-----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, HbGzw7wirth3IR8mO0bsCFpotRUsYrMOaB6RM/o3+Xkg94aWW/QD4gbXIXmDGixn bYVo2npRdmR6yeWd04DBig== 0000900421-97-000034.txt : 19970428 0000900421-97-000034.hdr.sgml : 19970428 ACCESSION NUMBER: 0000900421-97-000034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970425 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXXAM GROUP HOLDINGS INC CENTRAL INDEX KEY: 0001029500 STANDARD INDUSTRIAL CLASSIFICATION: PRIMARY PRODUCTION OF ALUMINUM [3334] IRS NUMBER: 760518669 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-18723 FILM NUMBER: 97586919 BUSINESS ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7139757600 MAIL ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 10-Q 1 MGHI 1ST QUARTER 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q --------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 Commission File Number 333-18723 MAXXAM GROUP HOLDINGS INC. (Exact name of Registrant as specified in its charter) DELAWARE 76-0518669 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification Number) organization) 5847 SAN FELIPE, SUITE 2600 77057 HOUSTON, TEXAS (Zip Code) (Address of Principal Executive Offices) Registrant's telephone number, including area code: (713) 975-7600 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Number of shares of common stock outstanding at April 24, 1997: 1,000 Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format. MAXXAM GROUP HOLDINGS INC. INDEX PART I. - FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheet at March 31, 1997 and December 31, 1996 3 Consolidated Statement of Operations for the three months ended March 31, 1997 and 1996 4 Consolidated Statement of Cash Flows for the three months ended March 31, 1997 and 1996 5 Condensed Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. - OTHER INFORMATION Item 1. Legal Proceedings 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures S-1 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS OF DOLLARS)
March 31, December 31, 1997 1996 ------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 58,284 $ 73,595 Marketable securities 31,158 31,423 Receivables: Trade 17,836 18,850 Other 4,385 2,543 Inventories 64,983 72,584 Prepaid expenses and other current assets 6,406 5,474 ------------- ------------- Total current assets 183,052 204,469 Timber and timberlands, net of accumulated depletion of $156,937 and $154,567, respectively 300,135 301,773 Property, plant and equipment, net of accumulated depreciation of $69,807 and $67,573, respectively 101,937 102,788 Note receivable from MAXXAM Inc. 125,000 125,000 Deferred financing costs, net 28,359 29,232 Deferred income taxes 63,582 63,414 Restricted cash 29,765 29,967 Other assets 7,446 6,455 ------------- ------------- $ 839,276 $ 863,098 ============= ============= LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Accounts payable $ 3,685 $ 3,928 Accrued interest 11,678 25,246 Accrued compensation and related benefits 7,728 10,033 Deferred income taxes 11,320 11,418 Other accrued liabilities 1,873 4,253 Long-term debt, current maturities 18,319 16,258 ------------- ------------- Total current liabilities 54,603 71,136 Long-term debt, less current maturities 882,111 889,769 Other noncurrent liabilities 27,068 26,387 ------------- ------------- Total liabilities 963,782 987,292 ------------- ------------- Contingencies Stockholder's deficit: Common stock, $1.00 par value; 3,000 shares authorized; 1,000 shares issued 1 1 Additional capital 89,767 89,767 Accumulated deficit (214,274) (213,962) ------------- ------------- Total stockholder's deficit (124,506) (124,194) ------------- ------------- $ 839,276 $ 863,098 ============= ============= The accompanying notes are an integral part of these financial statements.
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS OF DOLLARS)
Three Months Ended March 31, --------------------------- 1997 1996 ------------- ------------- (Unaudited) Net sales: Lumber and logs $ 60,266 $ 54,725 Other 6,549 5,079 ------------- ------------- 66,815 59,804 ------------- ------------- Operating expenses: Cost of goods sold (exclusive of depletion and depreciation) 38,045 33,078 Selling, general and administrative expenses 3,404 3,630 Depletion and depreciation 6,547 6,519 ------------- ------------- 47,996 43,227 ------------- ------------- Operating income 18,819 16,577 Other income (expense): Investment, interest and other income (expense) 4,398 3,298 Interest expense (23,697) (19,498) ------------- ------------- Income (loss) before income taxes (480) 377 Credit (provision) in lieu of income taxes 168 (152) ------------- ------------- Net income (loss) $ (312) $ 225 ============= ============= The accompanying notes are an integral part of these financial statements.
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
Three Months Ended March 31, --------------------------- 1997 1996 ------------- ------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (312) $ 225 Adjustments to reconcile net income to net cash provided by operating activities: Depletion and depreciation 6,547 6,519 Amortization of deferred financing costs and discounts on long-term debt 4,032 3,566 Net sales of marketable securities 22 21,579 Net losses (gains) on marketable securities 243 (1,198) Increase (decrease) in cash resulting from changes in: Receivables (1,615) 5,401 Inventories, net of depletion 5,761 2,901 Prepaid expenses and other assets (1,914) 247 Accounts payable (169) 182 Accrued interest (13,568) (16,052) Other liabilities (3,442) (3,478) Accrued and deferred income taxes (165) 152 Other 70 (5) ------------- ------------- Net cash provided by (used for) operating activities (4,510) 20,039 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (2,258) (2,842) Net proceeds from sale of assets 11 42 ------------- ------------- Net cash used for investing activities (2,247) (2,800) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemptions, repurchases of and principal payments on long-term debt (8,756) (8,494) Dividends paid - (1,600) Restricted cash withdrawals, net 202 300 ------------- ------------- Net cash used for financing activities (8,554) (9,794) ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,311) 7,445 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 73,595 48,396 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 58,284 $ 55,841 ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest $ 33,244 $ 31,984 The accompanying notes are an integral part of these financial statements.
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS) 1. GENERAL The information contained in the following notes to the consolidated financial statements is condensed from that which would appear in the annual consolidated financial statements; accordingly, the consolidated financial statements included herein should be reviewed in conjunction with the consolidated financial statements and related notes thereto contained in the Annual Report on Form 10-K filed by MAXXAM Group Holdings Inc. with the Securities and Exchange Commission ("SEC") for the fiscal year ended December 31, 1996 (the "Form 10-K"). Any capitalized terms used but not defined in these Condensed Notes to Consolidated Financial Statements have the same meaning given to them in the Form 10-K. All references to the "Company" include MAXXAM Group Holdings Inc. and its subsidiary companies unless otherwise noted or the context indicates otherwise. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year. The consolidated financial statements included herein are unaudited; however, they include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at March 31, 1997, the consolidated results of operations for the three months ended March 31, 1997 and 1996 and consolidated cash flows for the three months ended March 31, 1997 and 1996. Certain reclassifications of prior period information have been made to conform to the current presentation. The Company is a wholly owned subsidiary of MAXXAM. 2. INVENTORIES Inventories consist of the following:
March 31, December 31, 1997 1996 ------------- ------------- Lumber $ 53,736 $ 55,832 Logs 11,247 16,752 ------------- ------------- $ 64,983 $ 72,584 ============= =============
3. RESTRICTED CASH Restricted cash represents the amount held by the Trustee under the indenture governing the Timber Notes of the Company's indirect wholly owned subsidiary, Scotia Pacific. 4. INVESTMENT IN KAISER Subsequent to its formation, the Company received, as a capital contribution from MAXXAM, 27,938,250 shares of the common stock of Kaiser which are pledged as collateral for the MGI Notes (the "Pledged Kaiser Shares"). Kaiser is a fully integrated producer and marketer of alumina, primary aluminum and fabricated aluminum products. Kaiser's common stock is publicly traded on the New York Stock Exchange under the trading symbol "KLU." The Pledged Kaiser Shares represent a 39.0% equity interest in Kaiser at March 31, 1997 (34.6% on a fully diluted basis, after giving effect to the conversion of Kaiser's outstanding preferred stock into an equal number of common shares). The Company follows the equity method of accounting for its investment in Kaiser. The Company and MAXXAM are entities under common control; accordingly, the Company has recorded its investment in Kaiser at MAXXAM's historical cost. During the first quarter of 1993, losses exhausted Kaiser's equity with respect to its common stockholders. The Company recorded its equity share of such losses in January 1993 up to the amount of its investment in the Pledged Kaiser Shares. Since January 1993, cumulative losses with respect to the results of operations attributable to Kaiser's common stockholders have exceeded cumulative earnings. The Company is under no obligation to provide any economic support to Kaiser, and accordingly, has not recorded any amounts attributable to its equity in Kaiser's results of operations for any period subsequent to January 1993. The Company will not record its equity in Kaiser's results of operations until such time as future earnings exceed the cumulative losses incurred. The market value for the Pledged Kaiser Shares based on the price per share quoted at the close of business on April 22, 1997 was $303,828. There can be no assurance that such value would be realized should the Company dispose of its investment in the Pledged Kaiser Shares. The following table contains summarized financial information of Kaiser. For more information regarding Kaiser's financial condition and operations, reference is made to Kaiser's 1996 Form 10-K and March 31, 1997 Form 10-Q filed with the SEC.
March 31, December 31, 1997 1996 ------------- ------------- Current assets $ 1,009,900 $ 1,023,700 Property, plant and equipment, net 1,166,800 1,168,700 Other assets 759,600 741,600 ------------- ------------- Total assets $ 2,936,300 $ 2,934,000 ============= ============= Current liabilities $ 539,300 $ 609,400 Long-term debt, less current maturities 1,012,800 953,000 Other liabilities 1,191,300 1,180,600 Minority interests 122,300 121,700 Stockholders' equity: Preferred 98,100 98,100 Common (27,500) (28,800) ------------- ------------- 70,600 69,300 ------------- ------------- Total liabilities and stockholders' equity $ 2,936,300 $ 2,934,000 ============= =============
Three Months Ended March 31, --------------------------- 1997 1996 ------------- ------------- Net sales $ 547,400 $ 531,100 Costs and expenses (516,100) (490,800) Other expenses (24,900) (23,000) ------------- ------------- Income before income taxes and minority interests 6,400 17,300 Provision for income taxes (2,400) (6,600) Minority interests (1,400) (800) ------------- ------------- Net income 2,600 9,900 Dividends on preferred stock (2,100) (2,100) ------------- ------------- Net income available to common stockholders $ 500 $ 7,800 ============= ============= Equity in earnings of Kaiser $ - $ - ============= =============
5. LONG-TERM DEBT Long-term debt consists of the following:
March 31, December 31, 1997 1996 ------------- ------------- 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015 $ 327,418 $ 336,130 10-1/2% Pacific Lumber Senior Notes due March 1, 2003 235,000 235,000 11-1/4% MGI Senior Secured Notes due August 1, 2003 100,000 100,000 12-1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount 107,332 104,173 12% MGHI Senior Secured Notes due August 1, 2003 130,000 130,000 Other 680 724 ------------- ------------- 900,430 906,027 Less: current maturities (18,319) (16,258) ------------- ------------- $ 882,111 $ 889,769 ============= =============
6. CONTINGENCIES Pacific Lumber's operations are subject to a variety of California and federal laws and regulations dealing with timber harvesting, endangered species and critical habitat, and air and water quality. Moreover, these laws and regulations are modified from time to time and are subject to judicial and administrative interpretation. Compliance with such laws, regulations and judicial and administrative interpretations, together with the cost of litigation incurred in connection with certain timber harvesting operations of Pacific Lumber, have increased the cost of logging operations. Pacific Lumber is subject to certain pending matters described below which could have a material adverse effect on the consolidated financial position, results of operations or liquidity of Pacific Lumber, and in turn MGI and the Company. There can be no assurance that certain pending or future governmental regulations, legislation, judicial or administrative decisions or California ballot initiatives will not have a material adverse effect on the Company. In May 1996, the USFWS published the Final Designation of critical habitat for the marbled murrelet, a coastal seabird, which designated over four million acres as critical habitat for the marbled murrelet. Although nearly all of the designated habitat is public land, approximately 33,000 acres of Pacific Lumber's timberlands are included in the Final Designation, the substantial portion of such acreage being young growth timberlands. In order to mitigate the impact of the Final Designation, particularly with respect to timberlands occupied by the marbled murrelet, Pacific Lumber over the last few years has attempted to develop the Murrelet HCP. Due to, among other things, the unfavorable response of the USFWS to Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its subsidiaries filed the Takings Litigation alleging that certain portions of their timberlands have been "taken" and seeking just compensation. Pursuant to the Headwaters Agreement entered into by Pacific Lumber, MAXXAM, the United States and California on September 28, 1996 described in Note 7 below, the Takings Litigation has been stayed at the request of the parties. It is impossible for the Company to determine the potential adverse effect of the Final Designation on the Company's consolidated financial position, results of operations or liquidity until such time as various regulatory and legal issues are resolved; however, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on timberlands designated as critical habitat for the marbled murrelet, such effect could be materially adverse to Pacific Lumber, and in turn MGI and the Company. If Pacific Lumber is unable to harvest or is severely limited in harvesting, it intends to seek just compensation from the appropriate governmental agencies on the grounds that such restrictions constitute a governmental taking. There continue to be other regulatory actions and lawsuits seeking to have other species listed as threatened or endangered under the ESA and/or the CESA and to designate critical habitat for such species. For example, the NMFS has announced that by April 25, 1997 it will make a final determination concerning whether to list the coho salmon under the ESA in northern California, including, potentially, lands owned by Pacific Lumber. It is uncertain what impact, if any, such listings and/or designations of critical habitat would have on the consolidated financial position, results of operations or liquidity of Pacific Lumber, and in turn MGI and the Company. In 1994, the BOF adopted certain regulations regarding compliance with long-term sustained yield ("LTSY") objectives. These regulations require that timber companies project timber growth and harvest on their timberlands over a 100-year planning period and establish a LTSY harvest level that takes into account environmental and economic considerations. Timber companies must submit an SYP which demonstrates that the average annual harvest over any rolling ten-year period will not exceed the LTSY harvest level and that Pacific Lumber's projected timber inventory is capable of sustaining the LTSY harvest level in the last decade of the 100- year planning period. On December 17, 1996, Pacific Lumber submitted a proposed SYP to the CDF. The proposed SYP sets forth an LTSY harvest level substantially the same as Pacific Lumber's average annual timber harvest over the last six years. The proposed SYP also indicates that Pacific Lumber's average annual timber harvest during the first decade of the SYP would approximate the LTSY harvest level. During the second decade of the proposed SYP, Pacific Lumber's average annual timber harvest would be approximately 8% less than that proposed for the first decade. The SYP, when approved, will be valid for ten years. Thereafter, revised SYPs will be prepared every decade that will address the LTSY harvest level based upon reassessment of changes in the resource base and protection of public resources. The proposed SYP assumes that the transactions contemplated by the Headwaters Agreement (see Note 7) will be consummated and that the Multi-Species HCP will permit Pacific Lumber to harvest its timberlands (including over the next two decades a substantial portion of its old growth timberlands not transferred pursuant to the Headwaters Agreement) to achieve maximum sustained yield. The SYP is subject to review and approval by the CDF, and there can be no assurance that the SYP will be approved in its proposed form. Until the SYP is reviewed and approved, the Company is unable to predict the impact that these regulations will have on Pacific Lumber's future timber harvesting practices. It is possible that the results of the review and approval process could require Pacific Lumber to reduce its timber harvest in future years from the harvest levels set forth in the proposed SYP. The Company believes Pacific Lumber would be able to mitigate the effect of any required reduction in harvest level by acquisitions of additional timberlands and making corresponding amendments to the SYP; however, there can be no assurance that Pacific Lumber would be able to do so and the amount of such acquisitions would be limited by Pacific Lumber's available financial resources. The Company is unable to predict the ultimate impact the sustained yield regulations will have on its future financial position, results of operations or liquidity. Various groups and individuals have filed objections with the CDF and the BOF regarding the CDF's and the BOF's actions and rulings with respect to certain of Pacific Lumber's THPs and other timber harvesting operations, and Pacific Lumber expects that such groups and individuals will continue to file such objections. In addition, lawsuits are pending or threatened which seek to prevent Pacific Lumber from implementing certain of its approved THPs or which challenge other operations by Pacific Lumber. These challenges have severely restricted Pacific Lumber's ability to harvest old growth timber on its property. To date, challenges with respect to Pacific Lumber's THPs relating to young growth timber and to its other operations have been limited; however, no assurance can be given as to the extent of such challenges in the future. Pacific Lumber believes that environmentally focused challenges to its timber harvesting and other operations are likely to occur in the future, particularly with respect to virgin and residual old growth timber. Although such challenges have delayed or prevented Pacific Lumber from conducting a portion of its operations, they have not had a material adverse effect on Pacific Lumber's consolidated financial position, results of operations or liquidity. Nevertheless, it is impossible to predict the future nature or degree of such challenges or their ultimate impact on the consolidated financial position, results of operations or liquidity of Pacific Lumber, and in turn MGI and the Company. The Company is also involved in various claims, lawsuits and proceedings. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to 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. 7. HEADWATERS AGREEMENT On September 28, 1996, the Pacific Lumber Parties entered into the Headwaters Agreement with the United States and California. The Headwaters Agreement provides the framework for the acquisition by the United States and California of approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to as the Headwaters Forest and the Elk Head Springs Forest (collectively, the "Headwaters Timberlands"). A substantial portion of the Headwaters Timberlands consists of virgin old growth timberlands. The Headwaters Timberlands would be transferred in exchange for (a) property and other consideration (possibly including cash) from the United States and California having an aggregate fair market value of $300 million and (b) approximately 7,755 acres of adjacent timberlands to be acquired by the United States and California (the "Elk River Timberlands") from a third party. The United States and California would also acquire and retain an additional 1,900 acres of timberlands from such third party. The Headwaters Agreement also provides, among other things, for the expedited processing by the United States of a Permit (an incidental take permit) to be based upon a Multi-Species HCP covering (a) the Resulting Pacific Lumber Timber Property (the property Pacific Lumber will own after consummation of the Headwaters Agreement) and (b) the Headwaters Timberlands and the 1,900 acres of additional timberlands to be acquired and retained by the United States and California (both as conserved habitat). The agreement also requires expedited processing by California of an SYP covering the Resulting Pacific Lumber Timber Property. On December 5, 1996, the United States and California each furnished a list of properties consisting of oil and gas interests, timberlands and a variety of other real estate properties for Pacific Lumber's review and approval. Neither list was accompanied by the requisite background information, although both lists did indicate that additional information would be made available. On December 10, 1996, Pacific Lumber wrote to the United States and California, stating, among other things, that the requisite background information had not been furnished, requesting the missing information and indicating that certain of the properties did not appear to be "available," as legislative action would be required for exchange of certain of the properties. In February 1997, as permitted by the Headwaters Agreement, Pacific Lumber notified California that its presented properties were not acceptable. As part of the Headwaters Agreement, the Pacific Lumber Parties agreed to not enter the Headwaters Forest or the Elk Head Forest to conduct logging operations, including salvage logging (the "Moratorium"). The Moratorium was to terminate if by July 28, 1997 the parties had not achieved the Specified Items to their respective satisfaction. On March 11, 1997, the Pacific Lumber Parties agreed to amend the Headwaters Agreement to extend the period of time during which these closing conditions must be met to February 17, 1998. The extension is, however, subject to the achievement of certain milestones toward completion of the Headwaters Agreement. The parties have agreed to execute an amendment to the Headwaters Agreement evidencing these modifications. Closing of the Headwaters Agreement is subject to various conditions, including (a) acquisition by the government of the Elk River Timberlands from a third party, (b) approval of an SYP and a Multi-Species HCP and issuance of a Permit, each in form and substance satisfactory to Pacific Lumber, (c) the issuance by the Internal Revenue Service and the California Franchise Tax Board of closing agreements in form and substance sought by and satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial decision in any litigation brought by third parties that any party reasonably believes will significantly delay or impair the transactions described in the Headwaters Agreement, and (e) the dismissal with prejudice at closing of the Takings Litigation. The parties to the Headwaters Agreement are working to satisfy these conditions; however, there can be no assurance that the Headwaters Agreement will be consummated. MAXXAM GROUP HOLDINGS INC. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the response to Part I, Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any capitalized terms used but not defined in this Item have the same meaning given to them in the Form 10-K. This section contains statements which constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-Q. Such statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors include the effectiveness of management's strategies and decisions, general economic and business conditions, developments in technology, new or modified statutory or regulatory requirements and changing prices and market conditions. This section and the Company's Form 10-K identify other factors that could cause such differences. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. RESULTS OF OPERATIONS The Company's wholly owned subsidiary, MGI, and MGI's principal operating subsidiaries, Pacific Lumber and Britt, are engaged in forest products operations. MGI's business is seasonal in that it generally experiences lower first quarter sales due largely to the general decline in construction-related activity during the winter months. Accordingly, the Company's results for any one quarter are not necessarily indicative of results to be expected for the full year. The following table presents selected operational and financial information for the three months ended March 31, 1997 and 1996.
THREE MONTHS ENDED MARCH 31, --------------------------- 1997 1996 ------------- ------------- (In millions of dollars, except shipments and prices) Shipments: Lumber: (1) Redwood upper grades 13.0 10.4 Redwood common grades 57.2 57.3 Douglas-fir upper grades 2.5 2.2 Douglas-fir common grades 19.4 19.3 Other 3.9 1.9 ------------- ------------- Total lumber 96.0 91.1 ============= ============= Logs (2) 2.5 5.9 ============= ============= Wood chips (3) 60.2 49.0 ============= ============= Average sales price: Lumber: (4) Redwood upper grades $ 1,322 $ 1,386 Redwood common grades 505 482 Douglas-fir upper grades 1,211 1,153 Douglas-fir common grades 486 378 Logs (4) 478 469 Wood chips (5) 75 87 Net sales: Lumber, net of discount $ 59.1 $ 51.9 Logs 1.2 2.8 Wood chips 4.5 4.3 Cogeneration power 1.0 .4 Other 1.0 .4 ------------- ------------- Total net sales $ 66.8 $ 59.8 ============= ============= Operating income $ 18.8 $ 16.4 ============= ============= Operating cash flow (6) $ 25.4 $ 23.1 ============= ============= Income (loss) before income taxes $ (0.5) $ .4 ============= ============= Net income (loss) $ (0.3) $ .2 ============= ============= - --------------- (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."
Net sales Net sales for the three months ended March 31, 1997 increased from the three months ended March 31, 1996, principally due to higher average realized prices for common grade redwood and Douglas-fir lumber and increased shipments of manufactured upper grade redwood lumber. Operating income Operating income for the three months ended March 31, 1997 increased from the three months ended March 31, 1996, principally due to the increase in sales discussed above. Income (loss) before income taxes Income (loss) before income taxes for the three months ended March 31, 1997 decreased from the three months ended March 31, 1996, primarily as a result of the increase in interest expense due to the issuance of the MGHI Notes on December 23, 1996 and lower earnings from marketable securities. These decreases were partially offset by the increase in operating income discussed above. FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES The Pacific Lumber Credit Agreement and the indentures governing the Pacific Lumber Senior Notes and the Timber Notes contain various covenants which, among other things, limit the ability of Pacific Lumber and Scotia Pacific to incur additional indebtedness and liens, to engage in transactions with affiliates, to pay dividends and to make investments. As of March 31, 1997, under the most restrictive of these covenants, approximately $21.5 million of dividends could be paid by Pacific Lumber to MGI. As of March 31, 1997, $39.1 million of borrowings was available under the Pacific Lumber Credit Agreement, of which $4.7 million was available for letters of credit and $30.0 million for timberland acquisitions. No borrowings were outstanding as of March 31, 1997, and letters of credit outstanding amounted to $10.3 million. The indenture governing the MGI Notes, among other things, restricts the ability of MGI to incur additional indebtedness, engage in transactions with affiliates, pay dividends and make investments. During the three months ended March 31, 1997, MGI paid dividends of $0.5 million to MGHI. As of March 31, 1997, under the most restrictive of these covenants, $0.3 million of dividends could be paid by MGI to MGHI. The indenture governing the MGHI Notes contains various covenants which, among other things, restrict the ability of the Company to incur additional indebtedness and liens, engage in transactions with affiliates, pay dividends and make investments. Except for a portion of possible proceeds from the Headwaters Agreement (see Note 7 to the Condensed Financial Statements), the Company does not expect to pay any dividends during the next several years. As of March 31, 1997, the Company had consolidated long-term debt of $852.3 million (net of current maturities and restricted cash deposited in the Liquidity Account) as compared to $859.8 million at December 31, 1996. The decrease in long-term debt was primarily due to principal payments on the Timber Notes. The Company and its subsidiaries anticipate that cash from operations, together with existing cash, cash equivalents, marketable securities and available sources of financing, will be sufficient to fund their working capital and capital expenditure requirements for the next year. With respect to their long-term liquidity, the Company and its subsidiaries believe that their existing cash and cash equivalents, together with their ability to generate sufficient cash from operations and to obtain both short- and long-term financing, should provide sufficient funds to meet their working capital and capital expenditure requirements. However, due to their highly leveraged condition, the Company and its subsidiaries are more sensitive than less leveraged companies to factors affecting their operations, including governmental regulation affecting timber harvesting practices, increased competition from other lumber producers or alternative building products and general economic conditions. TRENDS This section contains statements which constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See above for cautionary information with respect to such forward-looking statements. Pacific Lumber's operations are subject to a variety of California and federal laws, regulations and judicial and administrative interpretations dealing with timber harvesting, endangered species and critical habitat, and air and water quality. Moreover, these laws and regulations are modified from time to time and are subject to judicial and administrative interpretation. Compliance with such laws, regulations and judicial and administrative interpretations, together with the cost of litigation incurred in connection with certain timber harvesting operations of Pacific Lumber, have increased the cost of logging operations. Pacific Lumber is subject to certain pending matters which could have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. There can be no assurance that these pending matters or future governmental regulations, legislation or judicial or administrative decisions would not have a material adverse effect on the Company. See Part II. Item 1. "Legal Proceedings" and Note 6 to the Condensed Consolidated Financial Statements for further information regarding regulatory and environmental factors affecting the Company's operations. See also Note 7 to the Condensed Consolidated Financial Statements for the recent agreement to extend the Headwaters Agreement to February 17, 1998. 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. MAXXAM GROUP HOLDINGS INC. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to Item 3 of the Form 10-K for information concerning material legal proceedings with respect to the Company. The following material developments have occurred with respect to such legal proceedings. With respect to the Marbled Murrelet action described under "Timber Harvesting Litigation," on April 18, 1997, the U.S. Ninth Circuit Court of Appeals reversed the trial court's decision which had preliminarily enjoined eight already-approved THPs to the extent they rely on the Federal Owl Plan. Pacific Lumber had previously obtained regulatory reapproval of six of the eight THPs and confirmed with the trial court that six of those THPs were no longer subject to the preliminary injunction. With respect to the Redway action described under "Timber Harvesting Litigation," the defendants' motion to dismiss is pending; trial of the case is set for June 23, 1997. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS: 27 Financial Data Schedule B. REPORTS ON FORM 8-K: On March 12, 1997, the Company filed a Current Report on Form 8-K (under Item 5), dated March 11, 1997, concerning an agreement to amend the Headwaters Agreement to extend to February 17, 1998 the period of time during which the closing conditions must be met. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, who has signed this report on behalf of the Registrant and as the principal accounting officer of the Registrant. MAXXAM GROUP HOLDINGS INC. Date: April 24, 1997 By: /S/ PAUL N. SCHWARTZ Paul N. Schwartz Vice President EX-27 2 EXHIBIT 27 TO MGHI 10-Q
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 3-MOS DEC-31-1997 JAN-1-1997 MAR-31-1997 1 58,284 31,158 17,836 0 64,983 183,052 171,744 69,807 839,276 54,603 900,430 0 0 1 (124,507) 839,276 66,815 66,815 38,045 38,045 9,951 0 23,697 (480) (168) (312) 0 0 0 (312) 0 0
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