-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, r1gBGMsZf7XfX/CYGiul3M/mYOW06xacwttuWtotI7MFfBwErsAgX1DJzzhZ647e c2FAOFCsNZNAhkKkA/K/LA== 0000900421-94-000041.txt : 19941116 0000900421-94-000041.hdr.sgml : 19941116 ACCESSION NUMBER: 0000900421-94-000041 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: AMEX SROS: PHLX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXXAM INC CENTRAL INDEX KEY: 0000063814 STANDARD INDUSTRIAL CLASSIFICATION: 6552 IRS NUMBER: 952078752 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03924 FILM NUMBER: 94559405 BUSINESS ADDRESS: STREET 1: 5847 SAN FELIPE STE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7132673669 MAIL ADDRESS: STREET 1: P O BOX 572887 CITY: HOUSTON STATE: TX ZIP: 77257-2887 FORMER COMPANY: FORMER CONFORMED NAME: MCO HOLDINGS INC DATE OF NAME CHANGE: 19881115 FORMER COMPANY: FORMER CONFORMED NAME: MCCULLOCH OIL CORP DATE OF NAME CHANGE: 19800630 FORMER COMPANY: FORMER CONFORMED NAME: MCCULLOCH OIL CORP OF CALIFORNIA DATE OF NAME CHANGE: 19691118 10-Q 1 THIRD QUARTER 10-Q OF MAXXAM INC. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994 Commission File Number 1-3924 MAXXAM INC. (Exact name of Registrant as Specified in its Charter) DELAWARE 95-2078752 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification Number) organization) 5847 SAN FELIPE, SUITE 2600 HOUSTON, TEXAS 77057 (Address of Principal (Zip Code) 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 November 1, 1994: 8,698,543 MAXXAM INC. INDEX PAGE PART I. - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet at September 30, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statement of Operations for the three and nine months ended September 30, 1994 and 1993 . . . . . . . . . 4 Consolidated Statement of Cash Flows for the nine months ended September 30, 1994 and 1993 . . . . . . . . . . . . . . . . 5 Condensed Notes to Consolidated Financial Statements . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . 13 PART II. - OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 24 Item 5. Other Information . . . . . . . . . . . . . . . . . . . 25 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 25 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1 CONSOLIDATED BALANCE SHEET
September 30, December 31, 1994 1993 ------------- ------------- (Unaudited) (In millions of dollars) ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . $ 76.2 $ 83.9 Marketable securities . . . . . . . . . . . . 62.0 44.7 Receivables: Trade, net of allowance for doubtful accounts of $4.2 and $3.2 at September 30, 1994 and December 31, 1993, respectively . . . . . . . . . . 186.4 175.3 Other . . . . . . . . . . . . . . . . . . 53.5 90.8 Inventories . . . . . . . . . . . . . . . . . 496.5 503.6 Prepaid expenses and other current assets . . 130.1 93.3 ------------- ------------- Total current assets . . . . . . . . . . 1,004.7 991.6 Property, plant and equipment, net of accumulated depreciation of $556.0 and $481.3 at September 30, 1994 and December 31, 1993, respectively . 1,224.0 1,245.0 Timber and timberlands, net of depletion of $121.1 and $108.2 at September 30, 1994 and December 31, 1993, respectively . . . . . . . . . . . . 327.9 338.6 Investments in and advances to unconsolidated affiliates . . . . . . . . . . . . . . . . . . . 171.8 183.2 Deferred income taxes . . . . . . . . . . . . . . . 422.4 359.9 Long-term receivables and other assets . . . . . . 450.2 453.7 ------------- ------------- $ 3,601.0 $ 3,572.0 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable . . . . . . . . . . . . . . . $ 136.4 $ 135.6 Accrued interest . . . . . . . . . . . . . . . 28.3 53.7 Accrued compensation and related benefits . . 129.9 114.2 Other accrued liabilities . . . . . . . . . . 174.0 161.5 Payable to affiliates . . . . . . . . . . . . 79.4 74.0 Long-term debt, current maturities . . . . . . 34.8 38.3 ------------- ------------- Total current liabilities . . . . . . . . 582.8 577.3 Long-term debt, less current maturities . . . . . . 1,580.8 1,567.9 Accrued postretirement benefits . . . . . . . . . . 731.6 720.1 Other noncurrent liabilities . . . . . . . . . . . 638.7 650.3 ------------- ------------- Total liabilities . . . . . . . . . . . . 3,533.9 3,515.6 ------------- ------------- Commitments and contingencies Minority interests . . . . . . . . . . . . . . . . 331.4 224.3 Stockholders' deficit: Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A $.05 Non- Cumulative Participating Convertible Preferred Stock; shares issued: September 30, 1994 - 679,005 and December 31, 1993 - 679,084 . . . . . . . . . . . . . . . . . .3 .3 Common stock, $.50 par value; 28,000,000 shares authorized; shares issued: 10,063,359 . . 5.0 5.0 Additional capital . . . . . . . . . . . . . . 52.8 51.2 Accumulated deficit . . . . . . . . . . . . . (278.8) (180.8) Pension liability adjustment . . . . . . . . . (23.9) (23.9) Treasury stock, at cost (shares held: preferred - 845; common: September 30, 1994 - 1,364,816 and December 31, 1993 - 1,364,895) . . . . . . . . . . . . . . . (19.7) (19.7) ------------- ------------- Total stockholders' deficit . . . . . . . (264.3) (167.9) ------------- ------------- $ 3,601.0 $ 3,572.0 ============= =============
CONSOLIDATED STATEMENT OF OPERATIONS (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1994 1993 1994 1993 ---------- ---------- ---------- ---------- (Unaudited) Net sales: Aluminum operations . . . . . . . . . . . . . . . . . . $ 461.1 $ 428.4 $ 1,335.7 $ 1,303.2 Forest products operations . . . . . . . . . . . . . . . 60.7 58.8 180.4 169.5 Real estate operations . . . . . . . . . . . . . . . . . 23.1 19.3 61.6 55.4 ---------- ---------- ---------- ---------- 544.9 506.5 1,577.7 1,528.1 ---------- ---------- ---------- ---------- Costs and expenses: Costs of sales and operations (exclusive of depreciation and depletion): Aluminum operations . . . . . . . . . . . . . . . . 416.0 389.9 1,222.8 1,181.0 Forest products operations . . . . . . . . . . . . 31.6 36.4 95.8 94.3 Real estate operations . . . . . . . . . . . . . . 18.2 14.0 46.4 46.8 Depreciation and depletion . . . . . . . . . . . . . . . 28.7 30.2 89.9 90.2 Selling, general and administrative expenses . . . . . . 41.4 46.8 122.3 129.5 ---------- ---------- ---------- ---------- 535.9 517.3 1,577.2 1,541.8 ---------- ---------- ---------- ---------- Operating income (loss) . . . . . . . . . . . . . . . . . . . 9.0 (10.8) .5 (13.7) Other income (expense): Investment, interest and other income (expense) . . . . 4.5 7.6 (3.2) 24.3 Interest expense . . . . . . . . . . . . . . . . . . . . (44.3) (45.0) (132.0) (141.2) ---------- ---------- ---------- ---------- Loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles . . . . . . . . . . . . . . . . (30.8) (48.2) (134.7) (130.6) Credit for income taxes . . . . . . . . . . . . . . . . . . . 22.2 25.0 58.0 62.0 Minority interests . . . . . . . . . . . . . . . . . . . . . (6.3) (3.6) (15.9) .1 ---------- ---------- ---------- ---------- Loss before extraordinary item and cumulative effect of changes in accounting principles . . . . . . . . . . . . (14.9) (26.8) (92.6) (68.5) Extraordinary item: Loss on early extinguishment of debt, net of related benefits for minority interests of $nil in 1994 and $nil and $2.8 in 1993 and income taxes of $2.9 in 1994 and $3.3 and $27.5 in 1993, respectively . . . - (6.5) (5.4) (50.6) Cumulative effect of changes in accounting principles: Postretirement benefits other than pensions and postemployment benefits, net of related benefits for minority interests of $64.6 and income taxes of $240.2 . . . . . . . . . . . . . . . . . . . . . . - - - (444.3) Accounting for income taxes . . . . . . . . . . . . . . - - - 26.6 ---------- ---------- ---------- ---------- Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (14.9) $ (33.3) $ (98.0) $ (536.8) ========== ========== ========== ========== Per common and common equivalent share: Loss before extraordinary item and cumulative effect of changes in accounting principles . . . . . . . . . $ (1.58) $ (2.83) $ (9.80) $ (7.24) Extraordinary item . . . . . . . . . . . . . . . . . . . - (.69) (.57) (5.35) Cumulative effect of changes in accounting principles . - - - (44.15) ---------- ---------- ---------- ---------- Net loss . . . . . . . . . . . . . . . . . . . . . . . . $ (1.58) $ (3.52) $ (10.37) $ (56.74) ========== ========== ========== ==========
CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS OF DOLLARS)
Nine Months Ended September 30, ---------------------- 1994 1993 ---------- ---------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (98.0) $ (536.8) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and depletion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89.9 90.2 Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.9 (.1) Amortization of deferred financing costs and discounts on long-term debt . . . . . 14.6 15.4 Extraordinary loss on early extinguishment of debt, net . . . . . . . . . . . . . . 5.4 50.6 Equity in losses of unconsolidated affiliates . . . . . . . . . . . . . . . . . . . 2.8 11.8 Incurrence of financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . (19.4) (46.6) Cumulative effect of changes in accounting principles, net . . . . . . . . . . . . - 417.7 Decrease in receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.1 42.1 Decrease (increase) in inventories . . . . . . . . . . . . . . . . . . . . . . . . 10.3 (3.8) Increase in payable to affiliates and other liabilities . . . . . . . . . . . . . . 6.3 11.8 Decrease in prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . 2.7 11.7 Increase (decrease) in accounts payable . . . . . . . . . . . . . . . . . . . . . . .9 (28.5) Increase in accrued and deferred income taxes . . . . . . . . . . . . . . . . . . . (57.1) (75.0) Decrease in accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . (25.4) (16.8) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 (.5) --------- --------- Net cash used for operating activities . . . . . . . . . . . . . . . . . . . . . (31.5) (56.8) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from disposition of property and investments . . . . . . . . . . . . . . . 8.5 19.4 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (53.1) (49.5) Net sales (purchases) of marketable securities . . . . . . . . . . . . . . . . . . . . . (6.5) 33.5 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.7) (12.5) --------- --------- Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . (55.8) (9.1) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 225.5 1,193.6 Proceeds from issuance of Kaiser capital stock . . . . . . . . . . . . . . . . . . . . . 100.4 119.3 Net payments under revolving credit agreements and short-term borrowings . . . . . . . . (193.9) (109.7) Redemptions, repurchase of and principal payments on long-term debt . . . . . . . . . . (31.0) (1,150.0) Redemption of preference stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8.5) (4.2) Restricted cash deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (34.0) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12.9) (2.8) --------- --------- Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . 79.6 12.2 --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . (7.7) (53.7) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . 83.9 81.9 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . $ 76.2 $ 28.2 ========= ========= SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND financing activities: NET MARGIN BORROWINGS FOR MARKETABLE SECURITIES . . . . . . . . . . . . . . . . . . . . $ 10.0 $ 8.3 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest . . . . . . . . . . . . . . . . . . . . . . . $ 142.8 $ 142.5 Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.0 9.5
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 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 Inc. with the Securities and Exchange Commission for the fiscal year ended December 31, 1993 (the "Form 10-K"). All references to the "Company" include MAXXAM Inc. and its subsidiary companies unless otherwise indicated or the context indicates otherwise. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year. The consolidated financial statements included herein are unaudited; however, they include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at September 30, 1994, the consolidated results of operations for the three and nine months ended September 30, 1994 and 1993 and consolidated cash flows for the nine months ended September 30, 1994 and 1993. Certain reclassifications of prior period information have been made to conform to the current presentation. 2. CASH AND CASH EQUIVALENTS At September 30, 1994 and December 31, 1993, cash and cash equivalents includes $8.9 and $20.3, respectively, which is reserved for debt service payments on the 7.95% Timber Collateralized Notes due 2015. 3. INVENTORIES Inventories consist of the following:
September 30, December 31, 1994 1993 --------------- --------------- Aluminum Operations: Finished fabricated products . . . . . . $ 58.1 $ 83.7 Primary aluminum and work in process . . 158.8 141.4 Bauxite and alumina . . . . . . . . . . 88.1 94.0 Operating supplies and repair and maintenance parts . . . . . . . . . 108.2 107.8 --------------- --------------- 413.2 426.9 --------------- --------------- Forest Products Operations: Lumber . . . . . . . . . . . . . . . . . 63.9 58.4 Logs . . . . . . . . . . . . . . . . . . 19.4 18.3 --------------- --------------- 83.3 76.7 --------------- --------------- $ 496.5 $ 503.6 =============== =============== /TABLE 4. LONG-TERM DEBT Long-term debt consists of the following:
September 30, December 31, 1994 1993 ------------- ------------- Corporate: 14% Senior Subordinated Reset Notes due May 20, 2000 . . . . . $ 25.0 $ 25.0 12-1/2% Subordinated Debentures due December 15, 1999, net of discount . . . . . . . . . . . . . . . . . . . . . . . . 20.8 25.2 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 .5 Aluminum Operations: 1994 Credit Agreement . . . . . . . . . . . . . . . . . . . . - - 1989 Credit Agreement: Revolving Credit Facility . . . . . . . . . . . . . . . . - 188.0 9-7/8% Senior Notes due February 15, 2002, net of discount . . 223.6 - Alpart CARIFA Loan . . . . . . . . . . . . . . . . . . . . . . 60.0 60.0 12-3/4% Senior Subordinated Notes due February 1, 2003 . . . . 400.0 400.0 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69.4 78.1 Forest Products Operations: 7.95% Timber Collateralized Notes due July 20, 2015 . . . . . 363.8 377.0 11-1/4% Senior Secured Notes due August 1, 2003 . . . . . . . 100.0 100.0 12-1/4% Senior Secured Discount Notes due August 1, 2003, net of discount . . . . . . . . . . . . . . . . . . . . . . . 80.4 73.5 10-1/2% Senior Notes due March 1, 2003 . . . . . . . . . . . . 235.0 235.0 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9 2.9 Real Estate Operations: Secured notes due December 31, 1997, interest at prime plus 3% 15.4 17.2 Other notes and contracts, primarily secured by receivables, buildings, real estate and equipment . . . . . . . . . . 18.0 23.8 ------------ ------------ 1,615.6 1,606.2 Less: current maturities . . . . . . . . . . . . . . . . . . . . . (34.8) (38.3) ------------ ------------ $ 1,580.8 $ 1,567.9 ============ ============
The 1994 Credit Agreement On February 17, 1994, Kaiser Aluminum Corporation ("Kaiser," a majority owned subsidiary of the Company) and its principal operating subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), entered into a credit agreement with BankAmerica Business Credit, Inc. (as agent for itself and other lenders), Bank of America National Trust and Savings Association and certain other lenders (as amended, the "1994 Credit Agreement"). The 1994 Credit Agreement replaces Kaiser's previous credit agreement (as amended, the "1989 Credit Agreement") and consists of a $275.0 five-year secured revolving line of credit which matures in 1999. KACC is able to borrow under the facility by means of revolving credit advances and letters of credit in an aggregate amount equal to the lesser of $275.0 or a borrowing base relating to eligible accounts receivable and inventory. As of September 30, 1994, $65.8 of letters of credit were outstanding leaving $209.2 of borrowing capacity unused under the 1994 Credit Agreement (of which $59.2 could have been used for letters of credit). The 1994 Credit Agreement is unconditionally guaranteed by Kaiser 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 (i) a Reference Rate plus 1-1/2% or (ii) LIBOR 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% based upon a financial test, determined quarterly. The 1994 Credit Agreement was amended as of July 21, 1994. Kaiser recorded a pre-tax extraordinary loss of $8.3 for the nine months ended September 30, 1994, consisting primarily of the write-off of unamortized deferred financing costs related to the 1989 Credit Agreement. 9-7/8% Senior Notes (the "KACC Senior Notes") Concurrent with the offering by Kaiser of the 8.255% Preferred Redeemable Increased Dividend Equity Securities (the "PRIDES") (see Note 5), KACC issued $225.0 of the KACC Senior Notes. The net proceeds from the offering of the KACC 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. 5. MINORITY INTERESTS During the first quarter of 1994, Kaiser consummated the public offering of 8,855,550 shares of its PRIDES. The net proceeds from the sale of the PRIDES were approximately $100.4. The Company accounted for Kaiser's issuance of the PRIDES as additional minority interest. 6. INVESTMENT, INTEREST AND OTHER INCOME (EXPENSE) On May 17, 1994, the Company and The Pacific Lumber Company ("Pacific Lumber," a wholly owned indirect subsidiary of the Company) announced that an agreement in principle had been reached to settle class and related individual claims brought by former stockholders of Pacific Lumber against the Company, MAXXAM Group Inc. ("MGI," a wholly owned subsidiary of the Company), Pacific Lumber, former directors of Pacific Lumber and others concerning MGI's acquisition of Pacific Lumber. Of the pending approximately $52.0 settlement, approximately $33.0 was paid by insurance carriers of the Company and Pacific Lumber, approximately $14.8 was paid by Pacific Lumber and the balance was paid by other defendants and through the assignment of certain claims. The settlement is subject to certain contingencies, including a fairness hearing which is scheduled to be held on November 17, 1994. The above described cash payments are being held in the registry of the court pending satisfaction of these contingencies. In the second quarter of 1994, the Company recorded a pre- tax loss of $21.2 related to the settlement and associated costs. This amount is included in investment, interest and other income (expense). In February 1994, Pacific Lumber received a franchise tax refund of $7.2, 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 (expense) for the nine months ended September 30, 1994. 7. CREDIT FOR INCOME TAXES The credit for income taxes for the third quarter of 1994 includes a credit relating to reserves the Company no longer believes are necessary. The credit for income taxes for the third quarter of 1993 includes a credit resulting from an increase in the federal statutory income tax rate from 34% to 35%. 8. PER SHARE INFORMATION Per share calculations are based on the weighted average number of common shares outstanding in each period and, if dilutive, weighted average common equivalent shares assumed to be issued from the exercise of common stock options based upon the average price of the Company's common stock during the period. 9. CONTINGENCIES Environmental Contingencies Kaiser and KACC are subject to a wide variety of environmental laws and regulations and to fines or penalties assessed for alleged breaches of the environmental laws and to claims and litigation based upon such laws. KACC is currently 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 upon Kaiser's evaluation of these and other environmental matters, Kaiser has established environmental accruals primarily related to potential solid waste disposal and soil and groundwater remediation matters. At September 30, 1994, the balance of such accruals, which is primarily included in other noncurrent liabilities, was $38.2. These environmental accruals represent Kaiser's estimate of costs reasonably expected to be incurred based upon presently enacted laws and regulations, currently available facts, existing technology and Kaiser's assessment of the likely remediation actions to be taken. Kaiser expects that these remediation actions will be taken over the next several years and estimates that annual expenditures to be charged to the environmental accrual will be approximately $4.0 to $8.0 for the years 1994 through 1998 and an aggregate of approximately $12.7 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 by amounts which cannot presently be estimated. While uncertainties are inherent in the ultimate outcome of these matters and it is impossible to presently determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties should not have a material adverse effect on Kaiser's consolidated financial position or results of operations. Asbestos Contingencies KACC is a defendant in a number of lawsuits in which the plaintiffs allege that certain of their injuries were caused by exposure to asbestos during, and as a result of, their employment 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. As of the date of this Report, the number of such lawsuits pending was approximately 21,300. Based upon prior experience, Kaiser estimates annual future cash payments in connection with such litigation of approximately $8.0 to $13.0 for each of the years 1994 through 1998, and an aggregate of approximately $98.9 thereafter through 2007. Based upon past experience and reasonably anticipated future activity, Kaiser has established an accrual for estimated asbestos-related costs for claims filed and estimated to be filed and settled through 2007. Kaiser does not presently believe there is a reasonable basis for estimating such costs beyond 2007 and, accordingly, no accrual has been recorded for such costs which may be incurred. This accrual was calculated based upon the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, the current state of case law related to asbestos claims, the advice of counsel and the anticipated effects of inflation and discounting at an estimated risk-free rate. Accordingly, an asbestos-related cost accrual of $103.1 is included primarily in other noncurrent liabilities at September 30, 1994. The aggregate amount of the undiscounted liability at September 30, 1994 is $144.7, before consideration of insurance recoveries. Kaiser believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. While claims for recovery from some of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, Kaiser believes, based upon prior insurance-related recoveries in respect of asbestos-related claims, existing insurance policies and the advice of counsel, that substantial recoveries from the insurance carriers are probable. Accordingly, estimated insurance recoveries of $95.3, determined on the same basis as the asbestos-related cost accrual, are recorded primarily in long-term receivables and other assets as of September 30, 1994. Based upon the factors discussed in the two preceding paragraphs, management currently believes that the resolution of the asbestos-related uncertainties and the incurrence of asbestos-related costs net of insurance recoveries should not have a material adverse effect on Kaiser's consolidated financial position or results of operations. Other Contingencies The Company is involved in various other claims, lawsuits and other proceedings relating to a wide variety of matters. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to presently determine the actual 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 or results of operations. 10. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS KACC enters into a number of financial instruments with off- balance-sheet risk in the normal course of business that are designed to reduce its exposure to fluctuations in foreign exchange rates, alumina and primary aluminum 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 September 30, 1994, KACC had net forward foreign exchange contracts totaling approximately $17.2 for the purchase of 25.5 million Australian Dollars through May 1995. The option contracts are agreements that establish the maximum price or establish a range of prices at which the foreign currency may be acquired. At September 30, 1994, such options established a price range of $15.1 to $15.8 for the purchase of 24.0 million Australian Dollars through December 1994 and established a maximum price of $1.5 for the purchase of 1.0 million Pounds Sterling through December 1994. To mitigate its exposure to declines in the market prices of alumina and primary aluminum, 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 excess 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 excess primary aluminum and alumina and (iv) put options are purchased to establish minimum prices KACC will receive for a portion of its excess primary aluminum and alumina. In this regard, in respect of its remaining 1994 anticipated primary aluminum and alumina production, as of September 30, 1994, KACC had sold forward 11,250 metric tons of primary aluminum at fixed prices and had purchased call options in respect of 15,000 metric tons of primary aluminum. Further, in respect of its 1995 anticipated primary aluminum production, as of September 30, 1994, KACC had sold forward 41,700 metric tons of primary aluminum at fixed prices, purchased call options in respect of 30,000 metric tons of primary aluminum, purchased put options to establish a minimum price for 181,500 metric tons of primary aluminum and entered into option contracts that established a price range for 12,000 metric tons of primary aluminum. In addition, since several alumina sales contracts have pricing provisions which link the selling price of alumina to the spot price of primary aluminum, KACC has hedged a portion of its 1995 alumina sales on the primary aluminum forward market. As of September 30, 1994, KACC had sold 37,500 metric tons of primary aluminum forward at fixed prices and entered into option contracts that established a price range for 78,000 metric tons of primary aluminum in respect of such alumina sales contracts. KACC will not receive the benefit of market price increases to the extent (i) the quantity of production sold forward is greater than the tonnage covered by the purchased call options; (ii) market prices exceed the prices at which primary aluminum is sold forward, but are less than the strike price of the purchased call options, on the tonnage covered by the options; or (iii) market prices exceed the maximum of the price range on the tonnage covered by the option contracts entered to establish a price range. In addition, KACC enters into forward fixed price arrangements with certain customers which provide for the delivery of a specific quantity of fabricated aluminum products over a specified future period of time. In order to establish the cost of primary aluminum for a portion of such sales, KACC may enter into forward and options contracts. In this regard, at September 30, 1994, KACC had purchased 9,000 metric tons of primary aluminum forward purchase contracts at fixed prices that expire at various times through December 1995. KACC has also entered into a natural gas pricing contract to fix future prices of a portion (20,000 million BTU's per day) of a plant's natural gas supply through March 1995. At September 30, 1994, the net unrealized gain on KACC's position in forward foreign exchange and foreign currency options was $3.0 and the net unrealized loss on aluminum forward sales and option contracts and the natural gas pricing contract was $39.5, based on dealer quoted prices. Gains and losses arising from the use of hedging instruments are reflected in KACC's operating results concurrently with the consummation of the underlying hedged transactions. 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the response to Part I, Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any capitalized terms used but not defined in this Item have the same meaning given to them in the Form 10-K. RESULTS OF OPERATIONS The Company operates in three industries: aluminum, through its majority owned subsidiary Kaiser, a fully integrated aluminum producer; forest products, through MGI and its wholly owned subsidiaries; and real estate management and development, principally through MAXXAM Property Company and various other wholly owned subsidiaries. ALUMINUM OPERATIONS Kaiser's operating results are sensitive to changes in prices of alumina, primary aluminum and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold and on KACC's hedging strategies. Kaiser, through its principal subsidiary KACC, operates in two business segments: bauxite and alumina, and aluminum processing. Aluminum operations account for a significant portion of the Company's revenues and operating results. The following table presents selected operational and financial information for the three and nine months ended September 30, 1994 and 1993. The information presented in the table is in millions of dollars except shipments and prices.
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ---------------------- 1994 1993 1994 1993 -------- -------- -------- ---------- Shipments(1): Alumina . . . . . . . . . . . . . . . . . . 534.9 576.9 1,577.3 1,508.5 Aluminum products: Primary aluminum . . . . . . . . . . . 48.4 55.3 175.8 183.4 Fabricated aluminum products . . . . . 105.4 92.9 307.1 280.0 -------- -------- -------- --------- Total aluminum products . . . . . . 153.8 148.2 482.9 463.4 ======== ======== ======== ========= Average realized sales price: Alumina (per ton) . . . . . . . . . . . . . $ 171 $ 165 $ 162 $ 169 Primary aluminum (per pound) . . . . . . . . .60 .56 .56 .57 Net sales: Bauxite and alumina: Alumina . . . . . . . . . . . . . . . . $ 91.5 $ 95.3 $ 255.3 $ 255.5 Other(2)(3) . . . . . . . . . . . . . . 19.8 23.0 60.6 64.1 -------- -------- -------- --------- Total bauxite and alumina . . . . . 111.3 118.3 315.9 319.6 -------- -------- -------- --------- Aluminum processing: Primary aluminum . . . . . . . . . . . 64.1 68.7 218.2 229.3 Fabricated aluminum products . . . . . 281.9 238.3 790.8 744.6 Other(3) . . . . . . . . . . . . . . . 3.8 3.1 10.8 9.7 -------- -------- -------- --------- Total aluminum processing . . . . . 349.8 310.1 1,019.8 983.6 -------- -------- -------- --------- Total net sales . . . . . . . . $ 461.1 $ 428.4 $1,335.7 $ 1,303.2 ======== ======== ======== ========= Operating loss . . . . . . . . . . . . . . . . . $ (5.4) $ (16.1) $ (42.2) $ (37.0) ======== ======== ======== ========= Loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles . . . . . . $ (28.4) $ (33.4) $ (105.4) $ (90.1) ======== ======== ======== ========= Capital expenditures . . . . . . . . . . . . . . $ 15.8 $ 13.1 $ 37.5 $ 36.4 ======== ======== ======== ========= - --------------- (1) Shipments are expressed in thousands of metric tons. A metric ton is equivalent to 2,204.6 pounds. (2) Includes net sales of bauxite. (3) Includes the portion of net sales attributable to minority interests in consolidated subsidiaries.
Net sales Bauxite and alumina. Revenues from net sales to third parties for the bauxite and alumina segment were $111.3 million for the third quarter of 1994 compared with $118.3 million for the third quarter of 1993 and $315.9 million for the nine months ended September 30, 1994 compared with $319.6 million for the nine months ended September 30, 1993. Revenues from alumina decreased 4% to $91.5 million for the third quarter of 1994 from $95.3 million for the third quarter of 1993, principally due to decreased shipments partially offset by higher average realized prices. Revenues from alumina were $255.3 million for the nine months ended September 30, 1994 compared with $255.5 million for the nine months ended September 30, 1993, as increased shipments were offset by lower average realized prices. Aluminum processing. Revenues from net sales to third parties for the aluminum processing segment were $349.8 million for the third quarter of 1994 compared with $310.1 million for the third quarter of 1993 and $1,019.8 million for the nine months ended September 30, 1994 compared with $983.6 million for the nine months ended September 30, 1993. Revenues from primary aluminum decreased 7% to $64.1 million for the third quarter of 1994 from $68.7 million for the third quarter of 1993 principally due to decreased shipments, partially offset by higher average realized prices, and decreased 5% to $218.2 million for the nine months ended September 30, 1994 from $229.3 million for the nine months ended September 30, 1993, primarily because of lower shipments and, to a lesser extent, lower average realized prices. Shipments of primary aluminum to third parties constituted approximately 31% and 36% of total aluminum products shipments for the third quarter of 1994 and nine months ended September 30, 1994, respectively, compared with approximately 37% and 40% for the third quarter of 1993 and nine months ended September 30, 1993, respectively. Revenues from fabricated aluminum products increased 18% to $281.9 million for the third quarter of 1994 from $238.3 million for the third quarter of 1993 due to increased shipments and, to a lesser extent, higher average realized prices, and increased 6% to $790.8 million for the nine months ended September 30, 1994 from $744.6 million for the nine months ended September 30, 1993, as increased shipments were partially offset by lower average realized prices. Although KACC has realized improved prices for all of its products in the third quarter of 1994 compared with the third quarter of 1993 and the second quarter of 1994, the third quarter results continued to be unfavorably affected by: the defensive hedging of primary aluminum prices in respect of 1994 shipments, which were put in place prior to refinancings carried out in 1994 and recent improvements in metal prices; energy-related curtailments of primary aluminum production (see "Trends"); relatively low fixed price contracts for can sheet, which will expire at year end; and the lag time in more fully realizing margin improvements associated with the recently announced price increases for other fabricated products. Operating loss The operating loss for the third quarter of 1994 was $5.4 million, compared with $16.1 million for the third quarter of 1993. The operating loss for the nine months ended September 30, 1994 was $42.2 million, compared with $37.0 million for the nine months ended September 30, 1993. Kaiser's corporate general and administrative expenses of $18.0 million and $15.1 million for the third quarter of 1994 and 1993, respectively, and $53.4 million and $52.2 million for the nine months ended September 30, 1994 and 1993, respectively, were allocated by the Company to the bauxite and alumina and aluminum processing segments based upon those segments' ratio of sales to unaffiliated customers. Bauxite and alumina. The bauxite and alumina segment had operating income of $4.1 million for the third quarter of 1994, compared with an operating loss of $1.4 million for the third quarter of 1993. The operating loss for the nine months ended September 30, 1994 was $5.6 million, compared with $12.9 million for the nine months ended September 30, 1993. These improved operating results were principally due to lower manufacturing costs. Aluminum processing. The aluminum processing segment had an operating loss of $9.5 million for the third quarter of 1994, compared with $14.7 million for the third quarter of 1993. This decrease was principally due to increased shipments of fabricated aluminum products and higher average realized prices of primary aluminum and fabricated aluminum products, partially offset by decreased shipments of primary products. The operating loss for the nine months ended September 30, 1994 was $36.6 million, compared with $24.1 million for the nine months ended September 30, 1993. This increase was principally due to lower average realized prices of fabricated aluminum products. Third quarter results continued to be adversely affected by the defensive hedging of primary aluminum prices and the constraints on more fully realizing margin improvement of some fabricated products, as discussed above. Loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for the third quarter of 1994 was $28.4 million, compared with $33.4 million for the third quarter of 1993. This decrease was principally due to the lower operating losses, partially offset by a decrease in investment, interest and other income. The loss for the nine months ended September 30, 1994 was $105.4 million, compared with $90.1 million for the nine months ended September 30, 1993. This increase was principally due to a decrease in investment, interest and other income and the higher operating losses. FOREST PRODUCTS OPERATIONS The Company's forest products operations are conducted by MGI through its principal operating subsidiaries, Pacific Lumber and Britt Lumber Co., Inc. ("Britt"). MGI's business is highly seasonal in that the forest products business has historically experienced lower first and fourth quarter sales due largely to the general decline in construction related activity during the winter months. Accordingly, MGI's results for any one quarter are not necessarily indicative of results to be expected for the full year. The following table presents selected operational and financial information for the three and nine months ended September 30, 1994 and 1993. The information presented in the table is in millions of dollars except shipments and prices.
Three Months Ended Nine Months Ended September 30, September 30, --------------------- -------------------- 1994 1993 1994 1993 -------- -------- -------- -------- Shipments: Lumber(1): Redwood upper grades . . . . . . . . . 12.5 17.0 38.2 49.8 Redwood common grades . . . . . . . . . 55.8 42.8 160.9 136.7 Douglas-fir upper grades . . . . . . . 1.7 2.3 6.1 8.5 Douglas-fir common grades . . . . . . . 16.0 8.1 47.9 35.6 -------- -------- -------- -------- Total lumber . . . . . . . . . . . . 86.0 70.2 253.1 230.6 ======== ======== ======== ======== Logs(2) . . . . . . . . . . . . . . . . . . 1.6 8.0 12.0 8.9 ======== ======== ======== ======== Wood chips(3) . . . . . . . . . . . . . . . 57.0 40.0 152.2 111.2 ======== ======== ======== ======== Average sales price: Lumber(4): Redwood upper grades . . . . . . . . . $ 1,434 $ 1,328 $ 1,436 $ 1,272 Redwood common grades . . . . . . . . . 472 472 460 475 Douglas-fir upper grades . . . . . . . 1,431 1,248 1,402 1,189 Douglas-fir common grades . . . . . . . 429 457 439 439 Logs(4) . . . . . . . . . . . . . . . . . . 515 700 638 701 Wood chips(5) . . . . . . . . . . . . . . . 85 84 82 81 Net sales: Lumber, net of discount . . . . . . . . . . $ 53.5 $ 48.3 $ 156.6 $ 150.5 Logs . . . . . . . . . . . . . . . . . . . . .8 5.6 7.6 6.2 Wood chips . . . . . . . . . . . . . . . . . 4.8 3.4 12.5 9.0 Cogeneration power . . . . . . . . . . . . . 1.2 1.2 2.7 2.9 Other . . . . . . . . . . . . . . . . . . . .4 .3 1.0 .9 -------- -------- -------- -------- Total net sales . . . . . . . . . . $ 60.7 $ 58.8 $ 180.4 $ 169.5 ======== ======== ======== ======== Operating income . . . . . . . . . . . . . . . . $ 19.8 $ 9.6 $ 56.3 $ 41.4 ======== ======== ======== ======== Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles . $ 2.6 $ (7.8) $ (10.9) $ (14.1) ======== ======== ======== ======== Capital expenditures . . . . . . . . . . . . . . $ 3.5 $ 2.3 $ 10.0 $ 8.9 ======== ======== ======== ======== FN - --------------- (1) Lumber shipments are expressed in millions of board feet. (2) Log shipments are expressed in millions of board feet, net Scribner scale. (3) Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds. (4) Dollars per thousand board feet. (5) Dollars per bone dry unit.
Shipments Lumber shipments for the third quarter of 1994 were 86.0 million board feet, an increase of 23% from 70.2 million board feet for the third quarter of 1993. This increase was principally due to a 30% increase in redwood common lumber shipments and a 98% increase in shipments of common grade Douglas-fir lumber, partially offset by a 26% decrease in shipments of upper grade redwood lumber. Log shipments for the third quarter of 1994 were 1.6 million feet (net Scribner scale), a decrease from 8.0 million feet for the third quarter of 1993. Lumber shipments for the nine months ended September 30, 1994 were 253.1 million board feet, an increase of 10% from 230.6 million board feet for the nine months ended September 30, 1993. This increase was principally due to an 18% increase in redwood common lumber shipments and a 35% increase in shipments of common grade Douglas-fir lumber, partially offset by a 23% decrease in shipments of upper grade redwood lumber. Log shipments for the nine months ended September 30, 1994 were 12.0 million feet (net Scribner scale), an increase from 8.9 million feet for the nine months ended September 30, 1993. Old growth trees constitute Pacific Lumber's principal source of upper grade redwood lumber. Due to the severe restrictions on Pacific Lumber's ability to harvest virgin old growth timber on its property (see "Trends" under Item 7 of the Form 10-K), Pacific Lumber's supply of upper grade lumber has decreased in some premium product categories. Pacific Lumber has been able to lessen the impact of these decreases by augmenting its production facilities to increase its recovery of upper grade lumber from smaller diameter logs and increasing the production of manufactured upper grade lumber products through its end and edge glue facility (which was recently expanded). However, unless Pacific Lumber is able to sustain the harvest level of old growth trees it has experienced in recent years, Pacific Lumber expects that its supply of premium upper grade lumber products will decrease from current levels and that its manufactured lumber products will constitute a higher percentage of its shipments of upper grade lumber products. Net sales Revenues from net sales of lumber and logs for the third quarter of 1994 increased by approximately 1% from the third quarter of 1993. This increase was principally due to increased shipments of redwood common lumber, increased shipments of common grade Douglas-fir lumber and an 8% increase in the average realized price of upper grade redwood lumber, partially offset by decreased shipments of upper grade redwood lumber and decreased log shipments. Revenues from net sales of lumber and logs for the nine months ended September 30, 1994 increased by approximately 5% from the nine months ended September 30, 1993. This increase was principally due to increased shipments of redwood common lumber, a 13% increase in the average realized price of upper grade redwood lumber, increased shipments of common grade Douglas-fir lumber, increased log shipments and an 18% increase in the average realized price of upper grade Douglas-fir lumber, partially offset by decreased shipments of upper grade redwood lumber and a 3% decrease in the average realized price of redwood common lumber. Operating income Operating income for the third quarter of 1994 increased by approximately 106% as compared to the third quarter of 1993. Operating income for the nine months ended September 30, 1994 increased by approximately 36% as compared to the nine months ended September 30, 1993. These increases were principally due to higher sales of lumber and wood chips, lower purchases of lumber and logs from third parties, improved sawmill productivity and reduced overhead costs in 1994 compared to 1993. For the nine months ended September 30, 1993, cost of goods sold was reduced by $1.2 million for an additional business interruption insurance claim as a result of the April 1992 earthquake. Pacific Lumber's cost of producing lumber products has continued to increase as a result of compliance with evolving environmental regulations, litigation associated with its timber harvesting plans and greater costs attributable to processing larger numbers of smaller diameter logs and producing manufactured products. Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles Income before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles increased for the third quarter of 1994 as compared to the third quarter of 1993. This increase resulted from the increase in operating income. The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles decreased for the nine months ended September 30, 1994 as compared to the nine months ended September 30, 1993. This decrease resulted from the increase in operating income and decreased interest expense, partially offset by the loss on litigation settlement (see also "Pacific Lumber Merger Litigation" under Part II, Item 1 of this Report). In addition, investment, interest and other income (expense) for the nine months ended September 30, 1994 includes the receipt of a franchise tax refund of $7.2 million (as described in Note 6 to the Condensed Notes to Consolidated Financial Statements). The litigation settlement in the second quarter of 1994 (as described in Note 6 to the Condensed Notes to Consolidated Financial Statements) resulted in a pre- tax loss of $21.2 million which 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. The Company has recorded a net benefit of approximately $6.3 million for federal and state income taxes related to the settlement. Interest expense decreased due to lower interest rates resulting from the refinancing of the long-term debt of Pacific Lumber and MGI in March and August of 1993. REAL ESTATE OPERATIONS
Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 1994 1993 1994 1993 -------- -------- -------- -------- (In millions of dollars) Net sales . . . . . . . . . . . . . . . . . . . . $ 23.1 $ 19.3 $ 61.6 $ 55.4 Operating loss . . . . . . . . . . . . . . . . . (2.6) (.9) (6.0) (7.9) Loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles . . . . . . (1.7) (.5) (3.8) (8.9)
Net sales Revenues from net sales for the third quarter of 1994 were $23.1 million, an increase of $3.8 million from the third quarter of 1993. Net sales for the nine months ended September 30, 1994 were $61.6 million, an increase of $6.2 million from the nine months ended September 30, 1993. These increases were primarily due to bulk acreage sales in New Mexico and increased lot sales at the Company's Fountain Hills development in Arizona, partially offset by a decrease in rental revenues resulting from the sale of sixteen apartment complexes in December 1993. Operating loss The operating loss for the third quarter of 1994 was $2.6 million, an increase of $1.7 million from the third quarter of 1993. This increase was primarily due to higher overhead costs and decreased revenues resulting from the sale of apartment complexes, partially offset by the bulk acreage sales and the increased sales at Fountain Hills. The operating loss for the nine months ended September 30, 1994 was $6.0 million, a decrease of $1.9 million from the nine months ended September 30, 1993. The operating results for the nine months ended September 30, 1994 were adversely impacted by decreased revenues as a result of the sale of sixteen apartment complexes in December 1993 and higher overhead costs, offset by the increased sales at Fountain Hills and the bulk acreage sales. The operating loss for the nine months ended September 30, 1993 included a $5.9 million writedown of certain of the Company's nonstrategic real estate holdings to their estimated net realizable value. Loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for the third quarter of 1994 was $1.7 million, an increase of $1.2 million from the third quarter of 1993. This increase was primarily due to the increased operating loss discussed above, partially offset by a decrease in interest expense. The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for the nine months ended September 30, 1994 was $3.8 million, a decrease of $5.1 million from the nine months ended September 30, 1993. This decrease was primarily attributable to a decrease in interest expense and the decreased operating loss discussed above. The decreases in interest expense resulted primarily from repayments on debt attributable to the sale of the sixteen apartment complexes in December 1993. OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS
Three Months Ended Nine Months Ended September 30, September 30, ------------------- -------------------- 1994 1993 1994 1993 ------- -------- -------- -------- (In millions of dollars) Operating loss . . . . . . . . . . . . $ (2.8) $ (3.4) $ (7.6) $ (10.2) Loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles . . . . . . (3.3) (6.5) (14.6) (17.5)
Operating loss The operating losses represent corporate general and administrative expenses that are not allocated to the Company's industry segments. The operating loss for the third quarter of 1994 was $2.8 million, a decrease of $.6 million from the third quarter of 1993. The operating loss for the nine months ended September 30, 1994 was $7.6 million, a decrease of $2.6 million from the nine months ended September 30, 1993. These decreases were primarily due to lower overhead costs. Loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles includes operating losses, investment, interest and other income (expense) and interest expense, including amortization of deferred financing costs, that are not allocated to the Company's industry segments. The loss for the third quarter of 1994 was $3.3 million, a decrease of $3.2 million from the third quarter of 1993. The loss for the nine months ended September 30, 1994 was $14.6 million, a decrease of $2.9 million from the nine months ended September 30, 1993. These decreases were primarily due to lower interest expense and the decreased operating losses discussed above, partially offset by the equity in losses of affiliates. The equity in losses of affiliates is attributable to the Company's equity interest in Sam Houston Race Park (see "--Financial Condition and Investing and Financing Activities -- Parent Company"). The decreases in interest expense resulted primarily from the redemption of $20.0 million aggregate principal amount of the Reset Notes in August 1993. Minority interests Minority interests represent the minority stockholders' interest in the Company's aluminum operations. Extraordinary item The refinancing activities of Kaiser during the first quarter of 1994, as described in Note 4 to the Condensed Notes to Consolidated Financial Statements, resulted in an extraordinary loss of $5.4 million, net of benefits for income taxes of $2.9 million. The extraordinary loss consists primarily of the write-off of unamortized deferred financing costs on the 1989 Credit Agreement. The extraordinary losses for the three and nine months ended September 30, 1993 resulted from the refinancing activities of MGI, KACC and Pacific Lumber. FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES PARENT COMPANY Certain of the Company's subsidiaries, principally Kaiser and MGI, are restricted by their various debt agreements as to the amount of funds that can be paid in the form of dividends or loaned to the Company. KACC's 1994 Credit Agreement and the indentures governing the KACC Senior Notes and the KACC Notes contain covenants which, among other things, limit Kaiser's ability to pay cash dividends and restrict transactions between Kaiser and its affiliates. Under the most restrictive of these covenants, Kaiser is not currently permitted to pay dividends on its common stock. The indenture governing the MGI Notes contains various covenants which, among other things, limit the payment of dividends and restrict transactions between MGI and its affiliates. At September 30, 1994, under the most restrictive of these covenants, the amount of dividends which could be paid by MGI was not significant. Under the most restrictive covenants governing debt of the Company's real estate subsidiaries, approximately $28.3 million could be paid as of September 30, 1994. As of September 30, 1994, the Company (excluding its aluminum, forest products and real estate subsidiary companies) had cash and marketable securities of approximately $39.6 million. The Company believes that its existing cash and marketable securities (excluding its aluminum, forest products and real estate subsidiaries), together with the funds available to it, will be sufficient to fund its working capital requirements for the foreseeable future. Through various subsidiaries, the Company controls the general partner of, and holds an equity interest in, Sam Houston Race Park, Ltd. ("SHRP"), which owns a Class 1 horse racing track located in Houston. The track began operations on April 29, 1994. SHRP's initial working capital, together with cash flows from operations, has not been sufficient to enable SHRP to meet its obligations as they become due. SHRP's ability to recover its investment in Sam Houston Race Park is dependent upon its ability to achieve a level of cash flows from operations sufficient to enable it to meet its operating and financing obligations as they become due. In this regard, SHRP's general partner has undertaken a number of steps intended to improve SHRP's operations. These steps include increasing marketing and advertising programs, strengthening on-site management, reducing general and administrative costs, negotiating amendments to the contracts for purse payments, principally to reduce purse payments, and negotiating reductions with other obligees. In addition to its efforts to strengthen SHRP's operations, on September 1, 1994, a deficit notice was issued calling for $6.5 million in additional capital to be raised by SHRP through the offering of Class C-1 interests in SHRP (the "Capital Call"). A substantial portion of the proceeds of the Capital Call ($5.6 million) was made by a wholly owned subsidiary of the Company pursuant, in large degree, to its oversubscription right arising from limited participation by other partners. As a result of the Capital Call, the Company's equity interest in SHRP increased from approximately 29.7% to 45.0%. The cash received from the Capital Call was expected to be used, among other things, to make the January 15, 1995 interest payment on $75.0 million of the 11-3/4% Senior Secured Notes due July 15, 1999 (the "SHRP Notes"). However, results of operations with respect to the fall thoroughbred meet have been substantially below management's expectations. Absent a significant improvement in operating results for the fall thoroughbred meet, in order to continue operations, SHRP will be required to use a portion of the cash that had been expected to be used for the next interest payment due on the SHRP Notes. Accordingly, there can be no assurance that SHRP will be able to make the January 15, 1995 interest payment on the SHRP Notes. SHRP's general partner has not made any determination as to the actions it will take in the event SHRP is unable to make such interest payment. SHRP's general partner intends to retain a financial adviser regarding these matters. ALUMINUM OPERATIONS The offering of the PRIDES, the issuance of the KACC Senior Notes and the replacement of the 1989 Credit Agreement during the first quarter of 1994 (as described in Notes 4 and 5 to the Condensed Notes to Consolidated Financial Statements) were the final steps of a comprehensive refinancing plan which Kaiser began in January 1993 which extended the maturities of Kaiser's outstanding indebtedness, enhanced its liquidity and raised new equity capital. Kaiser expects that cash flows from operations and borrowings under the 1994 Credit Agreement will be sufficient to satisfy its working capital and capital expenditure requirements for the foreseeable future. The 1994 Credit Agreement was amended as of July 21, 1994, by the First Amendment to Credit Agreement (the "First Amendment"). The First Amendment provided, among other things, for an increase in the revolving line of credit from $250.0 million to $275.0 million, and for an increase in the inventory sub-limit of the borrowing base from $175.0 million to $200.0 million, under the 1994 Credit Agreement. FOREST PRODUCTS OPERATIONS MGI anticipates that cash flows from operations, together with existing cash, marketable securities and available sources of financing, will be sufficient to fund the working capital and capital expenditures requirements of MGI and its respective subsidiaries for the foreseeable future; however, due to its highly leveraged condition, MGI is more sensitive than less leveraged companies to factors affecting its operations, including governmental regulation affecting its timber harvesting practices, increased competition from other lumber producers or alternative building products and general economic conditions. REAL ESTATE OPERATIONS As of September 30, 1994, the Company's real estate subsidiaries had approximately $32.4 million available for use under various credit agreements. A substantial portion of the availability was attributable to the credit availability pursuant to the loan agreement secured by real properties, and certain loans secured by income-producing real property, purchased from the RTC. SENSITIVITY TO PRICES AND HEDGING PROGRAMS ALUMINUM OPERATIONS Since September 30, 1994, KACC has entered into additional forward foreign exchange contracts totaling approximately $32.9 million for the purchase of 45.0 million Australian Dollars from January through December 1995 in respect of its commitments for 1995 expenditures denominated in foreign currencies. Since September 30, 1994, KACC has entered into additional hedge positions in respect of its 1995 anticipated primary aluminum production. As of the date of this Report, KACC had sold forward an additional 43,750 metric tons of primary aluminum at fixed prices. See Note 10 to the Condensed Notes to Consolidated Financial Statements for derivative positions at September 30, 1994. TRENDS ALUMINUM OPERATIONS KACC has operated its Mead and Tacoma smelters in Washington at approximately 75% of their full capacity since January 1993, when three reduction potlines were removed from production (two at its Mead smelter and one at its Tacoma smelter) in response to a power reduction imposed by the Bonneville Power Administration ("BPA"). Although full BPA power was restored as of April 1, 1994, a 25% power reduction was imposed again by the BPA as of August 1, 1994, which reduction is expected to continue through November 30, 1994. The BPA has given notice that full BPA power will be restored as of December 1, 1994, and that the BPA expects to be able to provide full service through November 30, 1995. KACC is evaluating these new circumstances. In late August 1994, the Volta River Authority ("VRA") notified KACC that it intended to suspend supplying power to KACC's 90%-owned Volta Aluminium Company Limited ("VALCO") smelter after September 10, 1994, due to drought conditions in the catchment area of the Volta Lake. Following discussions between KACC and the VRA, an agreement was reached for VALCO to curtail one potline (of the 3-1/2 potlines that were then operating) on September 18, 1994. The agreement also called for KACC and the VRA to meet in late October to discuss data concerning rainfall, lake level, whether an additional curtailment was warranted, compensation due to KACC because of the curtailment and other matters related to the power contract. Following the discussions in October, the VRA has made sufficient power available to enable VALCO to restart the potline which was shut down in mid-September. Restart preparations have begun, and the potline is expected to be in full operation in early February 1995. The restoration of full operation of the potline will return VALCO to a production rate of approximately 140,000 metric tons of primary aluminum, or 70% of its total annual rated capacity of 200,000 metric tons. With such restored production, Kaiser would have an annual production rate of approximately 390,000 metric tons of primary aluminum, or 77% of its total annual rated capacity of 508,000 metric tons. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to Item 3 of the Form 10-K and Part II, Item 1 of the Company's Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 1994 and June 30, 1994 (the "Forms 10-Q") for information concerning material legal proceedings with respect to the Company. The following material developments have occurred with respect to such legal proceedings. Any capitalized or italicized terms used but not defined in this Item have the same meaning given to them in the Form 10-K and the Forms 10-Q. PACIFIC LUMBER MERGER LITIGATION With respect to the In re Ivan F. Boesky multidistrict securities litigation matter, on September 28, 1994, the judge signed the preliminary approval of the settlement agreement, which, among other things, established October 28, 1994 as the postmark deadline for requests for exclusion from the settlement (none has been received), established November 4, 1994 as the deadline for filing any objections to the settlement (none has been filed), established November 17, 1994 as the date for the fairness hearing and established December 23, 1994 as the postmark deadline for proofs of claim. Prior to preliminary approval of the settlement agreement, certain changes were made from the agreement in principle described in the Form 10-Q for the quarterly period ended June 30, 1994 (the "Second Quarter Form 10-Q"). The settlement agreement, as then executed, does not purport to cover certain claims brought in the Thompson State action by non-shareholders of Pacific Lumber or shareholders acting in capacities other than as shareholders involving environmental or other Pacific Lumber non-shareholder corporate issues. With respect to the DOL civil action, at the September 2, 1994 status conference, at defendants' request, the judge instructed the parties to attend a settlement conference before a federal magistrate, which has been scheduled for November 14, 1994, and scheduled the next status conference for December 16, 1994. With respect to the Miller action, the defendants and plaintiff in the DOL civil action have invited the Miller plaintiffs to attend the settlement conference referenced above. Additionally, on October 3, 1994, the U.S. House of Representatives approved a bill amending ERISA, which had been previously passed by the U.S. Senate on October 28, 1993, intended, in part, to overturn the U.S. District Court's dismissal of the Miller action and to make available certain remedies not previously provided under ERISA. On October 22, 1994, the President signed this legislation (the Pension Annuitants' Protection Act of 1994). As a result of the passage of this legislation, the Miller plaintiffs have asked the U.S. Ninth Circuit Court of Appeal to vacate the U.S. District Court judgment dismissing their case and to remand the case to the U.S. District Court; defendants have opposed this request. It is uncertain what effect, if any, this legislation will have on the pending appeal or the final disposition of this case. RANCHO MIRAGE LITIGATION With respect to the In re MAXXAM Inc./Federated Development Shareholders Litigation, on September 21, 1994, the Court held a fairness hearing with respect to the proposed settlement. The settlement has been submitted to the Court and the Company is awaiting a decision. With respect to the similar NL Industries Inc., et al. v. Federated Development Co., et al. action, the parties agreed to stay any further action in the case pending the decision concerning the proposed settlement in the In re MAXXAM Inc./Federated Development Shareholders Litigation. ITEM 5. OTHER INFORMATION In Part I, Item 1, "Business--Forest Products Operations-- Regulatory and Environmental Factors" of the Form 10-K and Part II, Item 5, "Other Information" of the Second Quarter Form 10-Q, a bill is described which relates to acquisition of certain of Pacific Lumber's timberlands. The bill, substantially amended to protect Pacific Lumber's private property rights, was passed by the U.S. House of Representatives in September 1994. However, the U.S. Senate recessed without acting upon a similar bill and agreed to limit its business, upon reconvening after the November election, to a single unrelated subject. It therefore appears unlikely that this legislation will move forward in this session of the U.S. Congress. With respect to the Arizona Department of Environmental Quality ("ADEQ") matter described in Part II, Item 5 of the Second Quarter Form 10- Q, the indicated entities and the ADEQ have entered into a consent decree with respect to this matter and it appears that the processing and approval of subdivision plats within the Fountain Hills development will not be delayed. On August 24, 1994, the United States Department of Justice (the "DOJ") issued Civil Investigative Demand No. 11356 ("CID") requesting information from Kaiser regarding (i) its production, capacity to produce and sales of primary aluminum from January 1, 1991 to the date of its response; (ii) any actual or contemplated reductions in its production of primary aluminum during that period; and (iii) any communications with others regarding any actual, contemplated, possible or desired reductions in primary aluminum production by Kaiser or any of its competitors during that period. Kaiser has submitted documents and interrogatory answers to the DOJ responding to the CID. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS: *10.1 Form of Deferred Fee Agreement under the 1994 Non- Employee Director Plan *11 Computation of Net Loss Per Common and Common Equivalent Share *27 Financial Data Schedule ----------------- * Included with this filing. B. REPORTS ON FORM 8-K: None. 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 chief financial officer of the Registrant. MAXXAM INC. Date: November 14, 1994 By: JOHN T. LA DUC ---------------------------------- John T. La Duc Senior Vice President and Chief Financial Officer EX-11 2 EXHIBIT 11/THIRD QUARTER 10-Q OF MAXXAM INC. MAXXAM INC. COMPUTATION OF NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE (IN MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 1994 1993 1994 1993 ----------- ----------- ----------- ----------- Weighted average common and common equivalent shares outstanding during each period . . . . . . . . . . 9,376,703 9,376,703 9,376,703 9,376,703 Common equivalent shares attributable to stock options and convertible securities . . . . . . . . . . . . 71,175 78,186 71,175 83,483 ----------- ----------- ----------- ----------- Total common and common equivalent shares . . . . . 9,447,878 9,454,889 9,447,878 9,460,186 =========== =========== =========== =========== Loss before extraordinary item and cumulative effect of changes in accounting principles . . . . . . . . $ (14.9) $ (26.8) $ (92.6) $ (68.5) Extraordinary item . . . . . . . . . . . . . . . . . . - (6.5) (5.4) (50.6) Cumulative effect of changes in accounting principles - - - (417.7) ----------- ----------- ----------- ----------- Net loss . . . . . . . . . . . . . . . . . . . . . . . $ (14.9) $ (33.3) $ (98.0) $ (536.8) =========== =========== =========== =========== Per common and common equivalent share: Loss before extraordinary item and cumulative effect of changes in accounting principles . . . . . . . . $ (1.58) $ (2.83) $ (9.80) $ (7.24) Extraordinary item . . . . . . . . . . . . . . . . - (.69) (.57) (5.35) Cumulative effect of changes in accounting principles - - - (44.15) ----------- ----------- ----------- ----------- Net loss . . . . . . . . . . . . . . . . . . . . . $ (1.58) $ (3.52) $ (10.37) $ (56.74) =========== =========== =========== ===========
EX-27 3 EXHIBIT 27 TO THIRD QUARTER 10-Q/MAXXAM INC.
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 9-MOS DEC-31-1994 JAN-01-1994 SEP-30-1994 1 76,200 62,000 190,600 4,200 496,500 1,004,700 1,780,000 556,000 3,601,000 582,800 1,615,600 5,000 0 300 (269,600) 3,601,000 1,577,700 1,577,700 1,365,000 1,365,000 212,200 0 132,000 (134,700) (58,000) (92,600) 0 (5,400) 0 (98,000) (10.37) (10.37)
EX-10 4 EXHIBIT 10.1 TO MAXXAM INC.'S THIRD QUARTER 10-Q DEFERRED FEE AGREEMENT THIS AGREEMENT, dated as of ____________________________, is by and between MAXXAM INC., a Delaware corporation (the "Company"), and ___________________ (the "Director"), currently residing at ___________________________________________________________________________ ______________________________________________________________. WITNESSETH: WHEREAS, the Director currently serves as a member of the Board of Directors of the Company (the "Board") and receives remuneration ("Director's Fees") from the Company in that capacity; and WHEREAS, the Director desires to enter into an arrangement providing for the deferral of Director's Fees; and WHEREAS, the Company is agreeable to such an arrangement; NOW, THEREFORE, it is agreed as follows: 1. The Director irrevocably elects to defer receipt, subject to the provisions of this Agreement, of _____ percent of any Director's Fees which may otherwise become payable to the Director for the Calendar year 1994 and which relate to services performed after the date hereof. Such election shall continue in effect with respect to any Director's Fees which may otherwise become payable to the Director for any calendar year subsequent to 1994 unless, prior to January 1 of such year, the Director shall have delivered to the Secretary of the Company a written revocation of such election with respect to Director's Fees for services performed after the date of such revocation. Until such time as the election made under this paragraph is revoked, the percentage specified in the first sentence hereof shall apply on each occasion on which Director's Fees would otherwise be paid to the Director. Director's Fees with respect to which the Director shall have elected to defer receipt are hereinafter referred to as "Deferred Director's Fees." 2. The Company shall credit the amount of Deferred Director's Fees to a book account (the "Deferred Fee Account") as of the date such fees would have been paid to the Director had this Agreement not been in effect. Director's Fees which would otherwise be payable for attending a meeting of the Board or of a committee thereof shall be credited to the Deferred Fee Account as of the first business day following such meeting; Director's Fees which would otherwise be payable as a retainer shall be credited to the Deferred Fee Account as of the first business day of the period to which they relate. 3. Earnings shall be credited to the Deferred Fee Account as follows: (NOTE: (a) and (b) below must add up to 100%) (A) _____None _____25% _____50% _____75% _____100% of the amount credited to the Deferred Fee Account pursuant to paragraph 2 shall be deemed invested in a number of phantom shares (including any fractional share) of the Company's Common Stock equal to the quotient of (a) such amount divided by (b) the closing market price (the "Closing Price") of a share of Common Stock as reported for the date such amount is credited to the Deferred Fee Account. Whenever a cash dividend is paid on Common Stock, the Deferred Fee Account shall be credited as of the payment date with a number of phantom shares (including any fractional share) equal to the quotient of (y) an amount equal to the cash dividend payable on a number of shares of Common Stock equal to the number of phantom shares (excluding any fractional share) standing credited to such Account at the record date divided by (z) the Closing Price on such payment date. In the event of a stock dividend or distribution, stock split, recapitalization or the like, the Deferred Fee Account shall be credited as of the payment date with a number of phantom shares (including any fractional share) equal to the number of shares (including any fractional share) of Company Stock payable in respect of shares of Company Stock equal in number to the number of phantom shares (excluding any fractional share) standing credited to such Account at the record date. At the time any payment is to be made from the Deferred Fee Account pursuant to paragraph 6, the number of phantom shares then standing credited thereto shall be valued at the Closing Price on the first business day of the month in which such payment is to be made, and such payment shall be made in cash. (B) _____None _____25% _____50% _____75% _____100% of the standing balance credited to the Deferred Fee Account as of the last business day of each month shall be increased by an amount reflecting interest on such balance for such month calculated using one-twelfth of the Prime Rate on the first day of such month. For this purpose the "Prime Rate" shall mean the prime rate (or base rate) announced for such date by Bank of America (whether or not such rate has actually been charged by such bank). In the event such bank discontinues the practice of announcing the prime rate, the "Prime Rate" shall mean the highest rate charged by such bank on short-term, unsecured loans to its most creditworthy large corporate borrowers. In the event such bank ceases to make unsecured loans to corporate borrowers, the "Prime Rate" shall mean the highest prime rate (or base rate) reported for such date in the Money Rates column or section of The Wall Street Journal as the rate in effect for corporate loans at large U.S. money center commercial banks (whether or not such rate has actually been charged by any such bank) as of such date. In the event The Wall Street Journal ceases publication of such rate, the "Prime Rate" shall mean the highest prime rate (or base rate) reported for such date in such other publication that publishes such prime rate information as the Company may choose to rely upon. 4. The Company shall provide an annual statement to the Director showing such information as is appropriate, including the aggregate amount standing credited to the Deferred Fee Account, as of a reasonably current date. 5. The Company's obligation to make payments from the Deferred Fee Account shall be a general obligation of the Company and such payments shall be made from the Company's general assets. The Director's relationship to the Company under this Agreement shall be only that of a general unsecured creditor, and this Agreement (including any action taken pursuant hereto) shall not, in and of itself, create or be construed to create a trust or fiduciary relationship of any kind between the Company and the Director, his or her designated beneficiary or any other person, or a security interest of any kind in any property of the Company in favor of the Director or any other person. The arrangement created by this Agreement is intended to be unfunded and no trust, security, escrow, or similar account shall be required to be established for the purposes of payment hereunder. However, the Company may in its discretion establish a "rabbi trust" (or other arrangement having equivalent taxation characteristics under the Internal Revenue Code or applicable regulations or rulings) to hold assets, subject to the claims of the Company's creditors in the event of insolvency, for the purpose of making payments hereunder. If the Company establishes such a trust, amounts paid therefrom shall discharge the obligations of the Company hereunder to the extent of the payments so made. 6. Deferred Director's Fees, including all earnings credited to the Deferred Fee Account pursuant to paragraph 3, shall be paid in cash to the Director or his or her designated beneficiary as soon as practicable following the date the Director ceases for any reason to be a member of the Board. Payments shall be made: / / in a lump sum; or / / in ____________________ annual installments (not to exceed 10). Each annual installment payment shall be made as of January 31 and shall be an amount equal to the balance standing credited to the Deferred Fee Account as of that date divided by the number of installments (including the one then due) remaining to be paid. Amounts standing credited to the Deferred Fee Account during the period in which installments are paid shall be adjusted to reflect the crediting of earnings in accordance with paragraph 3. 7. Payments hereunder shall be made to the Director except that: (a) in the event that the Director shall be determined by a court of competent jurisdiction to be incapable of managing his financial affairs, and if the Company has actual notice of such determination, payment shall be made to the Director's personal representative(s); and (b) in the event of the Director's death, payment shall be made to the last beneficiary designated by the Director for purposes of receiving such payment in such event in a written notice delivered to the Secretary of the Company; provided, that if such beneficiary has not survived the Director, or no valid beneficiary designation is in effect, payment shall instead be made to the Director's estate. The Company shall deduct from any payment hereunder any amounts required for federal and/or State and/or local withholding tax purposes. 8. Any balance standing credited to the Deferred Fee Account shall not in any way be subject to the debts or other obligations of the Director and, except as provided in paragraph 7(b), shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, garnishment or other legal or equitable process. 9. This Agreement shall not be construed to confer on the Director any right to be or remain a member of the Board or to receive any, or any particular rate of, Director's Fees. 10. Interpretations of, and determinations related to, this Agreement, including any determinations of the amount standing credited to the Deferred Fee Account, shall be made by the Board and shall be conclusive and binding upon all parties. The Company shall incur no liability to the Director for any such interpretation or determination so made or for any other action taken by it in connection with this Agreement in good faith. 11. This Agreement contains the entire understanding and agreement between the parties with respect to the subject matter hereof, and may not be amended, modified or supplemented in any respect except by a subsequent written agreement entered into by both parties. 12. This Agreement shall be binding upon, and shall inure to the benefit of, the Company and its successors and assigns and the Director and his or her heirs, executors, administrators and personal representatives. 13. This Agreement shall be governed and construed in accordance with the laws of the State of Texas, without regard to principles of choice of law. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer, and the Director has executed this Agreement, on the date first written above. ATTEST: MAXXAM INC. __________________________ Byron L. Wade, Secretary By:__________________________ _____________________________ [Director] DESIGNATION OF BENEFICIARY Dated as of ____________________________ To the Secretary of MAXXAM Inc.: In accordance with the provisions of the Deferred Fee Agreement dated as of SEPTEMBER 1, 1994, between the undersigned and MAXXAM Inc., I hereby designate _______________________________________* currently residing at _________________________________________ as my beneficiary to receive payments thereunder in the event of my death before payments in full thereunder have been made. In the event that the said beneficiary predeceases me, I hereby designate _______________________________ currently residing at _____________________________________ as my beneficiary thereunder. Very truly yours, ______________________________ [FN] - --------------- *If more than one beneficiary is to be designated, list the beneficiaries and specify the percentage of each payment to be received by each beneficiary. -----END PRIVACY-ENHANCED MESSAGE-----