ended December 31, 1993 was decreased by $875. The components of the Company's net deferred income tax assets (liabilities) are as follows:
December 31, 1994 1993 Deferred income tax assets: Timber and timberlands $ 37,209 $ 36,443 Loss and credit carryforwards 29,301 35,013 Other liabilities 4,840 4,627 Postretirement benefits other than pensions 2,145 1,734 Other 892 3,019 Valuation allowances (2,664) (5,613) ---------- ---------- Total deferred income tax assets, net 71,723 75,223 ---------- ---------- Deferred income tax liabilities: Inventories (16,339) (17,172) Property, plant and equipment (14,848) (19,101) Other (3,380) (1,016) ---------- ---------- Total deferred income tax liabilities (34,567) (37,289) ---------- ---------- Net deferred income tax assets $ 37,156 $ 37,934 ========== ==========
A principal component of the net deferred income tax assets listed above relates to the excess of the tax basis over financial statement basis with respect to timber and timberlands. The Company believes that it is more likely than not that this net deferred income tax asset will be realized, based primarily upon the estimated value of its timber and timberlands which is well in excess of its tax basis. The valuation allowances listed above relate primarily to loss and credit carryforwards. The Company evaluated all appropriate factors to determine the proper valuation allowances for loss and credit carryforwards. These factors included any limitations concerning use of the carryforwards, the year the carryforwards expire and the levels of taxable income necessary for utilization. The Company has concluded that it will more likely than not generate sufficient taxable income to realize the benefit attributable to the loss and credit carryforwards for which valuation allowances were not provided. Included in the net deferred income tax assets listed above are $33,540 and $36,056 at December 31, 1994 and 1993, respectively, which are recorded pursuant to the tax allocation agreements with MAXXAM. The following table presents the Company's estimated tax attributes, for federal income tax purposes, under the terms of the Amended Tax Allocation Agreement at December 31, 1994.
Expiring Through Regular Tax Attribute Carryforwards: Prior year net operating losses $ 72,012 2008 Net capital losses 3,997 1997 Alternative Minimum Tax Attribute Carryforwards: Current year net operating loss $ 3,853 2009 Prior year net operating losses 30,679 2008
6. EMPLOYEE BENEFIT PLANS The Company has a defined benefit plan which covers all employees of the Company. Under the plan, employees are eligible for benefits at age 65 or earlier, if certain provisions are met. The benefits are determined under a career average formula based on each year of service with the Company and the employee's compensation for that year. The Company's funding policy is to contribute annually an amount at least equal to the minimum cash contribution required by The Employee Retirement Income Security Act of 1974, as amended. A summary of the components of net periodic pension cost is as follows:
Years Ended December 31, 1994 1993 1992 Service cost - benefits earned during the year $ 1,643 $ 1,600 $ 1,546 Interest cost on projected benefit obligation 1,263 918 749 Actual loss (gain) on plan assets 10 (2,128) (1,013) Net amortization and deferral (859) 1,359 352 ---------- ---------- ---------- Net periodic pension cost $ 2,057 $ 1,749 $ 1,634 ========== ========== ==========
The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheet:
December 31, 1994 1993 Actuarial present value of accumulated plan benefits: Vested benefit obligation $ 11,809 $ 11,047 Non-vested benefit obligation 779 1,183 ---------- ---------- Total accumulated benefit obligation $ 12,588 $ 12,230 ========== ========== Projected benefit obligation $ 15,047 $ 15,303 Plan assets at fair value, primarily equity and debt securities (13,184) (12,216) ---------- ---------- Projected benefit obligation in excess of plan assets 1,863 3,087 Unrecognized net transition asset 29 35 Unrecognized net gain (loss) 1,475 (582) Unrecognized prior service cost (50) (89) ---------- ---------- Accrued pension liability $ 3,317 $ 2,451 ========== ========== /TABLE The assumptions used in accounting for the defined benefit plan were as follows:
1994 1993 1992 Rate of increase in compensation levels 5.0% 5.0% 5.0% Discount rate 8.5% 7.5% 8.0% Expected long-term rate of return on assets 8.0% 8.0% 9.0%
The Company has an unfunded defined benefit plan for certain postretirement and other benefits which covers substantially all employees of the Company. Participants of the plan are eligible for certain health care benefits upon termination of employment and retirement and commencement of pension benefits. Participants make contributions for a portion of the cost of their health care benefits. The Company adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106") as of January 1, 1993. The costs of postretirement benefits other than pensions are now accrued over the period the employees provide services to the date of their full eligibility for such benefits. Previously, such costs were expensed as actual claims were incurred. The cumulative effect of the change in accounting principle for the adoption of SFAS 106 was recorded as a charge to results of operations of $2,348, net of related income taxes of $1,566. The deferred income tax benefit related to the adoption of SFAS 106 was recorded at the federal and state statutory rates in effect on the date SFAS 106 was adopted. A summary of the components of net periodic postretirement benefit cost is as follows:
Years Ended December 31, 1994 1993 Service cost - benefits earned during the year $ 216 $ 153 Interest cost on accumulated postretirement benefit obligation 294 315 Net amortization and deferral (7) - ------------ ------------ Net periodic postretirement benefit cost $ 503 $ 468 ============ ============
The adoption of SFAS 106 increased the Company's loss before extraordinary item and cumulative effect of changes in accounting principles by $212 ($360 before tax) for the year ended December 31, 1993. The postretirement benefit liability recognized in the Company's Consolidated Balance Sheet is as follows:
December 31, 1994 1993 Retirees $ 860 $ 963 Actives eligible for benefits 656 696 Actives not eligible for benefits 2,355 2,549 ---------- ---------- Accumulated postretirement benefit obligation 3,871 4,208 Unrecognized net gain 972 71 ---------- ---------- Postretirement benefit liability $ 4,843 $ 4,279 ========== ==========
The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 13.0% for 1995 and is assumed to decrease gradually to 5.5% for 2008 and remain at that level thereafter. Each one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1994 by approximately $512 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $85. The discount rates used in determining the accumulated postretirement benefit obligation were 8.5% and 7.5% at December 31, 1994 and 1993, respectively. Subsequent to December 31, 1993, the Company's employees were eligible to participate in a defined contribution savings plan sponsored by MAXXAM. This plan is designed to enhance the existing retirement programs of participating employees. Employees may elect to contribute up to 16% of their compensation to the plan. For those participants who have elected to make voluntary contributions to the plan, the Company's contributions consist of a matching contribution of up to 4% of the compensation of participants for each calendar quarter. The cost to the Company of this plan was $1,215 for the year ended December 31, 1994. The Company is self-insured for workers' compensation benefits. Included in accrued compensation and related benefits and other noncurrent liabilities are accruals for workers' compensation claims amounting to $9,233 and $7,008 at December 31, 1994 and 1993, respectively. Workers' compensation expenses amounted to $3,698, $3,317 and $2,944 for the years ended December 31, 1994, 1993 and 1992, respectively. 7. RELATED PARTY TRANSACTIONS MAXXAM provides the Company with personnel, insurance, legal, accounting, financial, and certain other services. MAXXAM is compensated by the Company through the payment of a fee representing the reimbursement of actual out-of-pocket expenses incurred by MAXXAM, including, but not limited to, labor costs of personnel of MAXXAM rendering services to the Company. Charges by MAXXAM for such services were $1,744, $2,598 and $2,735 for the years ended December 31, 1994, 1993 and 1992, respectively. Net sales for the years ended December 31, 1994, 1993 and 1992 include revenues of $10,326, $9,198 and $6,942, respectively, from Britt Lumber Co., Inc., an indirect wholly owned subsidiary of MGI. The Company recognized operating income of $5,571, $1,972 and $1,335 on these revenues for the years ended December 31, 1994, 1993 and 1992, respectively. At December 31, 1994 and 1993, receivables include $1,283 and $178, respectively, related to these affiliate sales. On August 4, 1993, all of the Company's issued and outstanding common stock was pledged as collateral for MGI's $100.0 million 11-1/4% Senior Secured Notes due 2003 and $126.7 million 12-1/4% Senior Secured Discount Notes due 2003 (collectively, the "MGI Notes"). MGI conducts its operations primarily through subsidiary companies. The Company represents the substantial portion of MGI's assets and operations. The indenture governing the MGI Notes requires the Company's board of directors to declare and pay dividends on the Company's common stock to the maximum extent permitted by any consensual restriction or encumbrance on the Company's ability to declare and pay dividends, unless the Board determines in good faith that such declaration and payment would be detrimental to the capital or other operating needs of the Company. In 1994, in connection with the litigation settlement described in Note 8, the Company paid approximately $3,185 to a law firm in which a director of the Company is also a partner. In 1993, the Company paid approximately $1,931 in connection with the offering of the Senior Notes and the Timber Notes to this same law firm. 8. LOSS ON LITIGATION SETTLEMENT AND CONTINGENCIES During 1994, MAXXAM, the Company and others agreed to a settlement, subsequently approved by the Court, of class and related individual claims brought by former stockholders of the Company against MAXXAM, MGI, the Company, former directors of the Company and others concerning MGI's acquisition of the Company. Of the 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. In 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 or financial position. 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. 9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summary quarterly financial information for the years ended December 31, 1994 and 1993 is as follows:
Three Months Ended March 31 June 30 September 30 December 31 1994: Net sales $ 50,816 $ 55,120 $ 55,001 $ 66,442 Operating income 12,148 19,527 17,092 21,621 Income before extraordinary item 3,381 4,380 9,555 7,598 Extraordinary item, net - (14,866) - - Net income (loss) 3,381 (10,486) 9,555 7,598 1993: Net sales $ 45,569 $ 51,621 $ 55,819 $ 57,625 Operating income 13,560 13,309 11,427 12,920 Loss before extraordinary item and cumulative effect of changes in accounting principles (1,275) (62) (576) (449) Extraordinary item, net (10,802) - - - Cumulative effect of changes in accounting principles, net 2,625 - - - Net loss (9,452) (62) (576) (449)