-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ll5fVO+SKFlmiyuz/JyIhpTKq5r0xw8yf0c6w+ISAuEB8dwCbs+pfREYBLG1dZgp jMOV8W+6XI57rsWWx8Woaw== 0000900421-96-000016.txt : 19960329 0000900421-96-000016.hdr.sgml : 19960329 ACCESSION NUMBER: 0000900421-96-000016 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXXAM GROUP INC /DE/ CENTRAL INDEX KEY: 0000764542 STANDARD INDUSTRIAL CLASSIFICATION: LUMBER & WOOD PRODUCTS (NO FURNITURE) [2400] IRS NUMBER: 131310680 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08857 FILM NUMBER: 96540158 BUSINESS ADDRESS: STREET 1: 5847 SAN FELIPE STE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7139757600 MAIL ADDRESS: STREET 1: 5847 SAN FELIPE STE 2600 STREET 2: STE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 10-K405 1 FORM 10-K OF MAXXAM GROUP INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K -------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 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, 1996: 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 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 over 125 years, engages in several principal aspects of the lumber industry--the growing and harvesting of redwood and Douglas-fir timber, the milling of logs into lumber products and the manufacturing of lumber into a variety of value-added finished products. Britt manufactures redwood and cedar fencing and decking products from small diameter logs, a substantial portion of which Britt acquires from Pacific Lumber (which cannot efficiently process them in its own mills). PACIFIC LUMBER OPERATIONS Timberlands Pacific Lumber owns and manages approximately 192,000 acres of commercial timberlands. These timberlands are located in Humboldt County along the northern California coast which has very favorable soil and climate conditions. These timberlands contain approximately three-quarters redwood and one-quarter Douglas-fir timber. 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 greatly facilitate Pacific Lumber's operations and 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 "Scotia Pacific Timberlands"), a special purpose Delaware corporation and wholly owned subsidiary of Pacific Lumber ("Scotia Pacific"). Pacific Lumber has the exclusive right to harvest (the "Pacific Lumber Harvest Rights") approximately 8,000 non- contiguous acres of the Scotia Pacific Timberlands consisting substantially of virgin old growth redwood and virgin old growth Douglas-fir timber located on numerous small parcels throughout the Scotia Pacific Timberlands. Substantially all of Scotia Pacific's assets, including the Scotia Pacific Timberlands and the GIS (defined below), are pledged as security for Scotia Pacific's 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes"). Pacific Lumber harvests and purchases from Scotia Pacific all of the logs harvested from the Scotia Pacific Timberlands. See "--Relationships With Scotia Pacific and Britt" for a description of this and other relationships among Pacific Lumber, Scotia Pacific and Britt. The forest products industry grades lumber in various classifications according to quality. The two broad categories within which all grades fall, based on the absence or presence of knots, are called "upper" and "common" grades, respectively. "Old growth" trees, often defined as trees which have been growing for approximately 200 years or longer, have a higher percentage of upper grade lumber than "young growth" trees (those which have been growing for less than 200 years). "Virgin" old growth trees are located in timber stands that have not previously been harvested. "Residual" old growth trees are located in timber stands which have been partially harvested in the past. Pacific Lumber has engaged in extensive efforts to supplement the natural regeneration of timber and increase the amount of timber on its timberlands. Pacific Lumber is required to comply with California forestry regulations regarding reforestation, which generally require that an area be reforested to specified standards within an established period of time. Pacific Lumber also actively engages in efforts to establish timberlands from open areas such as pasture land. During 1995, Pacific Lumber planted approximately 676,000 redwood and Douglas-fir seedlings. Regeneration of redwood timber generally is accomplished through the natural growth of new redwood sprouts from the stump remaining after a redwood tree is harvested. Such new redwood sprouts grow quickly, thriving on existing mature root systems. In addition, Pacific Lumber supplements natural redwood regeneration by planting redwood seedlings. Douglas-fir timber grown on Pacific Lumber's timberlands is regenerated almost entirely by planting seedlings. HARVESTING PRACTICES The ability of Pacific Lumber to sell logs or lumber products will depend, in part, upon its ability to obtain regulatory approval of timber harvesting plans ("THPs"). THPs are required to be developed by registered professional foresters and must be filed with, and approved by, the California Department of Forestry ("CDF") prior to the harvesting of timber. Each THP is designed to comply with applicable environmental laws and regulations. The CDF's evaluation of proposed THPs incorporates review and analysis of such THPs by several California and federal agencies and public comments received with respect to such THPs. An approved THP is applicable to specific acreage and specifies the harvesting method and other conditions relating to the harvesting of the timber covered by such THP. See "--Regulatory and Environmental Factors" for information regarding proposed critical habitat designation, sustained yield regulations and related matters. Pacific Lumber maintains a detailed geographical information system covering its timberlands (the "GIS"). The GIS covers numerous aspects of Pacific Lumber's properties, including timber type, tree class, wildlife data, roads, rivers and streams. By carefully monitoring and updating this data base and conducting field studies, Pacific Lumber's foresters are able to develop detailed THPs addressing the various regulatory requirements. Pacific Lumber also utilizes a Global Positioning System ("GPS") which allows precise location of geographic features through satellite positioning. Use of the GPS greatly enhances the quality and efficiency of GIS data. Pacific Lumber employs a variety of well-accepted methods of selecting trees for harvest. These methods, which are designed to achieve optimal regeneration, are referred to as "silvicultural systems" in the forestry profession. Silvicultural systems range from very light thinnings aimed at enhancing the growth rate of retained trees to clear cutting which results in the harvest of all trees in an area and replacement with a new forest stand. In between are a number of varying levels of partial harvests which can be employed. Pacific Lumber's foresters select the appropriate silvicultural system for any given site based upon the specific conditions of that site. Pacific Lumber customarily employs silvicultural systems that involve thinnings followed by a variety of partial cuttings to achieve a high degree of natural regeneration. Partial harvesting allows the remaining trees to obtain more light, nutrients and water, thereby promoting faster growth rates. Pacific Lumber uses a variety of factors, including the size and density of the remaining trees, to determine when to again submit a THP with respect to a given area. Clear cutting is only used under specific circumstances where it is advisable due to specific site conditions (such as undesirable tree species composition for natural regeneration, topographic difficulties which preclude partial cuttings or the need to create more diverse wildlife habitats within watersheds as recommended by Pacific Lumber's wildlife biologists). Due to the magnitude of its timberlands and conservative application of silvicultural systems that retain substantial numbers of trees on areas that are harvested, Pacific Lumber has historically conducted harvesting operations on approximately 5% of its timberlands in any given year. PRODUCTION FACILITIES Pacific Lumber owns four highly mechanized sawmills and related facilities located in Scotia, Fortuna and Carlotta, California. The sawmills historically have been supplied almost entirely from timber harvested from Pacific Lumber's timberlands. Since 1986, Pacific Lumber has implemented numerous technological advances 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 268 million board feet, with approximately 290, 286, and 228 million board feet produced in 1995, 1994 and 1993, respectively. The Fortuna sawmill, built by Pacific Lumber in 1972, produces primarily common grade lumber. During 1995, the Fortuna mill produced approximately 94 million board feet of lumber. The Carlotta sawmill was acquired in 1986 and produces both common and upper grade redwood lumber. During 1995, the Carlotta mill produced approximately 67 million board feet of lumber. Sawmill "A," located in Scotia, was remodeled in 1983 and processes Douglas-fir logs while Sawmill "B," also located in Scotia, primarily processes large diameter redwood logs. During 1995, Sawmills "A" and "B" produced 79 and 51 million board feet of lumber, respectively. Pacific Lumber operates a finishing plant which processes rough lumber into a variety of finished products such as trim, fascia, siding and paneling. These finished products include the industry's largest variety of customized trim and fascia patterns. Pacific Lumber also enhances the value of some grades of common grade lumber by assembling knot-free pieces of narrower and shorter lumber into wider or longer pieces in its 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 where several of its manufacturing facilities are located. Pacific Lumber sells surplus power to Pacific Gas and Electric Company. In 1995, the sale of surplus power accounted for approximately 1% of Pacific Lumber's total revenues. PRODUCTS The following table sets forth the distribution of Pacific Lumber's lumber production (on a net board foot basis) and revenues by product line:
Year Ended December 31, 1995 Year Ended December 31, 1994 ------------------------------------ ------------------------------------ % of Total % of Total Lumber % of Total Lumber % of Total Production Lumber % of Total Production Lumber % of Total Volume Revenues Revenues Volume Revenues Revenues Product ---------- ---------- ---------- ---------- ---------- ---------- Upper grade redwood lumber 17% 38% 31% 17% 41% 33% Common grade redwood lumber 54% 40% 32% 58% 36% 30% ---------- ----------- ---------- ---------- ---------- ---------- Total redwood lumber 71% 78% 63% 75% 77% 63% ---------- ----------- ---------- ---------- ---------- ---------- Upper grade Douglas- fir lumber 3% 5% 4% 3% 7% 5% Common grade Douglas-fir lumber 23% 14% 11% 20% 13% 10% ---------- ----------- ---------- ---------- ---------- ---------- Total Douglas- fir lumber 26% 19% 15% 23% 20% 15% ---------- ----------- ---------- ---------- ---------- ---------- Other grades of lumber 3% 3% 4% 2% 3% 4% ---------- ----------- ---------- ---------- ---------- ---------- Total lumber 100% 100% 82% 100% 100% 82% ========== =========== ========== ========= ========== ========== Logs 7% 9% ========== ========== Hardwood chips 4% 4% Softwood chips 5% 4% ---------- ---------- Total wood chips 9% 8% ========== ==========
Lumber Pacific Lumber primarily produces and markets lumber. In 1995, Pacific Lumber sold approximately 277 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. 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. The overall supply of upper grade lumber has been diminishing due to increasing environmental and regulatory restrictions and other factors. While Pacific Lumber's competitive position with respect to upper grade lumber has been improving due to the quality of its timberlands, Pacific Lumber's supply of upper grade lumber has decreased in some premium product categories. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." Common grade redwood lumber, Pacific Lumber's largest volume product, has many of the same aesthetic and structural qualities of redwood uppers, but has some knots, sapwood and a coarser grain. Such lumber is commonly used for construction purposes, including outdoor structures such as decks, hot tubs and fencing. Douglas-fir lumber is used primarily for new construction and some decorative purposes and is widely recognized for its strength, hard surface and attractive appearance. Douglas-fir is grown commercially along the west coast of North America and in Chile and New Zealand. Upper grade Douglas-fir lumber is derived primarily from old growth Douglas-fir timber and is used principally in finished carpentry applications. Common grade Douglas-fir lumber is used for a variety of general construction purposes and is largely interchangeable with common grades of other whitewood lumber. Logs Pacific Lumber currently sells certain logs that, due to their size or quality, cannot be efficiently processed by its mills into lumber. The purchasers of these logs are largely Britt, and surrounding mills which do not own sufficient timberlands to support their mill operations. See "- - -Relationships With Scotia Pacific and Britt" below. Except for the agreement with Britt described below, Pacific Lumber does not have any significant contractual relationships with 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. Wood Chips Pacific Lumber uses a whole-log chipper to produce wood chips from hardwood trees which would otherwise be left as waste. These chips are sold to third parties primarily for the production of facsimile and other specialty papers. Pacific Lumber also produces softwood chips from the wood residue and waste from its milling and finishing operations. These chips are sold to third parties for the production of wood pulp and paper products. BACKLOG AND SEASONALITY Pacific Lumber's backlog of sales orders at December 31, 1995 and 1994 was approximately $11.5 million and $11.9 million, respectively, the substantial portion of which was delivered in the first quarter of the next fiscal year. Pacific Lumber has historically experienced lower first quarter sales due largely to the general decline in construction-related activity during the winter months. As a result, Pacific Lumber's results in any one quarter are not necessarily indicative of results to be expected for the full year. MARKETING The housing, construction and remodeling markets are the primary markets for Pacific Lumber's lumber products. Pacific Lumber's policy is to maintain a wide distribution of its products both geographically and in terms of the number of customers. Pacific Lumber sells its lumber products throughout the country to a variety of accounts, the large majority of which are wholesalers, followed by retailers, industrial users, exporters and manufacturers. Upper grades of redwood and Douglas-fir lumber are sold throughout the entire United States, as well as to export markets. Common grades of redwood lumber are sold principally west of the Mississippi River, with California accounting for approximately 63% of these sales in 1995. Common grades of Douglas-fir lumber are sold primarily in California. In 1995, 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 revenues in 1995. Pacific Lumber markets its products through its own sales staff which focuses primarily on domestic sales. Pacific Lumber actively follows trends in the housing, construction and remodeling markets in order to maintain an appropriate level of inventory and assortment of products. Due to its high quality products, large inventory, competitive prices and long history, Pacific Lumber believes 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, product availability and product quality. Pacific Lumber's products compete not only with other wood products but with metals, masonry, plastic and other construction materials made from non-renewable resources. The level of demand for Pacific Lumber's products is dependent on such broad factors as overall economic conditions, interest rates and demographic trends. In addition, competitive considerations, such as total industry production and competitors' pricing, as well as the price of other construction products, affect the sales prices for Pacific Lumber's lumber products. Pacific Lumber currently enjoys a competitive advantage in the upper grade redwood lumber market due to the quality of its timber holdings and relatively low cost production operations. Competition in the common grade redwood and Douglas-fir lumber market is more intense, and Pacific Lumber competes with numerous large and small lumber producers. EMPLOYEES As of March 1, 1996, Pacific Lumber had approximately 1,600 employees, none of whom are covered by a collective bargaining agreement. RELATIONSHIPS WITH SCOTIA PACIFIC AND BRITT In March 1993, Pacific Lumber consummated its offering of $235 million of 10-1/2% Senior Notes due 2003 (the "Pacific Lumber Senior Notes") and Scotia Pacific consummated its offering of $385 million of Timber Notes. Upon the closing of such offerings, Pacific Lumber, Scotia Pacific and Britt entered into a variety of agreements. Pacific Lumber and Scotia Pacific entered into a Services Agreement (the "Services Agreement") and an Additional Services Agreement (the "Additional Services Agreement"). Pursuant to the Services Agreement, Pacific Lumber provides operational, management and related services with respect to the Scotia Pacific Timberlands containing timber of Scotia Pacific ("Scotia Pacific Timber") not performed by Scotia Pacific's own employees. Such services include the furnishing of all equipment, personnel and expertise not within Scotia Pacific's possession and reasonably necessary for the operation and maintenance of the Scotia Pacific Timberlands containing Scotia Pacific Timber. In particular, Pacific Lumber is required to regenerate Scotia Pacific Timber, prevent and control loss of Scotia Pacific Timber by fires, maintain a system of roads throughout the Scotia Pacific Timberlands, take measures to control the spread of disease and insect infestation affecting Scotia Pacific Timber and comply with environmental laws and regulations, including measures with respect to waterways, habitat, hatcheries and endangered species. Pacific Lumber is also required (to the extent necessary) to assist Scotia Pacific personnel in updating the GIS and to prepare and file, on Scotia Pacific's behalf, all pleadings and motions and otherwise diligently pursue appeals of any denial of any THP and related matters. As compensation for these and the other services to be provided by Pacific Lumber, Scotia Pacific pays a fee which is adjusted on January 1 of each year based on a specified government index relating to wood products. The fee was approximately $115,100 per month in 1995 and is expected to be approximately $112,100 per month in 1996. Pursuant to the Additional Services Agreement, Scotia Pacific provides Pacific Lumber with a variety of services, including (a) assisting Pacific Lumber to operate, maintain and harvest its own timber properties, (b) updating and providing access to the GIS with respect to information concerning Pacific Lumber's own timber properties, and (c) assisting Pacific Lumber with its statutory and regulatory compliance. Pacific Lumber pays Scotia Pacific a fee for such services equal to the actual cost of providing such services, as determined in accordance with generally accepted accounting principles. Pacific Lumber and Scotia Pacific also entered into a Master Purchase Agreement (the "Master Purchase Agreement"). The Master Purchase Agreement governs all purchases of logs by Pacific Lumber from Scotia Pacific. Each purchase of logs by Pacific Lumber from Scotia Pacific is made pursuant to a separate log purchase agreement (which incorporates the terms of the Master Purchase Agreement) for the Scotia Pacific Timber covered by an approved THP. Each log purchase agreement generally constitutes an exclusive agreement with respect to the timber covered thereby, subject to certain limited exceptions. The purchase price must be at least equal to the SBE Price (as defined below). The Master Purchase Agreement provides that if the purchase price equals or exceeds (i) the price for such species and category thereof set forth on the structuring schedule applicable to the Timber Notes and (ii) the SBE Price, then such price shall be deemed to be the fair market value of such logs. The Master Purchase Agreement defines the "SBE Price," for any species and category of timber, as the stumpage price for such species and category as set forth in the most recent "Harvest Value Schedule" published by the California State Board of Equalization ("SBE") applicable to the timber sold during the period covered by such Harvest Value Schedule. Such Harvest Value Schedules are published for purposes of computing yield taxes and generally are released every six months. As Pacific Lumber purchases logs from Scotia Pacific pursuant to the Master Purchase Agreement, Pacific Lumber is responsible, at its own expense, for harvesting and removing the standing Scotia Pacific Timber covered by approved THPs and, thus, the purchase price thereof 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 Scotia Pacific's revenues are derived from the sale of logs to Pacific Lumber under the Master Purchase Agreement. Pacific Lumber, Scotia Pacific and Salmon Creek Corporation ("Salmon Creek," a wholly owned subsidiary of Pacific Lumber) also entered into a Reciprocal Rights Agreement granting to each other certain reciprocal rights of egress and ingress through their respective properties in connection with the operation and maintenance of such properties and their respective businesses. In addition, Pacific Lumber entered into an Environmental Indemnification Agreement with Scotia Pacific pursuant to which Pacific Lumber agreed to indemnify Scotia Pacific from and against certain present and future liabilities arising with respect to hazardous materials, hazardous materials contamination or disposal sites, or under environmental laws with respect to the Scotia Pacific Timberlands. Pacific Lumber entered into an agreement with Britt (the "Britt Agreement") which governs the sale of logs by Pacific Lumber and Britt to each other, the sale of hog fuel (wood residue) by Britt to Pacific Lumber for use in Pacific Lumber's cogeneration plant, the sale of lumber by Pacific Lumber and Britt to each other, and the provision by Pacific Lumber of certain administrative services to Britt (including accounting, purchasing, data processing, safety and human resources services). The logs which Pacific Lumber sells to Britt and which are used in Britt's manufacturing operations are sold at approximately 75% of applicable SBE prices (to reflect the lower quality of these logs). Logs which either Pacific Lumber or Britt purchases from third parties and which are then sold to each other are transferred at the actual cost of such logs. Hog fuel is sold at applicable market prices, and administrative services are provided by Pacific Lumber based on Pacific Lumber's actual costs and an allocable share of Pacific Lumber's overhead expenses consistent with past practice. BRITT LUMBER OPERATIONS Business Britt is located in Arcata, California, approximately 45 miles north of Pacific Lumber's headquarters. Britt's primary business is the processing of small diameter redwood logs into wood fencing products for sale to retail and wholesale customers. Britt was incorporated in 1965 and operated as an independent manufacturer of fence products until July 1990, when it was purchased by a subsidiary of the Company. Britt purchases small diameter (6 to 11 inch) and short length (6 to 12 feet) redwood logs from Pacific Lumber and a variety of different diameter and different length logs from various timberland owners. Britt processes logs at its mill into a variety of different fencing products, including "dog-eared" 1" x 6" fence stock in six and eight foot lengths, 4" x 4" fence posts in 6 through 12 foot lengths, and other fencing products in 6 through 12 foot lengths. Britt's purchases of logs from third parties are generally consummated pursuant to short-term contracts of twelve months or less. See "--Pacific Lumber Operations--Relationships With Scotia Pacific and Britt" for a description of Britt's log purchases from Pacific Lumber. Marketing In 1995, Britt sold approximately 78 million board feet of lumber products to approximately 100 different customers. Over one-half of its lumber sales were in northern California. The remainder of its 1995 sales were in southern California and ten other western states. The largest and top five of such customers accounted for approximately 33% and 72%, respectively, of such 1995 sales. Britt markets its products to a variety of customers, including distribution centers, industrial remanufacturers, wholesalers and retailers and is expanding its market eastward. Britt's backlog of sales orders at December 31, 1995 and 1994 was approximately $3.2 million and $3.6 million, respectively, the substantial portion of which was delivered in the first quarter of the next fiscal year. Facilities and Employees Britt's manufacturing operations are conducted on 12 acres of land, 10 acres of which are leased on a long-term fixed-price basis from an unrelated third party. Fence production is conducted in a 46,000 square foot mill. An 18 acre log sorting and storage yard is located one quarter of a mile away. The mill was constructed in 1980, and capital expenditures to enhance its output and efficiency are made periodically. Britt's (single shift) mill capacity, assuming 40 production hours per week, is estimated at 35.5 million board feet of fencing products per year. As of March 1, 1996, Britt employed approximately 110 people, none of whom are covered by a collective bargaining agreement. Competition Management estimates that Britt accounted for approximately one- third of the redwood fence market in 1995 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 federal laws and regulations dealing with timber harvesting, endangered species and critical habitat, 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 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. The Company does not expect that compliance with such existing laws and regulations will have a material adverse effect on its future liquidity, consolidated operating results or financial position; however, these laws and regulations are modified from time to time and there can be no assurance that certain pending or future legislation, governmental regulations or judicial or administrative decisions would not materially adversely affect the Company (see below). In 1994, the BOF 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 March 1992, the marbled murrelet was approved for listing as endangered under the CESA. In October 1992, the United States Fish and Wildlife Service ("USFWS") issued its final rule listing the marbled murrelet as a threatened species under the ESA in the tri-state area of Washington, Oregon and California. Pacific Lumber has incorporated, and will continue to incorporate as required, mitigation measures into its THPs to protect and maintain habitat for the marbled murrelet on its timberlands. The BOF requires Pacific Lumber to conduct pre-harvest marbled murrelet surveys to provide certain site specific mitigations in connection with THPs covering virgin old growth timber and unusually dense stands of residual old growth timber. Such surveys can only be conducted during a portion of the murrelet's nesting and breeding season, which extends from April through mid-September. Accordingly, such surveys are expected to delay the review and approval process with respect to certain of the THPs filed by Pacific Lumber. The results of such surveys to date (based upon current survey protocols) have indicated that Pacific Lumber has approximately 6,000 acres of occupied marbled murrelet habitat. A substantial portion of this land contains virgin and residual old growth timber and the bulk of it falls within the areas proposed to be designated as critical habitat for the marbled murrelet (see below). Pacific Lumber is unable to predict when or if it will be able to harvest this acreage. In January 1994, the USFWS proposed designation of critical habitat for the marbled murrelet under the ESA (which proposed designation did not include any of Pacific Lumber's timberlands). In July 1995, in a case entitled Marbled Murrelet v. Babbitt (Case No. C-91-522R), a U.S. District Court in Seattle ordered the USFWS to make its final designation of critical habitat for the marbled murrelet by January 29, 1996 and to issue its proposed final designation of critical habitat by August 1, 1995. On August 10, 1995, the USFWS published its proposed final designation of critical habitat for the marbled murrelet (the "Proposed Designation"), seeking to designate over four million acres as critical habitat for the marbled murrelet, including approximately 33,000 acres of Pacific Lumber's timberlands. The Proposed Designation was subject to a 60-day comment period and Pacific Lumber filed comments vigorously opposing the Proposed Designation. In February 1996, the Court extended until May 15, 1996 the deadline for final designation of critical habitat for the marbled murrelet. The USFWS has not yet published its final designation of critical habitat for the marbled murrelet. Pacific Lumber is unable to predict when or if it would be able to harvest on any acreage finally designated as critical habitat. Furthermore, it is impossible to determine the future adverse impact of such designation on Pacific Lumber's liquidity, consolidated financial position or results of operations until such time as the Proposed Designation is finalized and related regulatory and legal issues are fully resolved. However, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on timberlands designated as marbled murrelet critical habitat, such restrictions could have a material adverse effect on its liquidity, consolidated financial condition and results of operations. If Pacific Lumber is unable to harvest or is severely limited in harvesting, it intends to seek full compensation from the appropriate governmental agencies on the grounds that such restrictions constitute a taking. Pacific Lumber's wildlife biologists are conducting research concerning the marbled murrelet on its timberlands and are currently developing a habitat conservation plan for the marbled murrelet (the "Murrelet HCP"). The Murrelet HCP, which is designed to mitigate the impact of the Proposed Designation, has been submitted to the USFWS. Pacific Lumber is working with the USFWS and other government agencies on the Murrelet HCP. It is uncertain when the Murrelet HCP review process will be completed or what the outcome will be of the review process or its effect upon Pacific Lumber's liquidity, consolidated financial position or results of operations. There also continue to be other regulatory actions and lawsuits seeking to have various other species listed as threatened or endangered under the ESA and/or the CESA and to designate critical habitat for such species. It is uncertain what effect any such other listings and/or designations of critical habitat would have on liquidity, Pacific Lumber's consolidated financial position or results of operations. Various groups and individuals have filed objections with the CDF and the BOF regarding the CDF's and the BOF's actions and rulings with respect to certain of Pacific Lumber's THPs, and Pacific Lumber 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 and other harvesting operations. These challenges have severely restricted Pacific Lumber's ability to harvest virgin old growth timber on its property (and to a lesser extent, its residual old growth timber). To date, challenges with respect to Pacific Lumber's THPs relating to young growth and residual old growth timber have been limited; however, no assurance can be given as to the extent of such challenges in the future. Pacific Lumber believes that environmentally focused challenges to its THPs are likely to occur in the future, particularly with respect to virgin and residual old growth timber. Although such challenges have delayed or prevented Pacific Lumber from conducting a portion of its operations, to date such challenges have not had a material adverse effect on the Company's liquidity, 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 liquidity, consolidated results of operations or financial position of the Company. See also Item 3. "Legal Proceedings--Timber Harvesting Litigation" for a description of the pending Marbled Murrelet action. In June 1990, the USFWS designated the northern spotted owl as threatened under the ESA. The owl's range includes all of Pacific Lumber's timberlands. The ESA and its implementing regulations (and related California regulations) generally prohibit harvesting operations in which individual owls might be killed, displaced or injured or which result in significant habitat modification that could impair the survival of individual owls or the species as a whole. Since 1988, biologists have conducted inventory and habitat utilization studies of northern spotted owls on Pacific Lumber's timberlands. Pacific Lumber has developed and the USFWS has given its full concurrence to a comprehensive wildlife management plan for the northern spotted owl (the "Owl Plan"). The Owl Plan was recently updated through 1999 and the USFWS agreed that operations consistent with the Owl Plan would not result in the take of any owls. By incorporating the Owl Plan into each THP filed with the CDF, Pacific Lumber is able to expedite the approval time 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. The plaintiffs in the Marbled Murrelet action have requested injunctive relief with respect to the Owl Plan. See Item 3. "Legal Proceedings--Timber Harvesting Litigation." 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, air and water quality, and the restriction, regulation and administration of timber harvesting practices. For example, a bill has been introduced in the California legislature which would, among other things, initiate negotiations by the California Resources Agency for the public acquisition of approximately 4,700 acres of Pacific Lumber's timberlands, 3,000 acres of which is a contiguous block of virgin old growth redwood forest often referred to as the "Headwaters Forest." In addition, the U.S. Congressman from the congressional district in which Pacific Lumber is located has introduced a bill which would, among other things, authorize public acquisition of the Headwaters Forest and up to 1,700 contiguous acres. The bill would authorize the Secretary of the Interior to exchange government-owned timberlands and other property for the appraised fair market value of the Headwaters Forest and any contiguous acreage to be acquired. 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 future liquidity, consolidated financial position or operating results of the Company. Furthermore, any bills which are passed are subject to executive veto and court challenge. In addition to existing and possible new or modified statutory enactments, regulatory requirements and administrative and legal actions, the California timber industry remains subject to potential California or local ballot initiatives and evolving federal and California case law which could affect timber harvesting practices. It is, however, impossible to assess the effect of such matters on the future liquidity, consolidated financial position or operating results 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 In September 1989, seven past and present employees of Pacific Lumber brought an action against the Company, Pacific Lumber, MAXXAM and certain current and former directors and officers of the Company, Pacific Lumber and MAXXAM, in the United States District Court, Northern District of California, entitled Kayes, et al. v. Pacific Lumber Company, et al. (No. C89-3500) (the "Kayes action"). 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 Company, Pacific Lumber and MAXXAM defendants breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 ("ERISA") to participants and beneficiaries of the Retirement Plan by purchasing the group annuity contract from Executive Life and selecting Executive Life 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) (the "Miller action") on April 26, 1993. The Miller action was dismissed on May 14, 1993. On October 22, 1994, the President signed the Pension Annuitants' Protection Act of 1994, 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 April 10, 1995, the U.S. Ninth Circuit Court of Appeals reversed the dismissal of the Miller action. On August 7, 1995, the defendants requested the U.S. Supreme Court to review the case by filing a petition for writ of certiorari. The U.S. Supreme Court denied defendants' petition for writ of certiorari. 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 the Company, Pacific Lumber, MAXXAM 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. On December 8, 1995, the parties in the Kayes/Miller action and DOL civil action reached an agreement in principle to settle these matters. The proposed settlement is subject to execution of a definitive agreement and other contingencies. A status conference is scheduled for April 12, 1996 in the Kayes/Miller action and the DOL civil action. A special committee of the Board of Directors of MAXXAM has been appointed to review the proposed settlement and a related derivative action. Management is of the opinion that the outcome of the foregoing litigation and proposed settlement should not have a material adverse effect on the Company's liquidity, consolidated financial position or results of operations. TIMBER HARVESTING LITIGATION Various actions, similar to each other, have been filed against the Company, Pacific Lumber and its subsidiaries, MAXXAM, various state officials and others, alleging, among other things, violations of the Forest Practice Act, the CEQA, ESA, CESA, and/or related regulations. These actions seek to prevent Pacific Lumber and its subsidiaries from harvesting certain of their THPs and conducting certain other timber operations. The Sierra Club and EPIC v. The California Department of Forestry, Scotia Pacific Holding Co., et al. (No. 95 DR 0072) action (the "Sierra Club action") in the Superior Court of Humboldt County, filed on March 10, 1995 by the Sierra Club and the Environmental Protection Information Center ("EPIC"), relates to exemptions for forest health which Pacific Lumber and its subsidiaries had previously filed covering their entire 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 exemptions. In May 1995, the Court denied plaintiffs' request for a preliminary injunction and dismissed the case on its merits. On May 19, 1995, plaintiffs appealed the Court's decision and requested an emergency stay of harvesting. On June 6, 1995, the Court of Appeal denied the plaintiffs' request for a stay of timber harvesting operations; however, plaintiffs continued their appeal of the trial court's decision. In July 1995, the USFWS and the California Department of Fish and Game (the "CDFG") inspected Pacific Lumber's property and determined that certain areas (which Pacific Lumber estimates to be approximately 6,000 acres) are suitable marbled murrelet habitat and have prohibited harvesting on these timberlands from April 1 through September 15 (the marbled murrelet breeding and nesting season). These agencies have also imposed certain other restrictions to assure that there is no adverse impact on the marbled murrelet. On September 1, 1995, Pacific Lumber and its subsidiaries notified the CDF that they intended to commence operations under the forest health exemptions shortly after September 15, 1995, the end of the marbled murrelet breeding season. In connection with the Sierra Club action, on February 23, 1996, the Court of Appeal affirmed the trial court's decision in favor of Pacific Lumber, finding that harvesting of dead, dying or diseased trees is exempt from the environmental review requirements of CEQA and the Forest Practice Act. It is uncertain if plaintiffs will seek review of this decision from the California Supreme Court. Pacific Lumber is still prohibited from harvesting under certain portions of the exemptions as a result of the Marbled Murrelet action described below. On September 15, 1995, EPIC filed another lawsuit with respect to the forest health exemptions; that case is entitled Marbled Murrelet, et al. v. Bruce Babbitt, et al. (No. C-95-3261) (the "Marbled Murrelet action") and was filed in the U.S. District Court for the Northern District of California. As amended, the complaint alleges, among other things, violations of the ESA, the National Environmental Protection Act ("NEPA") and the Administrative Procedures Act ("APA"). Plaintiffs claim, among other things, that the timber harvesting operations pursuant to the forest health exemptions will contribute to the destruction of habitat for the marbled murrelet and the northern spotted owl. Following a hearing on September 28, 1995, the Court dissolved a temporary restraining order ("TRO") and issued a preliminary injunction enjoining Pacific Lumber and its subsidiaries from conducting timber harvesting operations under portions of the forest health exemptions until a trial on the merits of the case. The majority of the timberlands which are subject to the injunction are timberlands which have been proposed as critical habitat for the marbled murrelet. In October 1995, Pacific Lumber appealed the issuance of the preliminary injunction to the U.S. Ninth Circuit Court of Appeals; oral argument in the appeal was held March 14, 1996. On March 6, 1996, the plaintiffs asked for leave to amend their pleadings to add additional claims and seek additional injunctive relief concerning, among other things, Pacific Lumber's Owl Plan and up to eight other THPs (only two of which are presently approved). The eight THPs cover approximately 1,360 acres of the Company's timberlands and represent a substantial portion of the volume Pacific Lumber and its subsidiaries are planning to utilize in their operations for 1996. On March 15, 1996, the Court granted plaintiffs' motion to file an amended complaint and issued a TRO enjoining Pacific Lumber and its subsidiaries from harvesting pursuant to the eight THPs. On March 20, 1996, the Court held a hearing on plaintiffs' motion for a preliminary injunction and extended the TRO for ten additional days while it considers the motion. 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. After the Superior Court reversed the BOF's approval of this THP, certain modifications were made to the THP, which was then unanimously approved by the BOF. The Superior Court later issued judgment in favor of Pacific Lumber. On appeal, the Court of Appeal in October 1993 affirmed the trial court's judgment approving harvesting under this THP. In April 1993, EPIC filed another action with respect to this THP entitled EPIC, Marbled Murrelet, et al. v. Bruce Babbitt, Secretary, Department of Interior, et al. (No. C93-1400) (the "EPIC action") in the U.S. District Court for the Northern District of California, alleging an unlawful "taking" of the marbled murrelet under the ESA. The Court dismissed the federal and state agency defendants and limited plaintiffs' claims against Pacific Lumber. 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 the area covered by the THP is occupied by the marbled murrelet and permanently enjoined implementation of the THP in order to protect the marbled murrelet. Pacific Lumber appealed the Court's decision to the U.S. Ninth Circuit Court of Appeals; oral argument on the appeal was held March 14, 1996. The Lost Coast League v. The California Department of Forestry, et al. (No. 94DR0046) action in Superior Court of Humboldt County, filed in February 1994, relates to a THP for approximately 121 acres of primarily virgin old growth timber. The Court issued an injunction staying timber harvesting pending trial. On July 14, 1994, after a trial on the merits, the Court issued its decision setting aside CDF's approval of the THP and remanding the THP to CDF for further review and consideration. In October 1994, Pacific Lumber submitted a revised THP, which was subsequently approved. The Court is expected to establish a briefing and trial schedule with respect to plaintiff's objections to the reapproval of the revised THP. In view of the recent developments in the Marbled Murrelet action, the Company is uncertain whether or not the matters described above will have a material adverse effect on the Company's liquidity, consolidated financial position or results of operations. See Item 1. "Business--Regulatory and Environmental Factors" above for a description of regulatory and similar matters which could affect Pacific Lumber's timber harvesting practices and future operating results. ZERO COUPON NOTE LITIGATION In April 1989, an action was filed against the Company, MAXXAM, MAXXAM Properties Inc. ("MPI," a wholly owned subsidiary of the Company) 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. USAT MATTER In January 1995, an action entitled U.S., ex rel., Martel v. Hurwitz, et al. was filed in the U.S. District Court for the Northern District of California (No. C950322) (the "Martel action") against the Company, MAXXAM and others. This action is purportedly brought by plaintiff on behalf of the U.S. government; however, the U.S. government has declined to participate in the suit. Plaintiff alleges, among other things, that defendants used the federally insured assets of United Savings Association of Texas ("USAT") to acquire junk bonds from Michael Milken and Drexel, Burnham, Lambert Inc. ("Drexel") and that, in exchange, Mr. Milken and Drexel arranged financing for defendants' various business ventures, including the acquisition of the Company. Plaintiff alleges that USAT became insolvent in 1988 and that defendants should be required to pay $1.6 billion (subject to trebling) to cover USAT's losses. Plaintiff seeks, among other things, that the Court impose a constructive trust upon the fruits of the alleged improper use of USAT funds. On March 22, 1996, the Court granted defendant's motion to have this case transferred to the U.S. District Court for the Southern District of Texas. Management is of the opinion that the outcome of the foregoing litigation should not have a material adverse effect on the Company's liquidity, consolidated financial position or results of operations. 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 liquidity, 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 $4.8 million in 1995. No dividends were declared or paid in 1994. As of December 31, 1995, approximately $1.9 million of dividends could be paid by the Company, of which $1.6 million was paid in January 1996. 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 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 operational and financial information for the years ended December 31, 1995 and 1994.
Years Ended December 31, ----------------------- 1995 1994 ---------- ---------- (In millions of dollars, except shipments and prices) Shipments: Lumber: (1) Redwood upper grades 46.5 52.9 Redwood common grades 216.7 218.4 Douglas-fir upper grades 7.4 8.6 Douglas-fir common grades and other 76.0 66.3 ---------- ---------- Total lumber 346.6 346.2 ========== ========== Logs (2) 12.6 17.7 ========== ========== Wood chips (3) 214.0 210.3 ========== ========== Average sales price: Lumber: (4) Redwood upper grades $ 1,495 $ 1,443 Redwood common grades 477 460 Douglas-fir upper grades 1,301 1,420 Douglas-fir common grades 392 444 Logs (4) 440 615 Wood chips (5) 102 83 Net sales: Lumber, net of discount $ 211.3 $ 216.5 Logs 5.6 10.9 Wood chips 21.7 17.4 Cogeneration power 2.5 3.5 Other 1.5 1.3 ---------- ---------- Total net sales $ 242.6 $ 249.6 ========== ========== Operating income $ 73.2 $ 77.8 ========== ========== Operating cash flow (6) $ 99.6 $ 103.8 ========== ========== Income before income taxes and extraordinary item $ 4.7 $ 14.8 ========== ========== Net income $ 3.5 $ 3.6 ========== ========== - --------------- (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 1995 were essentially unchanged from 1994. Increased shipments of common grade Douglas-fir lumber were mostly offset by decreased shipments of both upper and common grades of redwood lumber. Log shipments in 1995 were 12.6 million feet (net Scribner scale), a decrease of 5.1 million feet from 1994 shipments. 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 old growth timber (large diameter) 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 production capacity for 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 prior years, Pacific Lumber expects that its production of premium upper grade lumber products will decline 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 1995 decreased as compared to 1994. Decreased shipments of upper grade redwood lumber, lower average realized prices for common and upper grade Douglas-fir lumber and logs, and decreased shipments of logs and redwood common lumber were largely offset by increased shipments of common grade Douglas-fir lumber and higher average realized prices for both common and upper grades of redwood lumber. The increase in other sales for 1995 as compared to 1994 was due to higher average realized prices for wood chips, partially offset by lower sales of electrical power. Operating income Operating income for 1995 decreased as compared to 1994. This decrease was primarily due to lower sales of lumber, higher cost of lumber sales and lower sales of logs and electrical power, partially offset by increased sales of wood chips and higher gross margins on wood chip sales. Cost of lumber sales for 1995 was unfavorably impacted by higher purchases of logs from third parties, partially offset by improved sawmill productivity. Cost of goods sold for 1995 was reduced by $1.5 million of business interruption insurance proceeds for the settlement of claims related to an April 1992 earthquake. 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, Pacific Lumber has significantly increased its production capacity for manufactured lumber products by assembling knot-free pieces of narrower and shorter lumber into wider or longer pieces in its 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. Pacific Lumber has instituted a number of measures at its sawmills during the past several years designed to enhance the efficiency of its operations, such as expansion of its manufactured lumber facilities and other improvements in lumber recovery, automated lumber handling and the modification of its production scheduling to maximize cogeneration power revenues. Income before income taxes and extraordinary item Income before income taxes and extraordinary item decreased for 1995 as compared to 1994. This decrease was primarily due to lower investment, interest and other income and the decrease in operating income. Investment, interest and other income for 1995 includes net gains on marketable securities of $4.2 million. Investment, interest and other income for 1994 includes the receipt of a franchise tax refund of $7.2 million (as described in Note 10 to the Consolidated Financial Statements) and net gains on marketable securities of $1.7 million. Credit (provision) in lieu of income taxes The credit in lieu of income taxes for 1994 includes a credit relating to reserves the Company no longer believes are necessary. Extraordinary item The litigation settlement in the second quarter of 1994 (as described in Note 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. FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES The Company conducts its operations primarily through its subsidiaries, Pacific Lumber and Britt. Creditors of the Company's subsidiaries have priority with respect to the assets, cash flows and earnings of such subsidiaries over the claims of the creditors of the Company, including the holders of the MGI Notes. As of December 31, 1995, the indebtedness of the subsidiaries reflected on the Company's Consolidated Balance Sheet was $586.0 million. The indentures governing the Pacific Lumber Senior Notes and the Timber Notes (the "Timber Note Indenture") and Pacific Lumber's revolving credit agreement (as amended and restated, the "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 Scotia Pacific, exclusive of the net income and depletion of Scotia Pacific as long as any Timber Notes are outstanding. As of December 31, 1995, under the most restrictive of these covenants, approximately $15.7 million of dividends could be paid by Pacific Lumber. Pacific Lumber paid an aggregate of $22.0 million and $24.5 million of dividends in 1995 and 1994, respectively. In March 1995, Britt paid dividends consisting of $6.0 million of receivables from its parent, MPI. These receivables represented prior cash advances from Britt to MPI. Substantially all of the Company's consolidated assets are owned by Pacific Lumber and a significant portion of Pacific Lumber's consolidated assets are owned by Scotia Pacific. The Company expects that Pacific Lumber will provide a major portion of its future operating cash flow. Pacific Lumber is dependent upon Scotia Pacific for a significant portion of its timber requirements from which it generates the substantial portion of its operating cash flow. The holders of the Timber Notes have priority over the claims of creditors of Pacific Lumber with respect to the assets and cash flows of Scotia Pacific and the holders of the Pacific Lumber Senior Notes have priority over the claims of creditors of the Company with respect to the assets and cash flows of Pacific Lumber. Under the terms of the Timber Note Indenture, Scotia Pacific will not have available cash for distribution to Pacific Lumber unless Scotia Pacific's cash flow from operations exceeds the amounts required by the Timber Note Indenture to be reserved for the payment of current debt service (including interest, principal and premiums) on the Timber Notes, capital expenditures and certain other operating expenses. The Timber Note Indenture prohibits Scotia Pacific from incurring any additional indebtedness for borrowed money and limits the business activities of Scotia Pacific to the ownership and operation of its timber and timberlands and actions reasonably incidental thereto. The Timber Notes are structured to link, to the extent of cash available, the deemed depletion of Scotia Pacific's timber (through the harvest and sale of logs) to required amortization of the Timber Notes. The required amount of amortization due on any Timber Note payment date is determined by various mathematical formulas set forth in the Timber Note Indenture. The minimum amount of principal which Scotia Pacific must pay (on a cumulative basis) through any Timber Note payment date in order to avoid an Event of Default (as defined in the Timber Note Indenture) is referred to as Rated Amortization. If all payments of principal are made in accordance with Rated Amortization, the payment date on which Scotia Pacific will pay the final installment of principal is July 20, 2015. The amount of principal which Scotia Pacific must pay through each Timber Note payment date in order to avoid payment of prepayment or deficiency premiums is Scheduled Amortization. If all payments of principal are made in accordance with Scheduled Amortization, the payment date on which Scotia Pacific will pay the final installment of principal is July 20, 2009. The following table presents the amortization of the Timber Notes based on Rated Amortization and Scheduled Amortization:
Rated Scheduled Amortization Amortization --------------- --------------- (In millions of dollars) Years Ending December 31: 1996 $ 8.3 $ 14.1 1997 8.5 16.2 1998 8.7 19.3 1999 10.2 21.6 2000 12.6 24.0 Thereafter 301.9 255.0 --------------- --------------- $ 350.2 $ 350.2 =============== ===============
During 1994, 1995 and January 1996, Scotia Pacific repaid approximately $13.1 million, $13.6 million and $8.5 million, respectively, of the aggregate principal amount outstanding on the Timber Notes in accordance with Scheduled Amortization. Once appropriate provision is made for current debt service on the Timber Notes and expenditures for operating and capital costs, and in the absence of certain Trapping Events (as defined in the Timber Note Indenture) or outstanding judgments, the Timber Note Indenture does not limit monthly distributions of available cash from Scotia Pacific to Pacific Lumber. Accordingly, the Company expects that once Scotia Pacific's debt service, operating and capital expenditure requirements have been met, substantially all of Scotia Pacific's available cash will be periodically distributed to Pacific Lumber. Scotia Pacific paid $59.0 million and $88.9 million of dividends to Pacific Lumber during the years ended December 31, 1995 and 1994, respectively. In the event Scotia Pacific'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, accordingly it would be precluded from distributing funds to the Company, therefore the Company's ability to pay interest on the MGI Notes and its other indebtedness would also be materially impaired. During the years ended December 31, 1995 and 1994, Pacific Lumber's operating income before depletion and depreciation ("operating cash flow") amounted to $90.5 million and $95.9 million, respectively, which exceeded interest incurred on all of its indebtedness in those years by $35.0 million and $39.8 million, respectively. The Company believes that Pacific Lumber's level of operating cash flow and other available sources of financing will be sufficient to meet debt service, working capital and capital expenditure requirements for the next year. With respect to long-term liquidity, Pacific Lumber believes that its ability to generate sufficient levels of cash flow from operations, and its ability to obtain both short and long-term financing should provide sufficient funds to meet debt service, long-term working capital and capital expenditure requirements. As of December 31, 1995, the Company (excluding Pacific Lumber and its subsidiary companies) had cash and marketable securities of approximately $58.4 million. The Company believes, although there can be no assurance, that the aggregate dividends which will be available to it from Pacific Lumber and Britt, during the period in which cash interest will not be payable on the MGI Discount Notes, will exceed the Company's cash interest payments on the MGI Senior Notes. When cash interest payments on the MGI Discount Notes commence on February 1, 1999, the Company believes that it should be able to make such cash interest payments out of its then existing cash resources and from cash expected to be available to it from Pacific Lumber and Britt. The indenture governing the MGI Notes, among other things, restricts the ability of the Company to incur additional indebtedness, engage in transactions with affiliates, pay dividends and make investments. As of December 31, 1995, under the most restrictive of these covenants, approximately $1.9 million of dividends could be paid by the Company, of which $1.6 was paid in January 1996. On September 29, 1995, the Company paid dividends of $4.8 million. 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. Pacific Lumber's Revolving Credit Agreement with a bank expires on May 31, 1998. 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 $60.0 million, of which $15.0 million may be used for standby letters of credit and $30.0 million is restricted to acquisition of timberlands. Borrowings made pursuant to the portion of the credit facility restricted to timberland acquisitions would also be secured by the purchased timberlands. As of December 31, 1995, $48.1 million of borrowings was available under the Revolving Credit Agreement, of which $3.1 million was available for letters of credit and $30.0 million was restricted to timberland acquisitions. No borrowings were outstanding as of December 31, 1995, and letters of credit outstanding amounted to $11.9 million. The Revolving Credit Agreement contains covenants substantially similar to those contained in the indenture governing the Pacific Lumber Senior Notes. Capital expenditures for Pacific Lumber and Britt were made to improve production efficiency, reduce operating costs and, to a lesser degree, acquire additional timberlands. Capital expenditures of the Company's subsidiaries were $9.9 million and $11.3 million for the years ended December 31, 1995 and 1994, respectively. Capital expenditures for 1996 are expected to be $12.5 million and for the 1997 - 1998 period are estimated to be between $10.0 million and $15.0 million per year. Pacific Lumber may purchase additional timberlands from time to time as appropriate opportunities arise. Moreover, such purchases could exceed historical levels. Capital expenditures attributable to the reconstruction of Pacific Lumber's commercial facilities destroyed by an earthquake in April 1992 were $1.9 million for 1993 and $2.6 million for 1994, when construction was completed. As of December 31, 1995, the Company had consolidated working capital of $124.2 million and long-term debt of $732.9 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 $102.5 million and $736.4 million, respectively, at December 31, 1994. The decrease in long-term debt was primarily due to principal payments on the Timber Notes. The Company and its subsidiaries anticipate that cash flow from operations, together with existing cash, marketable securities and available sources of financing, will be sufficient to fund their working capital and capital expenditure requirements for the next year. With respect to their long-term liquidity, the Company and its subsidiaries believe that their existing cash and cash equivalents, together with their ability to generate sufficient levels of cash flow from operations and their ability to obtain both short and long-term financing, should provide sufficient funds to meet their working capital and capital expenditure requirements. However, due to their highly leveraged condition, the Company and its subsidiaries are more sensitive than less leveraged companies to factors affecting their operations, including litigation and governmental regulation affecting timber harvesting practices, increased competition from other lumber producers or alternative building products and general economic conditions. TRENDS The Company's forest products operations are primarily conducted by Pacific Lumber and are subject to a variety of California and federal laws and regulations dealing with timber harvesting, endangered species and critical habitat, 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 consolidated financial position, operating results or liquidity; however, these laws and regulations are modified from time to time, and there can be no assurance that certain pending or future governmental regulations, legislation or judicial or administrative decisions would not adversely affect the Company or its ability to sell lumber, logs or timber. See "Business--Regulatory and Environmental Factors" and Note 9 to the Consolidated Financial Statements for information regarding sustained yield regulations, the proposed final designation of approximately 33,000 acres of Pacific Lumber's timberlands as critical habitat for the marbled murrelet, and other information regarding regulatory and environmental factors affecting the Company's operations. Judicial or regulatory actions adverse to Pacific Lumber, increased regulatory delays and inclement weather in northern California, independently or collectively, could impair Pacific Lumber's ability to maintain adequate log inventories and force Pacific Lumber to temporarily idle or curtail operations at certain lumber mills from time to time. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the estimated future cash flows expected to result from the use and eventual disposition of an asset is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss is based on the fair value of the asset. SFAS 121 requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value, less cost to sell. SFAS 121 is effective for financial statements for fiscal years beginning after December 31, 1995. The Company does not expect that the adoption of SFAS 121 will have a material impact on the Company's consolidated financial statements. 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a)(2) of this Form 10-K is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. 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. ARTHUR ANDERSEN LLP San Francisco, California January 19, 1996 CONSOLIDATED BALANCE SHEET
December 31, ----------------------- 1995 1994 ---------- ---------- (In thousands of dollars) ASSETS Current assets: Cash and cash equivalents $ 48,396 $ 48,575 Marketable securities 36,568 19,514 Receivables: Trade 20,576 23,170 Other 1,624 7,435 Inventories 77,904 70,098 Prepaid expenses and other current assets 7,101 3,717 ---------- ---------- Total current assets 192,169 172,509 Timber and timberlands, net of depletion of $204,856 and $188,003 at December 31, 1995 and 1994, respectively 337,390 350,871 Property, plant and equipment, net 100,142 103,183 Deferred financing costs, net 27,288 30,096 Deferred income taxes 58,485 61,498 Restricted cash 31,367 32,402 Other assets 5,542 6,122 ---------- ---------- $ 752,383 $ 756,681 ========== ========== LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Accounts payable $ 4,166 $ 3,703 Accrued interest 25,354 25,765 Accrued compensation and related benefits 9,611 10,622 Deferred income taxes 10,244 12,986 Other accrued liabilities 4,435 3,266 Long-term debt, current maturities 14,195 13,670 ---------- ---------- Total current liabilities 68,005 70,012 Long-term debt, less current maturities 764,310 768,786 Other noncurrent liabilities 33,813 30,365 ---------- ---------- Total liabilities 866,128 869,163 ---------- ---------- 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 (195,032) (193,769) ---------- ---------- Total stockholder's deficit (113,745) (112,482) ---------- ---------- $ 752,383 $ 756,681 ========== ==========
CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- (In thousands of dollars) Net sales: Lumber and logs $ 216,898 $ 227,430 $ 215,743 Other 25,694 22,199 17,696 ---------- ---------- ---------- 242,592 249,629 233,439 ---------- ---------- ---------- Operating expenses: Cost of goods sold (exclusive of depletion and 127,124 129,598 134,563 depreciation) Selling, general and administrative 15,884 16,250 20,108 Depletion and depreciation 26,405 25,946 25,811 ---------- ---------- ---------- 169,413 171,794 180,482 ---------- ---------- ---------- Operating income 73,179 77,835 52,957 Other income (expense): Investment, interest and other income 9,393 14,367 9,718 Interest expense (77,824) (77,383) (80,339) ---------- ---------- ---------- Income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles 4,748 14,819 (17,664) Credit (provision) in lieu of income taxes (1,211) 3,616 3,355 ---------- ---------- ---------- Income (loss) from continuing operations before extraordinary items and cumulative effect of changes in accounting principles 3,537 18,435 (14,309) Loss from net assets transferred to MAXXAM, net of minority interests and related income taxes - - (512,970) ---------- ---------- ---------- Income (loss) before extraordinary items and cumulative effect of changes in accounting principles 3,537 18,435 (527,279) 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) $ 3,537 $ 3,569 $(531,900) ========== ========== ==========
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- (In thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 3,537 $ 3,569 $(531,900) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion and depreciation 26,405 25,946 25,811 Amortization of deferred financing costs and discounts on long-term debt 13,328 12,127 7,435 Net (purchases) sales of marketable securities (19,533) 5,321 12,389 Net losses (gains) on marketable securities (4,175) (1,669) (6,414) Loss (income) from net assets transferred to MAXXAM, net - - 512,970 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 (7,695) 3,634 (2,077) Increase (decrease) in accounts payable 463 832 471 Decrease (increase) in receivables 5,778 (7,660) 7,558 Decrease (increase) in prepaids and other assets (3,384) (528) 212 Increase in accrued and deferred income taxes 2,303 (3,815) (5,123) Decrease in other liabilities 7,734 (2,283) (185) Decrease in accrued interest (411) (451) (7,284) Other 1,020 (86) 848 ---------- ---------- ---------- Net cash provided by operating activities 25,370 34,937 19,332 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Payment of note receivable from affiliate 2,500 - - Net proceeds from sale of assets 18 1,149 256 Capital expenditures (9,852) (11,322) (11,120) Increase in net assets transferred to MAXXAM - - (11,770) ---------- ---------- ---------- Net cash used for investing activities (7,334) (10,173) (22,634) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemptions, repurchase of and principal payments on long-term debt (14,300) (13,237) (716,551) Net borrowings (payments) under revolving credit agreements - (2,900) 2,900 Incurrence of financing costs (150) (213) (34,738) Proceeds from issuance of long-term debt - - 790,000 Restricted cash deposits, net 1,035 1,160 (33,562) Dividends paid (4,800) - (20,000) ---------- ---------- ---------- Net cash used for financing activities (18,215) (15,190) (11,951) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (179) 9,574 (15,253) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 48,575 39,001 54,254 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 48,396 $ 48,575 $ 39,001 ========== ========== ========== SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Net margin borrowings (payments) for marketable securities $ (6,648) $ 5,628 $ 1,020 Timber and timberlands acquired subject to loan from seller 615 910 - Net assets transferred to MAXXAM - - 30,531 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest $ 64,907 $ 65,707 $ 80,188 Income taxes paid (refunded) (5,190) 1,170 46 Tax allocation payments to MAXXAM - 397 1,722
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
Common Stock Retained ($.08-1/3 Additional Earnings Par) Capital (Deficit) Total ---------- ---------- ---------- ---------- (In thousands of dollars) Balance, January 1, 1993 $ - $ 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) Net income - - 3,537 3,537 Dividend - - (4,800) (4,800) ---------- ---------- ---------- ---------- Balance, December 31, 1995 $ - $ 81,287 $(195,032) $(113,745) ========== ========== ========== ==========
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." MGI is a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). Intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior years' financial statements to be consistent with the current year's presentation. The Company 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." The Company presented the loss from 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) 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 is engaged in forest products operations conducted through its wholly owned subsidiaries, Pacific Lumber and Britt. Pacific Lumber is engaged in several principal aspects of the lumber industry, including the growing and harvesting of redwood and Douglas-fir timber, the milling of logs into lumber and the manufacture of lumber into a variety of finished products. Britt manufactures redwood and cedar fencing and decking products from small diameter logs, a substantial portion of which is obtained from Pacific Lumber. Housing, construction and remodeling are the principal markets for the Company's lumber products. Export sales generally constitute less than 4% of forest product sales. A significant portion of forest product sales are made to third parties located west of the Mississippi river. The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of revenues and expenses recognized during each period presented. The Company reviews all significant estimates affecting its consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their publication. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company's consolidated financial statements; accordingly, it is possible that the subsequent resolution of any one of the contingent matters described in Note 9 could differ materially from current estimates. The results of an adverse resolution of such uncertainties could have a material effect on the reported amounts of the Company's consolidated assets and liabilities. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents Cash equivalents consist of highly liquid money market instruments with original maturities of three months or less. Marketable Securities Marketable securities are carried at fair value. Prior to December 31, 1993, 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, 1995 were: 1995 - net unrealized holding gains of $1,666 and net realized gains of $2,509; 1994 - net unrealized holding losses of $1,094 and net realized gains of $2,763; and 1993 - net realized gains of $3,510, the recovery of $2,063 of net unrealized losses and net unrealized gains of $841. 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. Inventories Inventories are stated at the lower of cost or market. Cost is primarily determined using the last-in, first-out ("LIFO") method. Timber and Timberlands Timber and timberlands are stated at cost, net of accumulated depletion. Depletion is computed utilizing the unit-of-production method based upon estimates of timber values and quantities. Property, Plant and Equipment Property, plant and equipment, including capitalized interest, is stated at cost, net of accumulated depreciation. Depreciation is computed utilizing the straight-line method at rates based upon the estimated useful lives of the various classes of assets. Deferred Financing Costs Costs incurred to obtain financing are deferred and amortized over the estimated term of the related borrowing. Restricted Cash and Concentrations of Credit Risk Restricted cash represents the amount 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") of Scotia Pacific Holding Company ("Scotia Pacific"), a wholly owned subsidiary of Pacific Lumber. See Note 5. The Liquidity Account is not available, except under certain limited circumstances, for Scotia Pacific's working capital purposes; however, it is available to pay the Rated Amortization (as defined in Note 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, 1995, 1994 and 1993 includes interest of approximately $2,560, $2,638 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, 1995 and 1994, cash and cash equivalents include $19,742 and $19,439, 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) The adjustment to the Company's additional capital for the year ended December 31, 1993 resulted from a transaction relating to Kaiser's common stock prior to the Forest Products Group Formation. Pursuant to the terms of an amended compensation plan, Kaiser issued 4,228 shares to certain members of its management in 1993. As a result of this transaction, the Company's equity in Kaiser's net assets differed from the Company's historical cost. The Company accounted for this difference as an adjustment to additional capital. 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, 1995 December 31, 1994 ----------------------- ----------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ---------- Cash and cash equivalents $ 48,396 $ 48,396 $ 48,575 $ 48,575 Marketable securities (held for trading purposes) 36,568 36,568 19,514 19,514 Restricted cash 31,367 31,367 32,402 32,402 Long-term debt (778,505) (772,841) (782,456) (725,031)
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 loss from net assets transferred to MAXXAM is as follows:
Seven Months Ended July 31, 1993 ----------- Net sales: Aluminum operations $1,016,966 Real estate and other 19,654 ---------- 1,036,620 ----------- Costs and expenses: Aluminum operations 1,091,353 Real estate and other 28,132 ----------- 1,119,485 ----------- Loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles (82,865) Credit for income taxes 31,050 Minority interests 3,641 ----------- Loss before extraordinary item and cumulative effect of changes in accounting principles (48,174) 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) ----------- Loss from net assets transferred to MAXXAM $ (512,970) ===========
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, ----------------------- 1995 1994 ---------- ---------- Lumber $ 59,563 $ 55,310 Logs 18,341 14,788 ---------- ---------- $ 77,904 $ 70,098 ========== ==========
During 1993, Pacific Lumber's inventory quantities were reduced. This reduction 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. The effect of this inventory liquidation increased cost of goods sold by approximately $222 for the year ended December 31, 1993. 4. PROPERTY, PLANT AND EQUIPMENT The major classes of property, plant and equipment are as follows:
December 31, Estimated ----------------------- Useful Lives 1995 1994 ------------- ---------- ---------- Logging roads, land and improvements 15 years $ 7,929 $ 7,545 Buildings 33 years 29,661 28,209 Machinery and equipment 5 - 15 years 129,764 126,480 Construction in progress 520 30 ---------- ---------- 167,874 162,264 Less: accumulated depreciation (67,732) (59,081) ---------- ---------- $ 100,142 $ 103,183 ========== ==========
Depreciation expense for the years ended December 31, 1995, 1994 and 1993 was $9,663, $9,269 and $8,670, respectively. 5. LONG-TERM DEBT Long-term debt consists of the following:
December 31, ----------------------- 1995 1994 ---------- ---------- 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015 $ 350,233 $ 363,811 11-1/4% MGI Senior Secured Notes due August 1, 2003 100,000 100,000 12-1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount 92,498 82,779 10-1/2% Pacific Lumber Senior Notes due March 1, 2003 235,000 235,000 Other 774 866 ---------- ---------- 778,505 782,456 Less: current maturities (14,195) (13,670) ---------- ---------- $ 764,310 $ 768,786 ========== ==========
On March 23, 1993, Pacific Lumber issued $235,000 of the Pacific Lumber Senior Notes and Scotia Pacific, its newly-formed wholly owned subsidiary, issued $385,000 of the Timber Notes. Pacific Lumber and Scotia Pacific 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; (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 Scotia Pacific from incurring any additional indebtedness for borrowed money and limits the business activities of Scotia Pacific to the ownership and operation of its timber and timberlands. The Timber Notes are senior secured obligations of Scotia Pacific and are not obligations of, or guaranteed by, Pacific Lumber or any other person. The Timber Notes are secured by a lien on (i) Scotia Pacific's timber and timberlands (representing $179,364 of the Company's consolidated balance at December 31, 1995), (ii) Scotia Pacific's contract rights and certain other assets, (iii) the funds deposited in the Payment Account and the Liquidity Account, and (iv) substantially all of Scotia Pacific's other property and equipment. The Timber Notes are structured to link, to the extent of available cash, the deemed depletion of Scotia Pacific's timber (through the harvest and sale of logs) to required amortization of the Timber Notes. The required amount of amortization due on any Timber Note payment date is determined by various mathematical formulas set forth in the Timber Note Indenture. The minimum amount of principal which Scotia Pacific must pay (on a cumulative basis) through any Timber Note payment date in order to avoid an Event of Default (as defined 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 Scotia Pacific will pay the final installment of principal is July 20, 2015. The amount of principal which Scotia Pacific must pay through each Timber Note payment date in order to avoid prepayment or deficiency premiums is referred to as scheduled amortization ("Scheduled Amortization"). If all payments of principal are made in accordance with Scheduled Amortization, the payment date on which Scotia Pacific will pay the final installment of principal is July 20, 2009. Substantially all of the Company's consolidated assets are owned by Pacific Lumber and a significant portion of Pacific Lumber's assets are owned by Scotia Pacific. The Company expects that Pacific Lumber will provide a major portion of the Company's future operating cash flow. Pacific Lumber is dependent upon Scotia Pacific for a significant portion of its operating cash flow. The holders of the Timber Notes have priority over the claims of creditors of Pacific Lumber with respect to the assets and cash flows of Scotia Pacific, and the holders of the Pacific Lumber Senior Notes have priority over the claims and creditors of the Company with respect to the assets and cash flows of Pacific Lumber. Under the terms of the Timber Note Indenture, Scotia Pacific will not have available cash for distribution to Pacific Lumber unless Scotia Pacific's cash flow from operations exceeds the amounts required by the Timber Note Indenture to be reserved for the payment of current debt service (including interest, principal and premiums) on the Timber Notes, capital expenditures and certain other operating expenses. Principal and interest on the Timber Notes are payable semi- annually on January 20 and July 20. The Timber Notes are redeemable at the option of Scotia Pacific, in whole but not in part, at any time. The redemption price of the Timber Notes is equal to the sum of the principal amount, accrued interest and a prepayment premium calculated based upon the yield of like-term Treasury securities plus 50 basis points. Interest on the Pacific Lumber Senior Notes is payable semi- annually on March 1 and September 1. The Pacific Lumber Senior Notes are redeemable at the option of Pacific Lumber, in whole or in part, on or after March 1, 1998 at a price of 103% of the principal amount plus accrued interest. The redemption price is reduced annually until March 1, 2000, after which time the Pacific Lumber Senior Notes are redeemable at par. Pacific Lumber has a revolving credit agreement with a bank (as amended and restated, the "Revolving Credit Agreement") which expires on May 31, 1998. 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 $60,000, of which $15,000 may be used for standby letters of credit and $30,000 is restricted to timberland acquisitions. Borrowings made pursuant to the portion of the credit facility restricted to timberland acquisitions would also be secured by the purchased timberlands. As of December 31, 1995, $48,090 of borrowings was available under the Revolving Credit Agreement, of which $3,090 was available for letters of credit and $30,000 was restricted to timberland acquisitions. No borrowings were outstanding as of December 31, 1995, and letters of credit outstanding amounted to $11,910. The Revolving Credit Agreement contains covenants substantially similar to those contained in the indenture governing the Pacific Lumber Senior Notes. The indentures governing the Pacific Lumber Senior Notes, the Timber Notes and the 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, 1995, under the most restrictive of these covenants, approximately $15,663 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, 1995, under the most restrictive of these covenants, approximately $1,899 of dividends could be paid by the Company, of which $1,600 was paid in January 1996. 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 $33,222 and $43,941 at December 31, 1995 and 1994, 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, 1995 reflects Scheduled Amortization with respect to the Timber Notes:
Years Ending December 31, ---------------------------------------------------------------------------- 1996 1997 1998 1999 2000 Thereafter ---------- ---------- ---------- ---------- ---------- ---------- 7.95% Scotia Pacific Timber Collateralized Notes $ 14,103 $ 16,165 $ 19,335 $ 21,651 $ 23,970 $ 255,009 11-1/4% MGI Senior Secured Notes - - - - - 100,000 12-1/4% MGI Senior Secured Discount Notes - - - - - 125,720 10-1/2% Pacific Lumber Senior Notes - - - - - 235,000 Other 92 93 94 94 95 306 ----------- ---------- ---------- ---------- ---------- ---------- $ 14,195 $ 16,258 $ 19,429 $ 21,745 $ 24,065 $ 716,035 =========== ========== ========== ========== ========== ==========
Restricted Net Assets of Subsidiaries At December 31, 1995, certain debt instruments restricted the ability of Pacific Lumber to transfer assets, make loans and advances and pay dividends to the Company. As of December 31, 1995, all of the assets of Pacific Lumber and its subsidiaries are subject to such restrictions. 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, Scotia Pacific 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 (as amended, the "PL Tax Allocation Agreement"). Under the terms of the PL Tax Allocation Agreement, Pacific Lumber is liable to MAXXAM for the federal consolidated income tax liability of Pacific Lumber, Scotia Pacific and certain other subsidiaries of Pacific Lumber (but excluding Salmon Creek) (collectively, the "PL Subgroup") computed as if the PL Subgroup was a separate affiliated group of corporations which was never connected with MAXXAM. The PL Tax Allocation Agreement further provides that Salmon Creek is liable to MAXXAM for its federal income tax liability computed on a separate company basis as if it was never connected with MAXXAM. The remaining subsidiaries of MGI are each liable to MAXXAM for their respective income tax liabilities computed on a separate company basis as if they were never connected with MAXXAM, pursuant to their respective tax allocation agreements. MGI's tax allocation agreement with MAXXAM, (as amended on August 4, 1993, the "Tax Allocation Agreement"), provides that the Company's federal income tax liability is computed as if MGI files a consolidated tax return with all of its subsidiaries except Salmon Creek, and that such corporations were never connected with MAXXAM (the "MGI Consolidated Tax Liability"). The federal income tax liability of MGI is the difference between (i) the MGI Consolidated Tax Liability and (ii) the sum of the separate tax liabilities for the Company's subsidiaries (computed as discussed above), but excluding Salmon Creek. To the extent that the MGI Consolidated Tax Liability is less than the aggregate amounts in (ii), MAXXAM is obligated to pay the amount of such difference to MGI. The credit (provision) in lieu of income taxes on income (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, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Current: Federal credit (provision) in lieu of income taxes $ (167) $ - $ (988) State and local (35) (55) (253) ---------- ---------- ---------- (202) (55) (1,241) ---------- ---------- ---------- Deferred: Federal credit (provision) in lieu of income taxes (33) 2,366 4,825 State and local (976) 1,305 (229) ---------- ---------- ---------- (1,009) 3,671 4,596 ---------- ---------- ---------- $ (1,211) $ 3,616 $ 3,355 ========== ========== ==========
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, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles $ 4,748 $ 14,819 $ (17,664) ========== ========== ========== Amount of federal income tax based upon the statutory rate $ (1,662) $ (5,187) $ 6,182 Revision of prior years' tax estimates and other changes in valuation allowances 907 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 (657) 812 (313) Other 201 252 104 ---------- ---------- ---------- $ (1,211) $ 3,616 $ 3,355 ========== ========== ==========
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, ----------------------- 1995 1994 ---------- ---------- Deferred income tax assets: Loss and credit carryforwards $ 83,705 $ 86,864 Timber and timberlands 32,528 37,209 Other liabilities 17,203 10,460 Postretirement benefits other than pensions 2,316 2,145 Other 327 1,818 Valuation allowances (51,595) (52,060) ---------- ---------- Total deferred income tax assets, net 84,484 86,436 ---------- ---------- Deferred income tax liabilities: Inventories (16,068) (17,934) Property, plant and equipment (16,560) (16,563) Other (3,615) (3,427) ---------- ---------- Total deferred income tax liabilities (36,243) (37,924) ---------- ---------- Net deferred income tax assets $ 48,241 $ 48,512 ========== ==========
The valuation allowances listed above relate primarily to loss and credit carryforwards. As of December 31, 1995, approximately $32,528 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, 1995 is $32,110 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 $43,731 and $44,351 at December 31, 1995 and 1994, 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, 1995, 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: Net operating losses $ 224,485 2010 Net capital losses 5,177 1997 Minimum tax credit 167 - Alternative Minimum Tax Attribute Carryforwards: Net operating losses $ 185,803 2010
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, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Service cost - benefits earned during the year $ 1,483 $ 1,643 $ 1,600 Interest cost on projected benefit obligation 1,693 1,263 918 Actual loss (gain) on plan assets (3,900) 10 (2,128) Net amortization and deferral 2,460 (859) 1,359 ---------- ---------- ---------- Net periodic pension cost $ 1,736 $ 2,057 $ 1,749 ========== ========== ==========
The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheet:
December 31, ------------------------- 1995 1994 ----------- ---------- Actuarial present value of accumulated plan benefits: Vested benefit obligation $ 16,910 $ 11,809 Non-vested benefit obligation 1,214 779 ----------- ---------- Total accumulated benefit obligation $ 18,124 $ 12,588 =========== ========== Projected benefit obligation $ 21,841 $ 15,047 Plan assets at fair value, primarily equity and debt securities (18,363) (13,184) ----------- ---------- Projected benefit obligation in excess of plan assets 3,478 1,863 Unrecognized net transition asset 24 29 Unrecognized net gain (loss) (27) 1,475 Unrecognized prior service cost (45) (50) ----------- ---------- Accrued pension liability $ 3,430 $ 3,317 =========== ==========
The assumptions used in accounting for the defined benefit plan were as follows:
1995 1994 1993 ---------- ---------- ---------- Rate of increase in compensation levels 5.0% 5.0% 5.0% Discount rate 7.25% 8.5% 7.5% Expected long-term rate of return on assets 8.0% 8.0% 8.0%
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 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, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Service cost - benefits earned during the year $ 228 $ 216 $ 153 Interest cost on accumulated postretirement benefit obligation 317 294 315 Net amortization and deferral (53) (7) - ---------- ---------- ---------- Net periodic postretirement benefit cost $ 492 $ 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, ----------------------- 1995 1994 ---------- ---------- Retirees $ 634 $ 860 Actives eligible for benefits 726 656 Actives not eligible for benefits 3,317 2,355 ---------- ---------- Accumulated postretirement benefit obligation 4,677 3,871 Unrecognized net gain 553 972 ---------- ---------- Postretirement benefit liability $ 5,230 $ 4,843 ========== ==========
The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 11.0% for 1996 and is assumed to decrease gradually to 5.5% in 2008 and remain at that level thereafter. Each one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1995 by approximately $674 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $90. The discount rates used in determining the accumulated postretirement benefit obligation were 7.25% and 8.5% at December 31, 1995 and 1994, 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 $1,281 and $1,215 for the years ended December 31, 1995 and 1994, respectively. Pacific Lumber is self-insured for workers' compensation benefits. Included in accrued compensation and related benefits and other noncurrent liabilities are accruals for workers' compensation claims amounting to $8,900 and $9,233 at December 31, 1995 and 1994, respectively. Workers' compensation expenses amounted to $3,579, $4,069 and $3,776 for the years ended December 31, 1995, 1994 and 1993, 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 of MAXXAM personnel rendering services to the Company. Charges by MAXXAM for such services were $1,994, $2,254 and $3,347 for the years ended December 31, 1995, 1994 and 1993, 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 $52,000 settlement, $33,000 was paid by insurance carriers of MAXXAM and Pacific Lumber, $14,800 was paid by Pacific Lumber, and the balance was paid by other defendants and through the assignment of certain claims. In 1994, the Company recorded an extraordinary loss of $14,866 related to the settlement and associated costs, including a $2,000 accrual for certain contingent claims and $4,400 of related legal fees, net of benefits for federal and state income taxes of $6,312. The Company's operations are subject to a variety of California and federal laws and regulations dealing with timber harvesting, endangered species and critical habitat, and air and water quality. The Company does not expect that compliance with such existing laws and regulations will have a material adverse effect on its future consolidated operating results, financial position or liquidity; however, these laws are modified from time to time and there can be no assurance that certain pending or future legislation, governmental regulations or judicial or administrative decisions would not adversely affect the Company or its ability to sell lumber, logs or timber. In 1995, the U.S. Fish and Wildlife Service (the "USFWS") published its proposed final designation of critical habitat for the marbled murrelet (the "Proposed Designation"), seeking to designate over four million acres as critical habitat for the marbled murrelet, including approximately 33,000 acres of Pacific Lumber's timberlands. The Proposed Designation was subject to a 60-day comment period and Pacific Lumber filed comments vigorously opposing the Proposed Designation. The USFWS has not yet published its final designation of critical habitat for the marbled murrelet. Pacific Lumber is unable to predict when or if it would be able to harvest on any acreage finally designated as critical habitat. Furthermore, it is impossible to determine the future adverse impact of such designation on the Company's consolidated financial position, results of operations or liquidity until such time as the Proposed Designation is finalized and related regulatory and legal issues are fully resolved. However, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on timberlands designated as marbled murrelet critical habitat, such restrictions could have a material adverse effect on the Company's liquidity, consolidated financial position and results of operations. If Pacific Lumber is unable to harvest or is severely limited in harvesting, it intends to seek full compensation from the appropriate governmental agencies on the grounds that such restrictions constitute a taking. There continue to be other regulatory actions and lawsuits seeking to have various other species listed as threatened or endangered under the federal Endangered Species Act and/or the California Endangered Species Act and to designate critical habitat for such species. It is uncertain what impact, if any, such listings and/or designations of critical habitat will have on the Company's consolidated financial position, results of operations or liquidity. In 1994, the California Board of Forestry ("BOF") adopted certain regulations regarding compliance with long-term sustained yield 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. The Company is unable to predict the ultimate impact the sustained yield regulations will have on its future consolidated financial position, results of operations or liquidity. Various groups and individuals have filed objections with the California Department of Forestry ("CDF") and the BOF regarding the CDF's and the BOF's actions and rulings with respect to certain of the Company's timber harvesting plans ("THPs"), and the Company expects that such groups and individuals will continue to file objections to certain of the Company's THPs. In addition, lawsuits are pending which seek to prevent the Company from implementing certain of its approved THPs and other timber operations. These challenges have severely restricted Pacific Lumber's ability to harvest virgin old growth redwood timber on its property (and, to a lesser extent, its residual old growth timber). To date, challenges with respect to the Company's THPs relating to young growth and residual old growth have been limited; however, no assurance can be given as to the extent of such challenges in the future. The Company believes that environmentally focused challenges to its THPs are likely to occur in the future, particularly with respect to virgin and residual old growth timber. Although such challenges have delayed or prevented the Company from conducting a portion of its operations, to date such challenges have not had a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. It is, however, impossible to predict the future nature or degree of such challenges or their ultimate impact on the consolidated financial position, results of operations or liquidity of 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 that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 10. OTHER ITEMS Investment, Interest and Other Income In February 1994, Pacific Lumber received a franchise tax refund of $7,243, the substantial portion of which represents interest, from the State of California relating to tax years 1972 through 1985. This amount is included in investment, interest and other income for the year ended December 31, 1994. Items Related to 1992 Earthquake In 1995 and 1993, Pacific Lumber recorded reductions in cost of sales of $1,527 and $1,200, respectively, resulting from business interruption insurance reimbursements for higher operating costs and the related loss of revenues resulting from the April 1992 earthquake. Other receivables at December 31, 1994 included $1,684 related to earthquake related insurance claims. 11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summary quarterly financial information for the years ended December 31, 1995 and 1994 is as follows:
Three Months Ended ------------------------------------------------------- March 31 June 30 September 30 December 31 ---------- ---------- ------------- ------------- 1995: Net sales $ 51,968 $ 65,644 $ 63,300 $ 61,680 Operating income 12,423 21,767 18,697 20,292 Net income (loss) (3,292) 3,172 1,148 2,509 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
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 23 Consolidated balance sheet at December 31, 1995 and 1994 24 Consolidated statement of operations for the years ended December 31, 1995, 1994 and 1993 25 Consolidated statement of cash flows for the years ended December 31, 1995, 1994 and 1993 26 Consolidated statement of stockholder's equity (deficit) for the years ended December 31, 1995, 1994 and 1993 27 Notes to consolidated financial statements 28 2. FINANCIAL STATEMENT SCHEDULES: Schedule I - Condensed financial information of Registrant at December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993 46-48
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 I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET (UNCONSOLIDATED)
December 31, ----------------------- 1995 1994 ---------- ---------- (In thousands of dollars) ASSETS Current assets: Cash and cash equivalents $ 21,862 $ 24,214 Marketable securities 36,568 19,514 Other current assets 2,867 1,766 ---------- ---------- Total current assets 61,297 45,494 Investments in and advances from subsidiaries 141 17,083 Deferred financing costs and other assets 4,905 5,593 Deferred income taxes 17,671 13,609 ---------- ---------- $ 84,014 $ 81,779 ========== ========== LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Accounts payable and accrued liabilities $ 573 $ 178 Accrued interest 4,688 4,656 Margin borrowings for marketable securities - 6,648 ---------- ---------- Total current liabilities 5,261 11,482 Long-term debt 192,498 182,779 ---------- ---------- Total liabilities 197,759 194,261 ---------- ---------- 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 (195,032) (193,769) ---------- ---------- Total stockholder's deficit (113,745) (112,482) ---------- ---------- $ 84,014 $ 81,779 ========== ==========
STATEMENT OF OPERATIONS (UNCONSOLIDATED)
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- (In thousands of dollars) Investment, interest and other income (expense) $ 1,341 $ (2,159) $ (718) Interest expense (22,341) (21,180) (20,917) General and administrative expenses (370) (598) (720) Equity in earnings of subsidiaries 16,170 18,790 6,534 ---------- ---------- ---------- Loss from continuing operations before income taxes, extraordinary item and cumulative effect of change in accounting principle (5,200) (5,147) (15,821) Credit in lieu of income taxes 8,737 8,716 3,334 ---------- ---------- ---------- Income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle 3,537 3,569 (12,487) Loss from net assets transferred to MAXXAM, net of minority interests and related income taxes - - (512,970) ---------- ---------- ---------- Income (loss) before extraordinary item and cumulative effect of change in accounting principle 3,537 3,569 (525,457) 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) $ 3,537 $ 3,569 $(531,900) ========== ========== ==========
STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- (In thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 3,537 $ 3,569 $(531,900) Adjustments to reconcile net income (loss) to net cash used for operating activities: Amortization of deferred financing costs and discounts on long-term debt 11,059 9,930 4,855 Equity in earnings of subsidiaries (16,170) (18,790) (6,534) Net purchases of marketable securities (20,011) (1,808) (5,586) Net gains on marketable securities (3,697) (731) (2,551) Loss from net assets transferred to MAXXAM, net - - 512,970 Extraordinary loss on early extinguishment of debt, net - - 6,387 Cumulative effect of change in accounting principle - - 56 Decrease (increase) in receivables 171 90 (380) Increase in accrued and deferred income taxes (5,237) (8,518) (3,356) Increase (decrease) in accrued interest and other liabilities 330 (911) 3,272 Increase (decrease) in accounts payable - (53) 53 Other (16) 232 62 ---------- ---------- ---------- Net cash used for operating activities (30,034) (16,990) (22,652) ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Net advances from subsidiaries 33,112 41,112 35,695 Increase in net assets transferred to MAXXAM - - (11,770) ---------- ---------- ---------- Net cash provided by investing activities 33,112 41,112 23,925 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt - - 170,000 Redemptions of long-term debt (630) - (155,263) Dividends paid (4,800) - (20,000) Incurrence of financing costs - - (6,503) ---------- ---------- ---------- Net cash used for financing activities (5,430) - (11,766) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,352) 24,122 (10,493) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24,214 92 10,585 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 21,862 $ 24,214 $ 92 ========== ========== ========== SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Net margin borrowings (payments) for marketable $ (6,648) $ 5,628 $ 1,020 securities Net assets transferred to MAXXAM - - 30,531 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 11,250 $ 11,156 $ 13,975 Tax allocation payments to (refunds from) MAXXAM (3,500) (198) 22
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 present the loss from net assets transferred to MAXXAM 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 28, 1996 By: PAUL N. SCHWARTZ Paul N. Schwartz Vice President and Chief Financial Officer (Principal Financial Officer) Date: March 28, 1996 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 28, 1996 By: CHARLES E. HURWITZ Charles E. Hurwitz Chairman of the Board, President and Chief Executive Officer Date: March 28, 1996 By: PAUL N. SCHWARTZ Paul N. Schwartz Vice President, Chief Financial Officer and Director Date: March 28, 1996 By: JOHN A. CAMPBELL John A. Campbell Vice President and Director Date: March 28, 1996 By: JOHN T. LA DUC John T. La Duc Vice President and Director Date: March 28, 1996 By: ANTHONY R. PIERNO Anthony R. Pierno Vice President, General Counsel and Director Date: March 28, 1996 By: WILLIAM S. RIEGEL William S. Riegel Vice President and Director MAXXAM GROUP INC. INDEX OF EXHIBITS Exhibit Number Description [S] [C] 3.1 Certificate of Incorporation of MAXXAM Group Inc. (the "Company" or "MGI") (incorporated herein by reference to Exhibit 3.1E to the Company's definitive proxy statement dated October 24, 1984) 3.2 Certificate of Amendment of Certificate of Incorporation of the Company dated as of September 28, 1988 (incorporated herein by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988) 3.3 Certificate of Amendment of Certificate of Incorporation of the Company dated as of June 1, 1989 (incorporated herein by reference to Exhibit 3(c) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989) 3.4 By-laws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K dated July 10, 1986) 4.1 Indenture between the Company and Shawmut Bank, N.A., Trustee, regarding the Company's 12-3/4% Senior Secured Discount Notes due 2003 and 11-1/4% Senior Secured Notes due 2003 (incorporated herein by reference to Exhibit 4.1 to the Company's Annual Report on Form 10- K for the fiscal year ended December 31, 1993) 4.2 Indenture between The Pacific Lumber Company ("Pacific Lumber") and State Street Bank and Trust Company (as successor trustee to the First National Bank of Boston) ("State Street"), regarding Pacific Lumber's 10-1/2% Senior Notes due 2003 (incorporated herein by reference to Exhibit 4.1 to the Annual Report on Form 10-K of Pacific Lumber for the fiscal year ended December 31, 1993, File No. 1-9204) 4.3 Indenture between Scotia Pacific Holding Company ("Scotia Pacific") and State Street, as Trustee, regarding Scotia Pacific's 7.95% Timber Collateralized Notes due 2015 (incorporated herein by reference to Exhibit 4.1 to Scotia Pacific's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 55538; the "Scotia Pacific 1993 Form 10-K") 4.4 Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment among Scotia Pacific, State Street, as Trustee, and State Street, as Collateral Agent (incorporated herein by reference to Exhibit 4.2 to the Scotia Pacific 1993 Form 10-K) 4.5 Amended and Restated Credit Agreement dated as of November 10, 1995 between Pacific Lumber and Bank of America National Trust and Savings Association (incorporated herein by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of Pacific Lumber for the quarter ended September 30, 1995; File No. 1- 9204) 4.6 Form of Deed of Trust, Assignment of Rents, Grant of Easement and Fixture Filing (incorporated herein by reference to Exhibit 4.2 to the Quarterly Report on Form 10-Q of Pacific Lumber for the quarter ended September 30, 1995; File No. 1-9204) Note: Pursuant to Regulation Section 229.601, Item 601 (b)(4)(iii) of Regulation S-K, upon request of the Securities and Exchange Commission, the Company hereby agrees to furnish a copy of any unfiled instrument which defines the rights of holders of long-term debt of the Company and its consolidated subsidiaries (and for any of its unconsolidated subsidiaries for which financial statements are required to be filed) wherein the total amount of securities authorized thereunder does not exceed 10 percent of the total consolidated assets of the Company 10.1 Tax Allocation Agreement between the Company and MAXXAM Inc. dated August 4, 1993 (incorporated herein by reference to Exhibit 10.6 to the Amendment No. 3 to the Registration Statement on Form S-2 of the Company, Registration No. 33-64042; the "MGI Registration Statement") 10.2 Tax Allocation Agreement dated as of May 21, 1988 among MAXXAM Inc., the Company, Pacific Lumber and the corporations signatory thereto (incorporated herein by reference to Exhibit 10.8 to Pacific Lumber's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-9204) 10.3 Tax Allocation Agreement among Pacific Lumber, Scotia Pacific, Salmon Creek Corporation and MAXXAM Inc. dated March 23, 1993 (incorporated herein by reference to Exhibit 10.1 to Amendment No. 3 to the Form S-1 Registration Statement of Scotia Pacific, Registration No. 33-55538) 10.4 Tax Allocation Agreement between MAXXAM Inc. and Britt Lumber Co., Inc., dated as of July 3, 1990 (incorporated herein by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993) 10.5 Agreement dated December 20, 1985 between Pacific Lumber and General Electric Company (incorporated herein by reference to Exhibit 10(m) to Pacific Lumber's Registration Statement on Form S-1, Registration No. 33-5549; the "1985 GE Agreement") 10.6 Amendment No. 1 to Agreement between Pacific Lumber and General Electric Company dated July 29, 1986 relating to the 1985 GE Agreement (incorporated herein by reference to Exhibit 10.4 to Pacific Lumber's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-9204) 10.7 Power Purchase Agreement dated January 17, 1986 between Pacific Lumber and Pacific Gas and Electric Company (incorporated herein by reference to Exhibit 10(n) to Pacific Lumber's Registration Statement on Form S-1, Registration No. 33-5549) 10.8 Master Purchase Agreement between Pacific Lumber and Scotia Pacific (incorporated herein by reference to Exhibit 10.1 to the Scotia Pacific 1993 Form 10-K) 10.9 Services Agreement between Pacific Lumber and Scotia Pacific (incorporated herein by reference to Exhibit 10.2 to the Scotia Pacific 1993 Form 10-K) 10.10 Additional Services Agreement between Pacific Lumber and Scotia Pacific (incorporated herein by reference to Exhibit 10.3 to the Scotia Pacific 1993 Form 10-K) 10.11 Reciprocal Rights Agreement among Pacific Lumber, Scotia Pacific and Salmon Creek Corporation (incorporated herein by reference to Exhibit 10.4 to the Scotia Pacific 1993 Form 10-K) 10.12 Environmental Indemnification Agreement between Pacific Lumber and Scotia Pacific (incorporated herein by reference to Exhibit 10.5 to the Scotia Pacific 1993 Form 10-K) 10.13 Purchase and Services Agreement between Pacific Lumber and Britt Lumber Co., Inc. (incorporated herein by reference to Exhibit 10.17 to Amendment No. 2 to the Form S-2 Registration Statement of Pacific Lumber; Registration Statement No. 33-56332) 10.14 Put and Call Agreement dated November 16, 1987 between Charles E. Hurwitz and MPI (incorporated herein by reference to Exhibit C to Schedule 13D dated November 24, 1987, filed by the Company with respect to MAXXAM Inc.'s common stock; the "Put and Call Agreement") 10.15 Amendment to Put and Call Agreement, dated May 18, 1988 (incorporated herein by reference to Exhibit D to the Final Amendment to Schedule 13D dated May 20, 1988, filed by the Company relating to MAXXAM Inc.'s common stock) 10.16 Amendment to Put and Call Agreement, dated as of February 17, 1989 (incorporated herein by reference to Exhibit 10.35 to MAXXAM Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-3924) 10.22 Investment Management Agreement, dated as of December 1, 1991, by and among the Company, MAXXAM Inc. and certain related corporations (incorporated herein by reference to Exhibit 10.23 to Amendment No. 5 to the MGI Registration) 10.23 Undertaking, dated August 4, 1993, executed by MAXXAM in favor of the Company (incorporated herein by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994) *27 Financial Data Schedule *99.1 The consolidated financial statements and notes thereto of Kaiser Aluminum Corporation for the fiscal year ended December 31, 1995 *99.2 The consolidated financial statements and notes thereto of The Pacific Lumber Company for the fiscal year ended December 31, 1995 - --------------- * Included with this filing. EX-27 2 FINANCIAL DATA SCHEDULE
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 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1 48,396 36,568 20,576 0 77,904 192,169 167,874 67,732 752,383 68,005 778,505 0 0 0 (113,745) 752,383 242,592 242,592 127,124 127,124 42,289 0 77,824 4,748 1,211 3,537 0 0 0 3,537 0 0
EX-99.1 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, 1995 and 1994, and the related statements of consolidated income and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas February 16, 1996 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS December 31, ------------------- (In millions of dollars, except share amounts) 1995 1994 - -------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 21.9 $ 17.6 Receivables: Trade, less allowance for doubtful receivables of $5.0 in 1995 and $4.2 in 1994 222.9 150.7 Other 85.7 48.5 Inventories 525.7 468.0 Prepaid expenses and other current assets 76.6 158.0 -------- -------- Total current assets 932.8 842.8 Investments in and advances to unconsolidated affiliates 178.2 169.7 Property, plant, and equipment - net 1,109.6 1,133.2 Deferred income taxes 269.1 271.2 Other assets 323.5 281.2 -------- -------- Total $2,813.2 $2,698.1 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 184.5 $ 152.1 Accrued interest 32.0 32.6 Accrued salaries, wages, and related expenses 105.3 77.7 Accrued postretirement medical benefit obligation - current portion 46.8 47.0 Other accrued liabilities 129.4 176.9 Payable to affiliates 94.2 85.3 Long-term debt - current portion 8.9 11.5 -------- -------- Total current liabilities 601.1 583.1 Long-term liabilities 548.5 495.5 Accrued postretirement medical benefit obligation 734.0 734.9 Long-term debt 749.2 751.1 Minority interests 122.7 116.2 Stockholders' equity: Preferred stock, par value $.05, authorized 20,000,000 shares: Series A Convertible, stated value $.10, issued and outstanding, nil and 1,938,295 in 1995 and 1994 .2 PRIDES Convertible, par value $.05, issued and outstanding, 8,673,850 and 8,855,550 in 1995 and 1994 .4 .4 Common stock, par value $.01, authorized 100,000,000 shares; issued and outstanding, 71,638,514 and 58,205,083 in 1995 and 1994 .7 .6 Additional capital 530.3 527.8 Accumulated deficit (459.9) (502.6) Additional minimum pension liability (13.8) (9.1) -------- -------- Total stockholders' equity 57.7 17.3 -------- -------- Total $2,813.2 $2,698.1 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS) Year Ended December 31, ------------------------------ (In millions of dollars, except share amounts) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- Net sales $2,237.8 $1,781.5 $1,719.1 -------- -------- -------- Costs and expenses: Cost of products sold 1,798.4 1,625.5 1,587.7 Depreciation 94.3 95.4 97.1 Selling, administrative, research and development, and general 134.5 116.8 121.9 Restructuring of operations 35.8 -------- -------- -------- Total costs and expenses 2,027.2 1,837.7 1,842.5 -------- -------- -------- Operating income (loss): 210.6 (56.2) (123.4) Other expense: Interest expense (93.9) (88.6) (84.2) Other - net (14.1) (7.3) (.9) -------- -------- -------- Income (loss) before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles 102.6 (152.1) (208.5) (Provision) credit for income taxes (37.2) 53.8 86.9 Minority interests (5.1) (3.1) (1.5) -------- -------- -------- Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles 60.3 (101.4) (123.1) 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) 60.3 (106.8) (652.2) Dividends on preferred stock (17.6) (20.1) (6.3) -------- -------- -------- Net income (loss) available to common shareholders $ 42.7 $ (126.9) $ (658.5) ======== ======== ======== Earnings (loss) per common and common equivalent share: Primary: Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles $ .69 $ (2.09) $ (2.25) Extraordinary loss (.09) (.38) Cumulative effect of changes in accounting principles (8.84) -------- -------- -------- Net income (loss) $ .69 $ (2.18) $ (11.47) ======== ======== ======== Fully diluted $ .72 ======== Weighted average common and common equivalent shares outstanding (000): Primary 62,264 58,139 57,423 ======== ======== ======== Fully diluted 71,809 ========
The accompanying notes to consolidated financial statements are an integral part of these statements. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended December 31, ------------------------------ (In millions of dollars) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 60.3 $ (106.8) $ (652.2) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation 94.3 95.4 97.1 Amortization of excess investment over equity in unconsolidated affiliates 11.4 11.6 11.9 Amortization of deferred financing costs and discount on long-term debt 5.4 6.2 11.2 Equity in (income) losses of unconsolidated affiliates (19.2) 1.9 3.3 Restructuring of operations 35.8 Minority interests 5.1 3.1 1.5 Extraordinary loss on early extinguishment of debt - net 5.4 21.8 Cumulative effect of changes in accounting principles - net 507.3 (Increase) decrease in receivables (109.7) 36.4 (6.1) (Increase) decrease in inventories (57.7) (41.1) 13.0 Decrease (increase) in prepaid expenses and other assets 82.9 (60.6) (5.2) Increase (decrease) in accounts payable 32.4 25.8 (10.3) (Decrease) increase in accrued interest (.6) 9.3 19.2 Increase in payable to affiliates and accrued liabilities 10.6 50.8 76.9 Decrease in accrued and deferred income taxes (7.4) (68.8) (96.4) Other 10.9 9.3 8.1 -------- -------- -------- Net cash provided by (used for) operating activities 118.7 (22.1) 36.9 -------- -------- -------- Cash flows from investing activities: Net proceeds from disposition of property and investments 8.6 4.1 13.1 Capital expenditures (79.4) (70.0) (67.7) Investments in joint ventures (9.0) -------- -------- -------- Net cash used for investing activities (79.8) (65.9) (54.6) -------- -------- -------- Cash flows from financing activities: Repayments of long-term debt, including revolving credit (537.7) (345.1) (1,134.5) Borrowings of long-term debt, including revolving credit 532.3 378.9 1,068.1 Borrowings from MAXXAM Group Inc. (see supplemental disclosure below) 15.0 Tender premiums and other costs of early extinguishment of debt (27.1) Net short-term debt repayments (.5) (4.3) Incurrence of financing costs (.8) (19.2) (12.7) Dividends paid (20.8) (14.8) (6.3) Capital stock issued 1.2 100.1 119.3 Redemption of minority interests' preference stock (8.8) (8.5) (4.2) -------- -------- -------- Net cash (used for) provided by financing activities (34.6) 90.9 13.3 -------- -------- -------- Net increase (decrease) in cash and cash equivalents during the year 4.3 2.9 (4.4) Cash and cash equivalents at beginning of year 17.6 14.7 19.1 -------- -------- -------- Cash and cash equivalents at end of year $ 21.9 $ 17.6 $ 14.7 ======== ======== ======== Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest $ 88.8 $ 73.1 $ 53.7 Income taxes paid 35.7 16.0 13.5 Tax allocation payments from MAXXAM Inc. (3.9) 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. 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. The Company is a direct subsidiary of MAXXAM Inc. ("MAXXAM") and conducts its operations through its wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). KACC operates in all principal aspects of the aluminum industry - the mining of bauxite (the major aluminum-bearing ore), the refining of bauxite into alumina (the intermediate material), the production of primary aluminum, and the manufacture of fabricated and semi-fabricated aluminum products. Kaiser's production levels of alumina and primary aluminum exceed its internal processing needs, which allows it to be a major seller of alumina and primary aluminum to domestic and international third parties (see Note 10). The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amount of revenues and expenses during the reporting period. Uncertainties, with respect to such estimates and assumptions, are inherent in the preparation of the Company's consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of the Company's consolidated financial position and results of operation. Investments in 50%-or-less-owned entities are accounted for primarily by the equity method. Intercompany balances and transactions are eliminated. Certain reclassifications of prior-year information were made to conform to the current presentation. 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 changed 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". 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 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions of dollars, except share amounts) (continued) 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 these 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:
December 31, --------------- 1995 1994 - -------------------------------------------------------------------------- Finished fabricated products $ 91.5 $ 49.4 Primary aluminum and work in process 195.9 203.1 Bauxite and alumina 119.6 102.3 Operating supplies and repair and maintenance parts 118.7 113.2 ------ ------ $525.7 $468.0 ====== ======
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 Stock-Based Compensation The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for a stock-based compensation plan. Accordingly, no compensation cost has been recognized for this plan (see Note 6). Other Expense Other expense in 1995, 1994, and 1993 includes $17.8, $16.5, and $17.9 of pre-tax charges related principally to establishing additional: (i) litigation reserves for asbestos claims and (ii) environmental reserves for potential soil and groundwater remediation matters, each pertaining to operations which were discontinued prior to the acquisition of the Company by MAXXAM in 1988. Deferred Financing Costs Costs incurred to obtain debt financing are deferred and amortized over the estimated term of the related borrowing. Amortization of deferred financing costs of $5.3, $6.0, and $11.2 for the years ended December 31, 1995, 1994, and 1993, respectively, are included in interest expense. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) 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, 1995, 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 9). 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, 1995 December 31, 1994 -------------------- -------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - --------------------------------------------------------------------------------- Debt $758.1 $806.3 $762.6 $747.6 Foreign currency contracts 1.9 3.5
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 4). 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 9). Earnings (Loss) per Common and Common Equivalent Share Primary earnings (loss) per common and common equivalent share are computed by dividing net income (loss) available to common shareholders by the weighted average number of common and common equivalent shares outstanding during the period. Fully diluted earnings per common and common equivalent share are computed as if the Series A Shares and 181,700 shares of PRIDES (the "Converted PRIDES") had been converted to common shares at the beginning of the period. Accordingly, for purposes of the fully diluted calculations, the dividends attributable to the Series A shares and the Converted PRIDES ($9.2 for the year ended December 31, 1995) have not been deducted from net income, and the weighted average number of common and common equivalent shares outstanding includes the shares issued upon conversion of the Series A Shares and the Converted PRIDES as if they had been outstanding for the entire period. As a result of the redemption of the Series A Shares and conversion of the Converted PRIDES during the 1995 period, fully diluted earnings per share are presented for such period, even though the result is antidilutive. For the years ended December 31, 1994 and 1993, common equivalent shares attributable to the preferred stock and non-qualified stock options were excluded from the calculation of weighted average shares because they were antidilutive. 2. Investments In and Advances To Unconsolidated Affiliates - ------------------------------------------------------------ Summary combined financial information is provided below for unconsolidated aluminum investments, most of which supply and process raw materials. The investees are Queensland Alumina Limited ("QAL") (28.3% owned), Anglesey KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) 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, 1995 and 1994, KACC's net receivables from these affiliates were not material. Summary of Combined Financial Position
December 31, --------------- 1995 1994 - ----------------------------------------------------------------- Current assets $429.0 $342.3 Property, plant, and equipment - net 330.8 349.4 Other assets 39.3 42.4 ------ ------ Total assets $799.1 $734.1 ====== ====== Current liabilities $125.4 $122.4 Long-term debt 331.8 307.6 Other liabilities 35.6 31.0 Stockholders' equity 306.3 273.1 ------ ------ Total liabilities and stockholders' equity $799.1 $734.1 ====== ======
Summary of Combined Operations
Year Ended December 31, --------------------------- 1995 1994 1993 ------- ------- ------- Net sales $ 685.9 $ 489.8 $ 510.3 Costs and expenses (618.7) (494.8) (527.2) (Provision) credit for income taxes (18.7) (6.3) 1.9 ------- ------- ------- Net income (loss) $ 48.5 $ (11.3) $ (15.0) ======= ======= ======= Company's equity in income (loss) $ 19.2 $ (1.9) $ (3.3) ======= ======= =======
The Company's equity in income (loss) differs from the summary net income (loss) due to various percentage ownerships in the entities and equity method accounting adjustments. At December 31, 1995, KACC's investment in its unconsolidated affiliates exceeded its equity in their net assets by approximately $54.9. The Company is amortizing this amount over a 12-year period, which results in an annual amortization charge of approximately $11.4. 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 $284.4, $219.7, and $206.6 in the years ended December 31, 1995, 1994, and 1993, respectively. Dividends of $8.1, nil, and nil were received from investees in the years ended December 31, 1995, 1994, and 1993, respectively. In 1995, a subsidiary of the Company invested $9.0 in a foreign joint venture. This amount is included in Investments in and advances to unconsolidated affiliates. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) 3. Property, Plant, and Equipment - ---------------------------------- The major classes of property, plant, and equipment are as follows:
December 31, ------------------- 1995 1994 - --------------------------------------------------------------------- Land and improvements $ 151.8 $ 153.5 Buildings 198.5 196.8 Machinery and equipment 1,337.6 1,285.0 Construction in progress 59.6 45.0 -------- -------- 1,747.5 1,680.3 Accumulated depreciation 637.9 547.1 -------- -------- Property, plant, and equipment - net $1,109.6 $1,133.2 ======== ========
4. Long-Term Debt - ------------------ Long-term debt and its maturity schedule are as follows:
December 31, 2001 -------------- and 1995 1994 1996 1997 1998 1999 2000 After Total Total - ----------------------------------------------------------------------------------------------------------- 1994 Credit Agreement (9.00% at December 31, 1995 $ 13.1 $ 13.1 $ 6.7 9-7/8% Senior Notes, net $223.8 223.8 223.6 Pollution Control and Solid Waste Disposal Facilities Obligations (6.00% - 7.75%) $ 1.2 $ 1.3 $ 1.4 .2 $ .2 32.6 36.9 38.1 Alpart CARIFA Loan (fixed and variable rates) 60.0 60.0 60.0 Alpart Term Loan (8.95%) 6.3 6.2 12.5 18.7 12-3/4% Senior Subordinated Notes 400.0 400.0 400.0 Other borrowings (fixed and variable rates) 1.4 1.4 7.7 .3 .2 .8 11.8 15.5 ------ ------ ------ ------ ------ ------ ------ ------ Total $ 8.9 $ 8.9 $ 9.1 $ 13.6 $ .4 $717.2 758.1 762.6 ====== ====== ====== ====== ====== ====== Less current portion 8.9 11.5 ------ ------ Long-term debt $749.2 $751.1 ====== ======
1994 Credit Agreement On February 17, 1994, the Company and KACC entered into a credit agreement with BankAmerica Business Credit, Inc. and certain other lenders (as amended, the "1994 Credit Agreement"). The 1994 Credit Agreement consists of a $325.0 five-year secured, revolving line of credit, scheduled to mature in 1999. KACC is able to borrow under the facility by means of revolving credit advances and letters of credit (up to $125.0) in an aggregate amount equal to the lesser of $325.0 or a borrowing base relating to eligible accounts receivable plus eligible inventory. 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 previous credit agreement. As of December 31, 1995, $259.3 (of which $72.4 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 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) test, determined quarterly. As of December 31, 1995, the financial test permitted a reduction of 1-1/2% per annum in margins effective January 1, 1996. 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. Senior Notes Concurrent with the offering by the Company of its 8.255% PRIDES, Convertible Preferred Stock (the "PRIDES") (see Note 7), 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. Gramercy Solid Waste Disposal 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, 1995, $3.8 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. Substantially all of the Series A bonds bear interest at a floating rate of 87% of the applicable LIBID Rate (LIBOR less 1/8 of 1%). 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). KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) Senior Subordinated Notes On February 1, 1993, KACC issued $400.0 of its 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. 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 (the "Indentures") 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. Further, the Indentures provide that KACC must offer to purchase the Senior Notes and the 12-3/4% Notes, respectively, upon the occurrence of a Change of Control (as defined therein), and the 1994 Credit Agreement provides that the occurrence of a Change in Control (as defined therein) shall constitute an Event of Default thereunder. Capitalized Interest Interest capitalized in 1995, 1994, and 1993 was $2.8, $2.7, and $3.4, 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 restricted net assets of KACC totaled $24.0 at December 31, 1995. 5. 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, --------------------------- 1995 1994 1993 - ------------------------------------------------------------------- Domestic $ (55.9) $(168.4) $(232.0) Foreign 158.5 16.3 23.5 ------- ------- ------- Total $ 102.6 $(152.1) $(208.5) ======= ======= =======
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. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) The (provision) credit 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 - ------------------------------------------------------------------- 1995 Current $ (4.3) $ (40.2) $ (.1) $ (44.6) Deferred 15.2 (4.9) (2.9) 7.4 ------- ------- ------- ------- Total $ 10.9 $ (45.1) $ (3.0) $ (37.2) ======= ======= ======= ======= 1994 Current $ (18.0) $ (.1) $ (18.1) Deferred $ 71.2 .6 .1 71.9 ------- ------- ------- ------- Total $ 71.2 $ (17.4) $ 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 ======= ======= ======= =======
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 (provision) credit 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:
Year Ended December 31, ------------------------ 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------- Amount of federal income tax (provision) credit based on the statutory rate $(35.9) $ 53.2 $ 73.0 Percentage depletion 4.2 5.6 6.4 Revision of prior years' tax estimates and other changes in valuation allowances 1.5 .2 3.9 Foreign taxes, net of federal tax benefit (5.4) (5.3) (2.6) Increase in net deferred income tax assets due to tax rate change 1.8 3.4 Other (1.6) (1.7) 2.8 ------ ------ ------ (Provision) credit for income taxes $(37.2) $ 53.8 $ 86.9 ====== ====== ======
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. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) 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, ------------------ 1995 1994 - --------------------------------------------------------------------------------- Deferred income tax assets: Postretirement benefits other than pensions $ 289.9 $ 293.7 Loss and credit carryforwards 156.1 187.6 Other liabilities 107.8 109.6 Pensions 56.0 51.0 Foreign and state deferred income tax liabilities 30.8 28.1 Property, plant, and equipment 22.9 23.1 Inventories 1.8 Other 10.7 3.5 Valuation allowances (128.5) (133.9) ------- ------- Total deferred income tax assets - net 547.5 562.7 ------- ------- Deferred income tax liabilities: Property, plant, and equipment (179.8) (203.2) Investments in and advances to unconsolidated affiliates (66.4) (63.8) Inventories (8.3) Other (9.5) (6.4) ------- ------- Total deferred income tax liabilities (255.7) (281.7) ------- ------- Net deferred income tax assets $ 291.8 $ 281.0 ======= =======
The valuation allowances listed above relate primarily to loss and credit carryforwards and postretirement benefits other than pensions. As of December 31, 1995, approximately $97.7 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 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, 1995, is approximately $194.1. 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. As of December 31, 1995 and 1994, $53.5 and $37.9, respectively, of the net deferred income tax assets listed above are included on the Consolidated Balance Sheets in the caption entitled Prepaid expenses and other current assets. Certain other portions of the deferred income tax assets and liabilities listed above are included on the Consolidated Balance Sheets in the captions entitled Other accrued liabilities and Long-term liabilities. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) 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 7, 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 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. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) The following table presents the Company's tax attributes for federal income tax purposes as of December 31, 1995. The utilization of certain of these tax attributes is subject to limitations:
Expiring Through - -------------------------------------------------------------------------- Regular tax attribute carryforwards: Net operating losses $ 32.9 2007 General business tax credits 28.4 2008 Foreign tax credits 89.7 2000 Alternative minimum tax credits 19.4 Indefinite Alternative minimum tax attribute carryforwards: Net operating losses $ 17.1 2002 Foreign tax credits 83.5 2000
6. Employee Benefit and Incentive Plans - ---------------------------------------- Retirement Plans Retirement plans are non-contributory for salaried and hourly employees and generally provide for benefits based on a formula which considers length of service and earnings during years of service. The Company's funding policies meet or exceed all regulatory requirements. The funded status of the employee pension benefit plans and the corresponding amounts that are included in the Company's Consolidated Balance Sheets are as follows:
Plans with Accumulated Benefits Exceeding Assets (1) December 31, ------------------------- 1995 1994 - -------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation: Vested employees $ 753.0 $ 663.9 Nonvested employees 28.7 41.1 ------- ------- Accumulated benefit obligation 781.7 705.0 Additional amounts related to projected salary increases 34.2 30.0 ------- ------- Projected benefit obligation 815.9 735.0 Plan assets (principally common stocks and fixed income obligations) at fair value (592.3) (524.6) ------- ------- Plan assets less than projected benefit obligation 223.6 210.4 Unrecognized net losses (54.7) (42.5) Unrecognized net obligations (.5) (.8) Unrecognized prior-service cost (28.2) (30.9) Adjustment required to recognize minimum liability 49.8 42.9 ------- ------- Accrued pension obligation included in the Consolidated Balance Sheets (principally in Long-term liabilities) $ 190.0 $ 179.1 ======= ======= (1) Includes plans with assets exceeding accumulated benefits by approximately $.1 and $.3 in 1995 and 1994, respectively.
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 $(4.7) and $12.5 at December 31, 1995 and 1994, respectively, for the reduction (excess) of the minimum liability over the unrecognized net obligation and prior-service cost. These amounts KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) were recorded net of the related income tax (provision) credit of $2.8 and $(7.3) as of December 31, 1995 and 1994, respectively, which approximated the federal and state statutory rates. The components of net periodic pension cost are:
Year Ended December 31, --------------------------- 1995 1994 1993 - --------------------------------------------------------------------------------- Service cost - benefits earned during the period $ 10.0 $ 11.2 $ 10.8 Interest cost on projected benefit obligation 59.8 57.3 59.2 Return on assets: Actual gain (112.2) (.8) (70.3) Deferred gain (loss) 64.6 (53.0) 15.9 Net amortization and deferral 4.2 4.1 2.3 ------- ------- ------- Net periodic pension cost $ 26.4 $ 18.8 $ 17.9 ======= ======= =======
Assumptions used to value obligations at year-end, and to determine the net periodic pension cost in the subsequent year are:
1995 1994 1993 - ------------------------------------------------------------------------ Discount rate 7.5% 8.5% 7.5% Expected long-term rate of return on assets 9.5% 9.5% 10.0% Rate of increase in compensation levels 5.0% 5.0% 5.0%
Postretirement Benefits Other Than Pensions The Company and its subsidiaries provide postretirement health care and life insurance benefits to eligible retired employees and their dependents. Substantially all employees may become eligible for those benefits if they reach retirement age while still working for the Company or its subsidiaries. These benefits are provided through contracts with various insurance carriers. The Company has not funded the liability for these benefits, which are expected to be paid out of cash generated by operations. The Company adopted SFAS 106 to account for Postretirement benefits other than pensions as of January 1, 1993, as discussed in Note 1. In 1995, the Company adopted the Kaiser Aluminum Medicare Program ("KAMP"). KAMP is mandatory for all salaried retirees over 65 and for USWA retirees who retire after December 31, 1995, when they become 65, and voluntary for other hourly retirees of the Company's operations in the states of California, Louisiana, and Washington. The USWA contract, ratified on February 28, 1995, also contained changes to the retiree health benefits. These changes included increased retirees' copayments, deductibles, and coinsurance, and restricted Medicare Part B premium reimbursement to the 1995 level for employees retiring after November 1, 1994. These changes will lower the Company's expenses for retiree medical care. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) The Company's accrued postretirement benefit obligation is composed of the following:
December 31, ---------------- 1995 1994 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $557.6 $566.2 Active employees eligible for postretirement benefits 30.7 30.2 Active employees not eligible for postretirement benefits 61.1 98.7 ------ ------ Accumulated postretirement benefit obligation 649.4 695.1 Unrecognized net gains 20.5 55.0 Unrecognized gains related to prior-service costs 110.9 31.8 ------ ------ Accrued postretirement benefit obligation $780.8 $781.9 ====== ======
The components of net periodic postretirement benefit cost are:
Year Ended December 31, -------------------------- 1995 1994 1993 - ---------------------------------------------------------------------------- Service cost $ 4.5 $ 8.2 $ 7.1 Interest cost 52.3 56.9 58.5 Amortization of prior service cost (8.9) (3.2) ------ ------ ------ Net periodic postretirement benefit cost $ 47.9 $ 61.9 $ 65.6 ====== ====== ======
The 1996 annual assumed rates of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) are 8.0% and 7.5% for retirees under 65 and over 65, respectively, and are assumed to decrease gradually to 5.0% 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, 1995, by approximately $68.7 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1995 by approximately $7.8. The weighted average discount rate used to determine the accumulated postretirement benefit obligation at December 31, 1995 and 1994, was 7.5% and 8.5%, respectively. Postemployment Benefits The Company provides certain benefits to former or inactive employees after employment but before retirement. The Company adopted SFAS 112 to account for postemployment benefits as of January 1, 1993, as discussed in Note 1. 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 544,839 shares were available to be awarded at December 31, 1995. 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 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) 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:
1995 1994 1993 - ---------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 1,119,680 664,400 Granted 494,800 664,400 Exercised (at $7.25 and $9.75 per share) (155,500) (6,920) Expired or forfeited (38,095) (32,600) --------- --------- ------- Outstanding at end of year (prices ranging from $7.25 to $12.75 per share) 926,085 1,119,680 664,400 ========= ========= ======= Exercisable at end of year 211,755 120,180 ========= =========
In 1995, the Company adopted the Kaiser Aluminum Total Compensation System, an unfunded incentive compensation program. The program provides incentive pay based on performance against plan over a three- year period. 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 $11.9, $6.1, and $5.3 for the years ended December 31, 1995, 1994, and 1993, respectively. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) 7. 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, 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) Net income 60.3 Redeemable preference stock: Accretion 3.9 Stock redemption (8.7) Stock repurchase 5.4 Conversions (1,222 preference shares into cash) (.1) Common stock issued upon redemption and conversion of preferred stock (.2) .1 1.1 Dividends on preferred stock (17.6) Minority interest in majority-owned subsidiaries 6.0 Incentive plans accretion 1.4 Additional minimum pension liability (4.7) ------ ------ ----- ----- ----- ------- ------ BALANCE, DECEMBER 31, 1995 $ 29.7 $ 93.0 $ .4 $ .7 $530.3 $(459.9) $(13.8) ====== ====== ===== ===== ====== ======= ======
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 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.
1995 1994 1993 - ------------------------------------------------------------------------ Shares: Beginning of year 912,167 1,081,548 1,163,221 Redeemed (174,804) (169,381) (81,673) -------- --------- --------- End of year 737,363 912,167 1,081,548 ======== ========= =========
No additional Series A or B Stock will be issued. 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 1994 and 1995, KACC contributed $4.3 for each of the years 1993 and 1994, and will contribute $4.3 in March 1996 for 1995. 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, a profitability test was satisfied for 1995; therefore, 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 1996. 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. 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. 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 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, 1995, 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, --------------- 1995 1994 - ----------------------------------------------------------------- 4-1/8% 3,237 3,657 4-3/4% (1957 Series) 2,342 2,605 4-3/4% (1959 Series) 13,162 13,534 4-3/4% (1966 Series) 3,473 3,640
Preferred Stock Series A Convertible - In 1993, Kaiser issued 19,382,950 of its $.65 Depositary Shares (the "Depositary Shares"), each representing one- tenth of a share of Series A Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares"). On September 19, 1995, the Company redeemed all 1,938,295 Series A Shares, which resulted in the simultaneous redemption of all Depositary Shares in exchange for (i) 13,126,521 shares of the Company's common stock and (ii) $2.8 in cash comprised of (a) an amount equal to all accrued and unpaid dividends up to and including the day immediately prior to redemption date and (b) cash in lieu of any fractional shares of common stock that would have otherwise been issuable. PRIDES Convertible - In the first quarter of 1994, the Company consummated the public offering of 8,855,550 shares of the PRIDES. The net proceeds from the sale of the shares of PRIDES were approximately $100.1. The Company used such net proceeds to make non-interest- bearing loans to KACC in the aggregate principal amount of $33.2 (the aggregate dividends scheduled to accrue on the shares of PRIDES from the issuance date until December 31, 1997, the date on which the outstanding PRIDES will be mandatorily converted into shares of the Company's common stock), evidenced by intercompany notes, and used the balance of such net proceeds to make capital contributions to KACC in the aggregate amount of $66.9. Holders of shares of PRIDES are entitled to receive (when, as, and if the Board of Directors declares dividends on the PRIDES) cumulative preferential cash dividends at a rate per annum of 8.255% of the per share offering price (equivalent to $.97 per annum for each share of PRIDES), from the date of initial issuance, payable quarterly in arrears 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 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) the holders of any other classes or series of stock who are entitled to vote in such manner on all matters submitted to a vote of common stockholders. On December 31, 1997, unless either previously redeemed 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, at the election of the Company, 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) 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 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, 1995, 28,000,000 shares of the Company's common stock owned by MAXXAM were pledged as security for debt of a wholly owned subsidiary of MAXXAM, consisting of $100.0 aggregate principal amount of 11-1/4% Senior Secured Notes due 2003 and $125.7 aggregate principal amount of 12-1/4% Senior Secured Discount Notes due 2003. Proposed Recapitalization On February 5, 1996, the Company announced that it filed with the SEC a preliminary proxy statement relating to a proposed recapitalization and a special meeting of stockholders to consider and vote upon the proposal. The proposed recapitalization would: (i) provide for two classes of common stock: Class A Common Shares, $.01 par value, with one vote per share and a new lesser-voting class designated as Common Stock, $.01 par value, with 1/10 vote per share; (ii) redesignate as Class A Common Shares the 100 million currently authorized shares of existing common stock and authorize an additional 250 million shares to be designated as Common Stock; and (iii) change each issued share of the Company's existing common stock, par value $.01 per share, into (a) .33 of a Class A Common Share and (b) .67 of a share of Common Stock. The Company would pay cash in lieu of fractional shares. The Company anticipates that both the Class A Common Shares and the Common Stock will be approved for trading on the New York Stock Exchange. Upon the effective date of the recapitalization, approximately 23,640,000 Class A Common Shares and 47,998,000 shares of Common Stock would be issued and outstanding. The proportionate voting power of the holders of the PRIDES will increase immediately after the effectiveness of the recapitalization until such shares are redeemed or converted, which will occur on or before December 31, 1997. As of January 31, 1996, holders of the existing common stock and the PRIDES had 91.2% and 8.8%, respectively, of the total voting power of all stockholders. Immediately after the recapitalization, the KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) voting power of such holders of the PRIDES will increase to 19.6% in the aggregate, with a corresponding reduction in the voting power of such holders of the existing common stock. At such time as the PRIDES are redeemed or converted, the relative voting power of such holders of the PRIDES will decrease and the voting power for both such holders of the PRIDES and the existing common stock will be approximately the same as it would have been had the recapitalization not occurred. 8. Commitments and Contingencies - --------------------------------- Commitments KACC has financial commitments, including purchase agreements, tolling arrangements, forward foreign exchange and forward sales contracts (see Note 9), letters of credit, and guarantees. Such purchase agreements and tolling arrangements include long-term agreements for the purchase and tolling of bauxite into alumina in Australia by QAL. These obligations expire in 2008. Under the agreements, KACC is unconditionally obligated to pay its proportional share of debt, operating costs, and certain other costs of QAL. The aggregate minimum amount of required future principal payments at December 31, 1995, is $88.9, of which $26.7 is due in 1997 and the rest is due in 2002. The KACC share of payments, including operating costs and certain other expenses under the agreement, was $77.5, $85.6, and $86.7 for the years ended December 31, 1995, 1994, and 1993, respectively. KACC also has agreements to supply alumina to and to purchase aluminum from Anglesey. Minimum rental commitments under operating leases at December 31, 1995, are as follows: years ending December 31, 1996 - $22.7; 1997 - $21.6; 1998 - $24.6; 1999 - $29.7; 2000 - $27.3; thereafter - $187.0. The future minimum rentals receivable under noncancelable subleases was $67.0 at December 31, 1995. Rental expenses were $29.0, $26.8, and $29.0 for the years ended December 31, 1995, 1994, and 1993, respectively. Environmental Contingencies The Company and KACC are subject to a number of environmental laws, to fines or penalties assessed for alleged breaches of the environmental laws, and to claims and litigation based upon such laws. KACC currently is subject to a number of lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third- party sites listed on the National Priorities List under CERCLA. Based on the Company's evaluation of these and other environmental matters, the Company has established environmental accruals, primarily related to potential solid waste disposal and soil and groundwater remediation matters. The following table presents the changes in such accruals, which are primarily included in Long-term liabilities, for the years ended December 31, 1995, 1994, and 1993:
1995 1994 1993 - ------------------------------------------------------------------ Balance at beginning of period $ 40.1 $ 40.9 $ 46.4 Additional amounts 3.3 2.8 1.7 Less expenditures (4.5) (3.6) (7.2) ------ ------ ------ Balance at end of period $ 38.9 $ 40.1 $ 40.9 ====== ====== ======
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) These environmental accruals represent the Company's estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology, and the Company's assessment of the likely remediation action to be taken. The Company expects that these remediation actions will be taken over the next several years and estimates that annual expenditures to be charged to these environmental accruals will be approximately $3.0 to $9.0 for the years 1996 through 2000 and an aggregate of approximately $10.0 thereafter. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. The Company believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $23.0 and that the factors upon which a substantial portion of this estimate is based are expected to be resolved over the next twelve months. While uncertainties are inherent in the final outcome of these environmental matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. Asbestos Contingencies KACC is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 15 years. The following table presents the changes in number of such claims pending for the years ended December 31, 1995, 1994, and 1993.
1995 1994 1993 - -------------------------------------------------------------------------- Number of claims at beginning of period 25,200 23,400 13,500 Claims received 41,700 14,300 11,400 Claims settled or dismissed (7,200) (12,500) (1,500) ------ ------- ------ Number of claims at end of period 59,700 25,200 23,400 ====== ======= ======
KACC has been advised by its regional counsel that, although there can be no assurance, the recent increase in pending claims may be attributable in part to tort reform legislation in Texas which was passed by the legislature in March 1995 and which became effective on September 1, 1995. The legislation, among other things, is designed to restrict, beginning September 1, 1995, the filing of cases in Texas that do not have a sufficient nexus to that jurisdiction, and to impose, generally as of September 1, 1996, limitations relating to joint and several liability in tort cases. A substantial portion of the asbestos-related claims that were filed and served on KACC between June 30, 1995, and November 30, 1995, were filed in Texas prior to September 1, 1995. 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 2008. There are inherent uncertainties involved in estimating asbestos-related costs, and the Company's actual costs could exceed these estimates. The Company's accrual was calculated based on the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, and the advice of Wharton, Levin, Ehrmantraut, Klein & Nash, P.A. with respect to the current state of the law related to asbestos claims. Accordingly, an asbestos-related cost accrual of $160.1, before KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) consideration of insurance recoveries, is included primarily in Long-term liabilities at December 31, 1995. The Company estimates that annual future cash payments in connection with such litigation will be approximately $13.0 to $20.0 for each of the years 1996 through 2000, and an aggregate of approximately $78.0 thereafter through 2008. While the Company does not presently believe there is a reasonable basis for estimating such costs beyond 2008 and, accordingly, no accrual has been recorded for such costs which may be incurred beyond 2008, there is a reasonable possibility that such costs may continue beyond 2008, and such costs may be substantial. The Company believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. Claims for recovery from some of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, which have resulted in delays in recovering costs from the insurance carriers. The timing and amount of ultimate recoveries from these insurance carriers are dependent upon the resolution of these disputes. The Company believes, based on prior insurance-related recoveries in respect of asbestos-related claims, existing insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges with respect to applicable insurance coverage law relating to the terms and conditions of those policies, that substantial recoveries from the insurance carriers are probable. Accordingly, an estimated aggregate insurance recovery of $137.9, determined on the same basis as the asbestos-related cost accrual, is recorded primarily in Other assets at December 31, 1995. While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and insurance recoveries that will be received, management currently believes that, based on the factors discussed in the preceding paragraphs, the resolution of asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. Other Contingencies The Company or KACC is involved in various other claims, lawsuits, and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. 9. Derivative Financial Instruments and Related Hedging Programs - ----------------------------------------------------------------- KACC enters into a number of financial instruments 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, 1995, KACC had net forward foreign exchange contracts totaling approximately $102.8 for the purchase of 142.4 Australian dollars through April 30, 1997. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) 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 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 1996 anticipated production, as of December 31, 1995, KACC had sold forward 15,750 metric tons of primary aluminum at fixed prices. 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, 1995 KACC had purchased 53,300 metric tons of primary aluminum under forward purchase contracts at fixed prices that expire at various times through December 1996. At December 31, 1995, the net unrealized gain on KACC's position in aluminum forward sales and option contracts, based on an average price of $1,721 per metric ton ($.78 per pound) of aluminum, and forward foreign exchange contracts was $4.1. 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 creditworthiness. When appropriate, KACC arranges master netting agreements. 10. 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 $5.3, $.8, and $4.9 for the years ended December 31, 1995, 1994, and 1993, respectively. Sales of more than 10% of total revenue to a single customer were nil in 1995 and were $58.2 and $40.7 of bauxite and alumina and $147.7 and $145.7 of aluminum processing for the years ended December 31, 1994, and 1993, respectively. Export sales were less than 10% of total revenue during the years ended December 31, 1995, 1994, and 1993, respectively. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars, except share amounts) 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 1995 $1,589.5 $ 191.7 $ 239.4 $ 217.2 $2,237.8 1994 1,263.2 169.9 180.0 168.4 1,781.5 1993 1,177.8 155.4 207.5 178.4 1,719.1 Sales and transfers among 1995 $ 79.6 $ 191.5 $(271.1) geographic areas 1994 98.7 139.4 (238.1) 1993 88.2 79.6 (167.8) Equity in income (losses) of 1995 $ (.2) $ 19.4 $ 19.2 unconsolidated affiliates 1994 .2 (2.1) (1.9) 1993 (3.3) (3.3) Operating income (loss) 1995 $ 32.0 $ 9.8 $ 83.5 $ 85.3 $ 210.6 1994 (128.8) 9.9 18.3 44.4 (56.2) 1993 (145.9) (11.8) 21.9 12.4 (123.4) Investment in and advances to 1995 $ 1.2 $ 27.1 $ 149.9 $ 178.2 unconsolidated affiliates 1994 1.2 28.8 139.7 169.7 Identifiable assets 1995 $2,017.9 $ 381.9 $ 196.5 $ 216.9 $2,813.2 1994 1,933.8 364.8 200.0 199.5 2,698.1
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, 1995 and 1994, and for the years ended December 31, 1995, 1994, and 1993, is as follows:
Year Ended Bauxite & Aluminum December 31, Alumina Processing Corporate Total - --------------------------------------------------------------------------------------------------- Net sales to unaffiliated customers 1995 $514.2 $1,723.6 $2,237.8 1994 432.5 1,349.0 1,781.5 1993 423.4 1,295.7 1,719.1 Intersegment sales 1995 $159.7 $ 159.7 1994 146.8 146.8 1993 129.4 129.4 Equity in income (losses) of 1995 $ 3.6 $ 15.8 $ (.2) $ 19.2 unconsolidated affiliates 1994 (4.7) 2.6 .2 (1.9) 1993 (2.5) (.8) (3.3) Operating income (loss) 1995 $ 54.0 $ 238.9 $ (82.3) $ 210.6 1994 19.8 (8.4) (67.6) (56.2) 1993 (4.5) (46.3) (72.6) (123.4) 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 1995 $ 31.1 $ 60.4 $ 2.8 $ 94.3 1994 33.5 59.1 2.8 95.4 1993 35.3 59.9 1.9 97.1 Capital expenditures 1995 $ 27.3 $ 44.0 $ 8.1 $ 79.4 1994 28.9 39.9 1.2 70.0 1993 35.3 31.2 1.2 67.7 Investment in and advances to 1995 $129.9 $ 47.1 $ 1.2 $ 178.2 unconsolidated affiliates 1994 136.6 31.9 1.2 169.7 Identifiable assets 1995 $746.0 $1,341.2 $ 726.0 $2,813.2 1994 749.6 1,242.3 706.2 2,698.1
EX-99.2 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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 19, 1996 CONSOLIDATED BALANCE SHEET
December 31, ---------------------------- 1995 1994 ------------ ------------ (In thousands of dollars) ASSETS Current assets: Cash and cash equivalents $ 26,480 $ 24,330 Receivables: Trade 19,688 23,258 Other 1,565 4,035 Inventories 75,580 68,168 Prepaid expenses and other current assets 6,933 3,660 ------------ ------------ Total current assets 130,246 123,451 Timber and timberlands, net of depletion of $204,856 and $188,003 at December 31, 1995 and 1994, respectively 337,390 350,871 Property, plant and equipment, net 93,726 96,960 Deferred financing costs, net 22,397 24,516 Deferred income taxes 41,958 50,142 Restricted cash 31,367 32,402 Other assets 5,502 5,925 ------------ ------------ $ 662,586 $ 684,267 ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Accounts payable $ 3,898 $ 3,309 Accrued compensation and related benefits 9,241 10,285 Accrued interest 20,666 21,109 Deferred income taxes 10,244 12,986 Other accrued liabilities 3,077 2,105 Long-term debt, current maturities 14,195 13,670 ------------ ------------ Total current liabilities 61,321 63,464 Long-term debt, less current maturities 571,812 586,007 Other noncurrent liabilities 33,613 23,517 ------------ ------------ Total liabilities 666,746 672,988 ------------ ------------ Contingencies Stockholder's equity (deficit): Common stock, $.01 par value, 100 shares authorized and issued - - Additional capital 157,520 157,520 Accumulated deficit (161,680) (146,241) ------------ ------------ Total stockholder's equity (deficit) (4,160) 11,279 ------------ ------------ $ 662,586 $ 684,267 ============ ============
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- (In thousands of dollars) Net sales: Lumber and logs $ 197,320 $ 205,504 $ 193,227 Other 24,619 21,875 17,407 ---------- ---------- ---------- 221,939 227,379 210,634 ---------- ---------- ---------- Operating expenses: Cost of goods sold (exclusive of depletion and depreciation) 116,445 116,316 115,175 Selling, general and administrative 14,992 15,190 18,869 Depletion and depreciation 25,927 25,485 25,374 ---------- ---------- ---------- 157,364 156,991 159,418 ---------- ---------- ---------- Operating income 64,575 70,388 51,216 Other income (expense): Investment, interest and other income 3,928 12,022 3,884 Interest expense (55,462) (56,067) (59,145) ---------- ---------- ---------- Income (loss) before income taxes, extraordinary items and cumulative effect of changes in accounting principles 13,041 26,343 (4,045) Credit (provision) in lieu of income taxes (6,480) (1,429) 1,683 ---------- ---------- ---------- Income (loss) before extraordinary items and cumulative effect of changes in accounting principles 6,561 24,914 (2,362) 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) $ 6,561 $ 10,048 $ (10,539) ========== ========== ==========
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- (In thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 6,561 $ 10,048 $ (10,539) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion and depreciation 25,927 25,485 25,374 Net sales of marketable securities 478 6,619 6,025 Amortization of deferred financing costs 2,269 2,197 2,580 Net gains on marketable securities (478) (984) (1,310) Net loss (gain) on asset dispositions 419 (830) 134 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 7,572 1,627 (1,697) Increase in accounts payable 589 949 53 Decrease (increase) in receivables 5,913 (8,742) 9,991 Increase (decrease) in other liabilities 7,406 (2,027) (394) Decrease (increase) in inventories, net of depletion (7,301) (1,608) 987 Decrease (increase) in prepaid expenses and other current assets (3,273) (721) 237 Decrease in accrued interest (443) (518) (9,398) Other 423 706 (74) ---------- ---------- ---------- Net cash provided by operating activities 46,062 32,201 30,146 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sale of assets 13 1,119 229 Capital expenditures (9,140) (10,962) (10,472) ---------- ---------- ---------- Net cash used for investing activities (9,127) (9,843) (10,243) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (22,000) (24,500) (25,000) Redemptions, repurchase of and principal payments on long-term debt (13,670) (13,235) (557,883) Incurrence of financing costs (150) (213) (28,235) Proceeds from issuance of long-term debt - - 620,000 Restricted cash deposits, net 1,035 1,160 (33,562) ---------- ---------- ---------- Net cash used for financing activities (34,785) (36,788) (24,680) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,150 (14,430) (4,777) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24,330 38,760 43,537 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 26,480 $ 24,330 $ 38,760 ========== ========== ========== SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Timber and timberlands acquired subject to loans from seller $ 615 $ 910 $ - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest $ 53,636 $ 54,388 $ 65,963 Income taxes paid (refunded) (5,190) 1,170 14
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
Common Stock Additional Accumulated ($.01 Par) Capital Deficit Total ------------ ------------ ------------ ------------ (In thousands of dollars) Balance, January 1, 1993 $ - $ 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 Net income - - 6,561 6,561 Dividends - - (22,000) (22,000) ------------ ------------ ------------ ------------ Balance, December 31, 1995 $ - $ 157,520 $ (161,680) $ (4,160) ============ ============ ============ ============
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"). Intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior years' financial statements to be consistent with the current year's presentation. The Company operates in several principal aspects of the lumber industry - the growing and harvesting of redwood and Douglas-fir timber, the milling of logs in lumber and the manufacture of lumber into a variety of finished products. Housing, construction and remodeling are the principal markets for the Company's lumber products. Export sales generally constitute approximately 4% of the Company's sales. A significant portion of the Company's sales are made to third parties located west of the Mississippi river. The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of revenues and expenses recognized during each period presented. The Company reviews all significant estimates affecting its consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their publication. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company's consolidated financial statements; accordingly, it is possible that the subsequent resolution of any one of the contingent matters described in Note 8 could differ materially from current estimates. The results of an adverse resolution of such uncertainties could have a material effect on the reported amounts of the Company's consolidated assets and liabilities. 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, 1995 were: 1995 - net realized gains of $478; 1994 - a decrease in net unrealized gains of $264 and net realized gains of $1,248; and 1993 - net realized gains of $1,046 and net unrealized gains of $264. Inventories Inventories are stated at the lower of cost or market value. Cost is determined using the last-in, first-out ("LIFO") method. Timber and Timberlands Timber and timberlands are stated at cost, net of accumulated depletion. Depletion is computed utilizing the unit-of-production method based upon estimates of timber values and quantities. Property, Plant and Equipment Property, plant and equipment, including capitalized interest, is stated at cost, net of accumulated depreciation. Depreciation is computed utilizing the straight-line method at rates based upon the estimated useful lives of the various classes of assets. Deferred Financing Costs Costs incurred to obtain financing are deferred and amortized over the 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") of Scotia Pacific Holding Company ("Scotia Pacific"), a wholly owned subsidiary of the Company. See Note 4. The Liquidity Account is not available, except under certain limited circumstances, for Scotia Pacific's working capital purposes; however, it is available to pay the Rated Amortization (as defined in Note 4) and interest on the Timber Notes if and to the extent that cash flows are insufficient to make such payments. The required Liquidity Account balance will generally decline as principal payments are made on the Timber Notes. Investment, interest and other income for the years ended December 31, 1995, 1994 and 1993 includes interest of approximately $2,560, $2,638 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, 1995 and 1994, cash and cash equivalents include $19,742 and $19,439, respectively, (the "Payment Account") which is reserved for debt service payments on the Timber Notes (see Note 4). The Payment Account and the Liquidity Account are each held by a different financial institution. In the event of nonperformance by such financial institutions, the Company's exposure to credit loss is represented by the amounts deposited plus any unpaid accrued interest thereon. The Company mitigates its concentrations of credit risk with respect to these restricted cash deposits by maintaining them at high credit quality financial institutions and monitoring the credit ratings of these institutions. Fair Value of Financial Instruments The carrying amounts of cash 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, 1995 December 31, 1994 ----------------------- ----------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ---------- Cash and cash equivalents $ 26,480 $ 26,480 $ 24,330 $ 24,330 Restricted cash 31,367 31,367 32,402 32,402 Long-term debt (586,007) (590,594) (599,677) (558,801)
2. INVENTORIES Inventories consist of the following:
December 31, ----------------------- 1995 1994 ---------- ---------- Lumber $ 57,905 $ 53,393 Logs 17,675 14,775 ---------- ---------- $ 75,580 $ 68,168 ========== ==========
During 1993, inventory quantities were reduced. This reduction resulted in the liquidation of LIFO inventory quantities carried at prevailing costs from prior years which were higher than the current cost of inventory. The effect of this inventory liquidation increased cost of goods sold by approximately $222 for the year ended December 31, 1993. 3. PROPERTY, PLANT AND EQUIPMENT The major classes of property, plant and equipment are as follows:
December 31, ----------------------- Estimated Useful Lives 1995 1994 ------------- ---------- ---------- Machinery and equipment 5 - 15 years $ 122,437 $ 119,280 Buildings 33 years 29,079 27,666 Logging roads 15 years 7,486 7,102 ---------- ---------- 159,002 154,048 Less: accumulated depreciation (65,276) (57,088) ---------- ---------- $ 93,726 $ 96,960 ========== ==========
Depreciation expense for the years ended December 31, 1995, 1994 and 1993 was $9,185, $8,808 and $8,233, respectively. 4. LONG-TERM DEBT Long-term debt consists of the following:
December 31, ----------------------- 1995 1994 ---------- ---------- 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015 $ 350,233 $ 363,811 10-1/2% Pacific Lumber Senior Notes due March 1, 2003 235,000 235,000 Other 774 866 ---------- ---------- 586,007 599,677 Less: current maturities (14,195) (13,670) ---------- ---------- $ 571,812 $ 586,007 ========== ==========
On March 23, 1993, the Company issued $235,000 of the Senior Notes and Scotia Pacific, its newly-formed wholly owned subsidiary, issued $385,000 of the Timber Notes. The Company and Scotia Pacific 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; (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 Scotia Pacific from incurring any additional indebtedness for borrowed money and limits the business activities of Scotia Pacific to the ownership and operation of its timber and timberlands. The Timber Notes are senior secured obligations of Scotia Pacific and are not obligations of, or guaranteed by, the Company or any other person. The Timber Notes are secured by a lien on (i) Scotia Pacific's timber and timberlands (representing $179,364 of the Company's consolidated balance at December 31, 1995), (ii) Scotia Pacific's contract rights and certain other assets, (iii) the funds deposited in the Payment Account and the Liquidity Account, and (iv) substantially all of Scotia Pacific's other property and equipment. The Timber Notes are structured to link, to the extent of available cash, the deemed depletion of Scotia Pacific's timber (through the harvest and sale of logs) to required amortization of the Timber Notes. The required amount of amortization due on any Timber Note payment date is determined by various mathematical formulas set forth in the Timber Note Indenture. The minimum amount of principal which Scotia Pacific must pay (on a cumulative basis) through any Timber Note payment date in order to avoid an Event of Default (as defined 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 Scotia Pacific will pay the final installment of principal is July 20, 2015. The amount of principal which Scotia Pacific must pay through each Timber Note payment date in order to avoid prepayment or deficiency premiums is referred to as scheduled amortization ("Scheduled Amortization"). If all payments of principal are made in accordance with Scheduled Amortization, the payment date on which Scotia Pacific will pay the final installment of principal is July 20, 2009. Scheduled Amortization on the Timber Notes is as follows: years ending December 31, 1996 - $14,103; 1997 - $16,165; 1998 - $19,335; 1999 - $21,651; 2000 - $23,970; thereafter - $255,009. Principal and interest on the Timber Notes are payable semi- annually on January 20 and July 20. The Timber Notes are redeemable at the option of Scotia Pacific, in whole but not in part, at any time. The redemption price of the Timber Notes is equal to the sum of the principal amount, accrued interest and a prepayment premium calculated based upon the yield of like-term Treasury securities plus 50 basis points. Interest on the Senior Notes is payable semi-annually on March 1 and September 1. The Senior Notes are redeemable at the option of the Company, in whole or in part, on or after March 1, 1998 at a price of 103% of the principal amount plus accrued interest. The redemption price is reduced annually until March 1, 2000, after which time the Senior Notes are redeemable at par. The Company has a revolving credit agreement with a bank (as amended and restated, the "Revolving Credit Agreement") which expires on May 31, 1998. 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 $60,000, of which $15,000 may be used for standby letters of credit and $30,000 is restricted to timberland acquisitions. Borrowings made pursuant to the portion of the credit facility restricted to timberland acquisitions would also be secured by the purchased timberlands. As of December 31, 1995, $48,090 of borrowings was available under the Revolving Credit Agreement, of which $3,090 was available for letters of credit and $30,000 was restricted to timberland acquisitions. No borrowings were outstanding as of December 31, 1995, and letters of credit outstanding amounted to $11,910. The indentures governing the Senior Notes and the Timber Notes and the 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, 1995, under the most restrictive of these covenants, approximately $15,663 of dividends could be paid by the Company. Scheduled maturities of long-term debt outstanding at December 31, 1995 are as follows: years ending December 31, 1996 - $14,195; 1997 - $16,258; 1998 - $19,429; 1999 - $21,745; 2000 - $24,065; thereafter - $490,315. 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 "Tax Allocation Agreement"), provides that The Pacific Lumber Company, excluding its wholly owned subsidiaries ("Pacific Lumber"), is liable to MAXXAM for the federal consolidated income tax liability of Pacific Lumber, Scotia Pacific and certain other subsidiaries of Pacific Lumber (but excluding Salmon Creek Corporation) (collectively, the "PL Subgroup") computed as if the PL Subgroup was a separate affiliated group of corporations which was never affiliated with MAXXAM. The Tax Allocation Agreement further provides that Salmon Creek Corporation is liable to MAXXAM for its federal income tax liability computed as if Salmon Creek Corporation was a separate corporation which was never affiliated with MAXXAM. 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 consists of the following:
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Current: Federal credit (provision) in lieu of income taxes $ (239) $ - $ - State and local (61) (50) - ---------- ---------- ---------- (300) (50) - ---------- ---------- ---------- Deferred: Federal credit (provision) in lieu of income taxes (4,755) (1,748) 1,913 State and local (1,425) 369 (230) ---------- ---------- ---------- (6,180) (1,379) 1,683 ---------- ---------- ---------- $ (6,480) $ (1,429) $ 1,683 ========== ========== ==========
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, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Income (loss) before income taxes, extraordinary items and cumulative effect of changes in accounting principles $ 13,041 $ 26,343 $ (4,045) ========== ========== ========== Amount of federal income tax based upon the statutory rate $ (4,564) $ (9,220) $ 1,416 State and local taxes, net of federal tax benefit (966) 207 (150) Revision of prior years' tax estimates and other changes in valuation allowances (651) 7,148 (566) Increase in net deferred income tax assets due to tax rate change - - 850 Other (299) 436 133 ---------- ---------- ---------- $ (6,480) $ (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, ----------------------- 1995 1994 ---------- ---------- Deferred income tax assets: Timber and timberlands $ 32,528 $ 37,209 Loss and credit carryforwards 25,408 29,301 Other liabilities 7,806 4,840 Postretirement benefits other than pensions 2,316 2,145 Other 222 892 Valuation allowances (2,825) (2,664) ---------- ---------- Total deferred income tax assets, net 65,455 71,723 ---------- ---------- Deferred income tax liabilities: Inventories (16,056) (16,339) Property, plant and equipment (15,023) (14,848) Other (2,662) (3,380) ---------- ---------- Total deferred income tax liabilities (33,741) (34,567) ---------- ---------- Net deferred income tax assets $ 31,714 $ 37,156 ========== ==========
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 $28,199 and $33,540 at December 31, 1995 and 1994, respectively, which are recorded pursuant to the Tax Allocation Agreement with MAXXAM. The following table presents the Company's estimated tax attributes, for federal income tax purposes, under the terms of the Tax Allocation Agreement at December 31, 1995.
Expiring Through ---------- Regular Tax Attribute Carryforwards: Net operating losses $ 60,718 2010 Net capital losses 3,121 1997 Minimum tax credit 239 - Alternative Minimum Tax Attribute Carryforwards: Net operating losses $ 23,618 2010
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, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Service cost - benefits earned during the year $ 1,483 $ 1,643 $ 1,600 Interest cost on projected benefit obligation 1,693 1,263 918 Actual loss (gain) on plan assets (3,900) 10 (2,128) Net amortization and deferral 2,460 (859) 1,359 ---------- ---------- ---------- Net periodic pension cost $ 1,736 $ 2,057 $ 1,749
The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheet:
December 31, ----------------------- 1995 1994 ---------- ---------- Actuarial present value of accumulated plan benefits: Vested benefit obligation $ 16,910 $ 11,809 Non-vested benefit obligation 1,214 779 ---------- ---------- Total accumulated benefit obligation $ 18,124 $ 12,588 ========== ========== Projected benefit obligation $ 21,841 $ 15,047 Plan assets at fair value, primarily equity and debt securities (18,363) (13,184) ---------- ---------- Projected benefit obligation in excess of plan assets 3,478 1,863 Unrecognized net transition asset 24 29 Unrecognized net gain (loss) (27) 1,475 Unrecognized prior service cost (45) (50) ---------- ---------- Accrued pension liability $ 3,430 $ 3,317 ========== ==========
The assumptions used in accounting for the defined benefit plan were as follows:
1995 1994 1993 ---------- ---------- ---------- Rate of increase in compensation levels 5.0% 5.0% 5.0% Discount rate 7.25% 8.5% 7.5% Expected long-term rate of return on assets 8.0% 8.0% 8.0%
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 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, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Service cost - benefits earned during the year $ 228 $ 216 $ 153 Interest cost on accumulated postretirement benefit obligation 317 294 315 Net amortization and deferral (53) (7) - ---------- ---------- ---------- Net periodic postretirement benefit cost $ 492 $ 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, ----------------------- 1995 1994 ---------- ---------- Retirees $ 634 $ 860 Actives eligible for benefits 726 656 Actives not eligible for benefits 3,317 2,355 ---------- ---------- Accumulated postretirement benefit obligation 4,677 3,871 Unrecognized net gain 553 972 ---------- ---------- Postretirement benefit liability $ 5,230 $ 4,843 ========== ==========
The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 11.0% for 1996 and is assumed to decrease gradually to 5.5% in 2008 and remain at that level thereafter. Each one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1995 by approximately $674 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $90. The discount rates used in determining the accumulated postretirement benefit obligation were 7.25% and 8.5% at December 31, 1995 and 1994, 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 $1,281 and $1,215 for the years ended December 31, 1995 and 1994, respectively. The Company is self-insured for workers' compensation benefits. Included in accrued compensation and related benefits and other noncurrent liabilities are accruals for workers' compensation claims amounting to $8,900 and $9,233 at December 31, 1995 and 1994, respectively. Workers' compensation expenses amounted to $3,302, $3,698 and $3,317 for the years ended December 31, 1995, 1994 and 1993, 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 $1,694, $1,744 and $2,598 for the years ended December 31, 1995, 1994 and 1993, respectively. An agreement with Britt Lumber Co., Inc., an indirect wholly owned subsidiary of MGI ("Britt"), governs, among other things, the sale of logs and lumber by the Company and Britt to each other and the sale of hog fuel (wood residue) by Britt to the Company. The logs which the Company sells to Britt are sold at approximately 75% of the applicable price for such species and category as established by the California State Board of Equalization, which reflects the lower quality of these logs. Logs which either the Company or Britt purchases from third parties and which are then sold to each other are transferred at the actual cost of such logs. Hog fuel is sold to the Company by Britt at applicable market prices. Net sales for the years ended December 31, 1995, 1994 and 1993 include revenues of $13,627, $10,326 and $9,198, respectively, from Britt. The Company recognized operating income of $5,527, $5,571 and $1,972 on these revenues for the years ended December 31, 1995, 1994 and 1993, respectively. At December 31, 1995 and 1994, receivables include $813 and $1,283, 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 $52,000 settlement, $33,000 was paid by insurance carriers of MAXXAM and the Company, $14,800 was paid by the Company, and the balance was paid by other defendants and through the assignment of certain claims. In 1994, the Company recorded an extraordinary loss of $14,866 related to the settlement and associated costs, including a $2,000 accrual for certain contingent claims and $4,400 of related legal fees, net of benefits for federal and state income taxes of $6,312. The Company's operations are subject to a variety of California and federal laws and regulations dealing with timber harvesting, endangered species and critical habitat, and air and water quality. The Company does not expect that compliance with such existing laws and regulations will have a material adverse effect on its future consolidated financial position, results of operations or liquidity; however, these laws are modified from time to time and there can be no assurance that certain pending or future legislation, governmental regulations or judicial or administrative decisions would not materially adversely affect the Company or its ability to sell lumber, logs or timber. In 1995, the U.S. Fish and Wildlife Service (the "USFWS") published its proposed final designation of critical habitat for the marbled murrelet (the "Proposed Designation"), seeking to designate over four million acres as critical habitat for the marbled murrelet, including approximately 33,000 acres of the Company's timberlands. The Proposed Designation was subject to a 60-day comment period and the Company filed comments vigorously opposing the Proposed Designation. The USFWS has not yet published its final designation of critical habitat for the marbled murrelet. The Company is unable to predict when or if it would be able to harvest on any acreage finally designated as critical habitat. Furthermore, it is impossible to determine the future adverse impact of such designation on the Company's consolidated financial position, results of operations or liquidity until such time as the Proposed Designation and related regulatory and legal issues are fully resolved. However, if the Company is unable to harvest, or is severely limited in harvesting, on timberlands designated as marbled murrelet critical habitat, such restrictions could have a material adverse effect on the Company's consolidated financial position, results of operations and liquidity. If the Company is unable to harvest or is severely limited in harvesting, the Company intends to seek full compensation from the appropriate governmental agencies on the grounds that such restrictions constitute a taking. There continue to be other regulatory actions and lawsuits seeking to have various other species listed as threatened or endangered under the federal Endangered Species Act and/or the California Endangered Species Act and to designate critical habitat for such species. It is uncertain what impact, if any, such listings and/or designations of critical habitat will have on the Company's consolidated financial position, results of operations or liquidity. In 1994, the California Board of Forestry (the "BOF") 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. The Company is required to submit, by October 1996, a plan setting forth, among other things, its Projected Annual Growth. The Company 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 the Company 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. The Company 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. The Company is unable to predict the ultimate impact the sustained yield regulations will have on its future consolidated financial position, results of operations or liquidity. Various groups and individuals have filed objections with the California Department of Forestry ("CDF") and the BOF regarding the CDF's and the BOF's actions and rulings with respect to certain of the Company's timber harvesting plans ("THPs"), and the Company expects that such groups and individuals will continue to file objections to certain of the Company's THPs. In addition, lawsuits are pending which seek to prevent the Company from implementing certain of its approved THPs and other timber operations. These challenges have severely restricted the Company's ability to harvest virgin old growth redwood timber on its property (and, to a lesser extent, its residual old growth timber). To date, challenges with respect to the Company's THPs relating to young growth and residual old growth have been limited; however, no assurance can be given as to the extent of such challenges in the future. The Company believes that environmentally focused challenges to its THPs are likely to occur in the future, particularly with respect to virgin and residual old growth timber. Although such challenges have delayed or prevented the Company from conducting a portion of its operations, to date such challenges have not had a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. It is, however, impossible to predict the future nature or degree of such challenges or their ultimate impact on the consolidated financial position, results of operations or liquidity of 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 that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 9. OTHER ITEMS Investment, Interest and Other Income In February 1994, the Company received a franchise tax refund of $7,243, the substantial portion of which represents interest, from the State of California relating to tax years 1972 through 1985. This amount is included in investment, interest and other income for the year ended December 31, 1994. Items Related to 1992 Earthquake In 1995 and 1993, the Company recorded reductions in cost of sales of $1,527 and $1,200, respectively, resulting from business interruption insurance reimbursements for higher operating costs and the related loss of revenues resulting from the April 1992 earthquake. Other receivables at December 31, 1994 included $1,684 related to earthquake related insurance claims. 10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summary quarterly financial information for the years ended December 31, 1995 and 1994 is as follows:
Three Months Ended ----------------------------------------------------------- March 31 June 30 September 30 December 31 ---------- ---------- --------------- --------------- 1995: Net sales $ 47,309 $ 58,408 $ 58,807 $ 57,415 Operating income 9,991 18,785 17,115 18,684 Net income (loss) (2,013) 3,861 2,669 2,044 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
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