-----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, Bxqkh3EtwHyfEFdPxAfeknU9kXm8OVfYXPQkz2oH2Uoy22oMyVZbuEOLMRxB9R7m Q2ftNpuC9qj8qykyciRtAQ== 0000900421-98-000025.txt : 19980506 0000900421-98-000025.hdr.sgml : 19980506 ACCESSION NUMBER: 0000900421-98-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980505 SROS: AMEX SROS: PHLX SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXXAM INC CENTRAL INDEX KEY: 0000063814 STANDARD INDUSTRIAL CLASSIFICATION: PRIMARY PRODUCTION OF ALUMINUM [3334] IRS NUMBER: 952078752 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03924 FILM NUMBER: 98610038 BUSINESS ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7132673669 MAIL ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 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 MAXXAM 1998 FIRST 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, 1998 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 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 29, 1998: 7,000,597 TABLE OF CONTENTS PAGE PART I. - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheet at March 31, 1998 and December 31, 1997 3 Consolidated Statement of Operations for the three months ended March 31, 1998 and 1997 4 Consolidated Statement of Cash Flows for the three months ended March 31, 1998 and 1997 5 Condensed Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. - OTHER INFORMATION Item 1. Legal Proceedings 19 Item 6. Exhibits and Reports on Form 8-K 20 Signature S-1 MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31, 1998 1997 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 148.6 $ 164.6 Marketable securities 84.1 84.6 Receivables: Trade, net of allowance for doubtful accounts of $5.9 269.9 255.9 Other 72.5 126.3 Inventories 584.1 629.6 Prepaid expenses and other current assets 183.3 175.1 ------------ ------------ Total current assets 1,342.5 1,436.1 Property, plant and equipment, net of accumulated depreciation of $870.0 and $845.6, respectively 1,317.5 1,320.9 Timber and timberlands, net of accumulated depletion of $170.4 and $169.2, respectively 298.8 299.1 Investments in and advances to unconsolidated affiliates 160.5 159.5 Deferred income taxes 478.8 479.9 Long-term receivables and other assets 424.8 418.7 ------------ ------------ $ 4,022.9 $ 4,114.2 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 164.4 $ 187.3 Accrued interest 36.6 68.7 Accrued compensation and related benefits 141.6 159.3 Other accrued liabilities 171.6 174.9 Payable to affiliates 83.9 82.9 Short-term borrowings and current maturities of long-term debt 70.4 69.0 ------------ ------------ Total current liabilities 668.5 742.1 Long-term debt, less current maturities 1,877.6 1,888.0 Accrued postretirement medical benefits 725.2 730.1 Other noncurrent liabilities 577.7 586.3 ------------ ------------ Total liabilities 3,849.0 3,946.5 ------------ ------------ Commitments and contingencies Minority interests 174.9 170.6 ------------ ------------ Stockholders' deficit: Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A $.05 Non-Cumulative Participating .3 .3 Convertible Preferred Stock; shares issued: 669,701 Common stock, $.50 par value; 28,000,000 shares authorized; shares issued: 10,063,359 5.0 5.0 Additional capital 222.8 222.8 Accumulated deficit (116.6) (118.5) Pension liability adjustment (3.3) (3.3) Treasury stock, at cost (shares held: preferred - 845; common: 3,062,762) (109.2) (109.2) ------------ ------------ Total stockholders' deficit (1.0) (2.9) ------------ ------------ $ 4,022.9 $ 4,114.2 ============ ============ The accompanying notes are an integral part of these financial statements.
MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Three Months Ended March 31, -------------------------- 1998 1997 ------------ ------------ (Unaudited) Net sales: Aluminum operations $ 597.0 $ 547.4 Forest products operations 51.9 66.8 Real estate and other operations 15.1 17.4 ------------ ------------ 664.0 631.6 ------------ ------------ Costs and expenses: Cost of sales and operations: Aluminum operations 499.6 460.7 Forest products operations 33.1 38.0 Real estate and other operations 9.7 10.0 Selling, general and administrative expenses 42.2 44.5 Depreciation and depletion 28.1 29.4 ------------ ------------ 612.7 582.6 ------------ ------------ Operating income 51.3 49.0 Other income (expense): Investment, interest and other income 11.6 10.9 Interest expense (53.9) (53.1) ------------ ------------ Income before income taxes and minority interests 9.0 6.8 Provision for income taxes (3.2) (2.7) Minority interests (3.9) (3.4) ------------ ------------ Net income $ 1.9 $ .7 ============ ============ Basic earnings per common share $ 0.28 $ .08 ============ ============ Diluted earnings per common and common equivalent share $ 0.25 $ .07 ============ ============ The accompanying notes are an integral part of these financial statements.
MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS OF DOLLARS)
Three Months Ended March 31, -------------------------- 1998 1997 ------------ ------------ (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1.9 $ .7 Adjustments to reconcile net income to net cash used for operating activities: Depreciation and depletion 28.1 29.4 Net sales (purchases) of marketable securities 4.7 (.9) Minority interests 3.9 3.4 Amortization of deferred financing costs and discounts on long-term debt 6.3 6.3 Amortization of excess investment over equity in net assets of unconsolidated affiliates 2.5 - Equity in (earnings) loss of unconsolidated affiliates, net of dividends received (4.5) 7.8 Net gain on sale of real estate, mortgage loans and other assets (2.0) - Increase (decrease) in cash resulting from changes in: Receivables 30.5 (34.8) Payable to affiliates and other liabilities (44.0) (2.9) Inventories 43.5 (7.9) Accrued interest (31.9) (26.0) Prepaid expenses and other assets .8 (27.5) Accounts payable (22.9) (39.7) Accrued and deferred income taxes (4.7) .1 Other (4.5) (1.8) ------------ ------------ Net cash provided by (used for) operating activities 7.7 (93.8) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from disposition of property and investments 6.5 7.1 Capital expenditures (22.4) (27.2) Investment in subsidiaries and joint ventures (1.6) (7.1) Other 3.1 (2.7) ------------ ------------ Net cash used for investing activities (14.4) (29.9) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving credit agreements - 42.0 Proceeds from issuance of long-term debt 2.0 19.0 Redemptions, repurchases and principal payments on long-term debt (12.7) (63.7) Dividends paid to Kaiser's minority preferred stockholders - (2.1) Redemption of preference stock (1.1) (1.6) Restricted cash deposits - (12.6) Other 2.5 (.2) ------------ ------------ Net cash used for financing activities (9.3) (19.2) ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS (16.0) (142.9) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 164.6 336.6 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 148.6 $ 193.7 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest $ 79.5 $ 72.8 Income taxes paid 6.5 2.1 The accompanying notes are an integral part of these financial statements.
MAXXAM INC. AND SUBSIDIARIES 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 Form 10-K. Any capitalized terms used but not defined in these Condensed Notes to Consolidated Financial Statements are defined in the "Glossary of Defined Terms" contained in Appendix A. 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 March 31, 1998, the consolidated results of operations for the three months ended March 31, 1998 and 1997 and consolidated cash flows for the three months ended March 31, 1998 and 1997. Certain reclassifications of prior period information have been made to conform to the current presentation. SFAS No. 130 was issued in June 1997 with the adoption required for fiscal years beginning after December 31, 1997. SFAS 130 requires the presentation of an additional income measure (termed "comprehensive income"), which adjusts traditional net income for certain items that previously were only reflected as direct charges to equity (such as minimum pension liabilities). For the quarters ended March 31, 1998 and 1997 there is not a significant difference between "traditional" net income and comprehensive income as the amount of the adjustments required to arrive at comprehensive income is not significant. 2. INVENTORIES Inventories consist of the following:
MARCH 31, DECEMBER 31, 1998 1997 ------------- ------------- Aluminum Operations: Finished fabricated aluminum products $ 101.2 $ 103.9 Primary aluminum and work in process 181.9 226.6 Bauxite and alumina 120.8 108.4 Operating supplies and repair and maintenance parts 124.2 129.4 ------------- ------------- 528.1 568.3 ------------- ------------- Forest Products Operations: Lumber 49.0 49.7 Logs 7.0 11.6 ------------- ------------- 56.0 61.3 ------------- ------------- $ 584.1 $ 629.6 ============= =============
3. RESTRICTED CASH Long-term receivables and other assets include restricted cash in the amount of $32.7 and $33.7 at March 31, 1998 and December 31, 1997, respectively. Such restricted cash primarily represents the amount held by the trustee under the indenture governing the Timber Notes. 4. LONG-TERM DEBT Long-term debt consists of the following:
MARCH 31, DECEMBER 31, 1998 1997 ------------ ------------ 12% MGHI Senior Secured Notes due August 1, 2003 $ 130.0 $ 130.0 11-1/4% MGI Senior Secured Notes due August 1, 2003 100.0 100.0 12-1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount 120.9 117.3 10-1/2% Pacific Lumber Senior Notes due March 1, 2003 235.0 235.0 Pacific Lumber Credit Agreement 9.4 9.4 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015 309.2 320.0 KACC Credit Agreement - - 10-7/8% KACC Senior Notes due October 15, 2006, including premium 225.0 225.8 9-7/8% KACC Senior Notes due February 15, 2002, net of discount 225.0 224.2 12-3/4% KACC Senior Subordinated Notes due February 1, 2003 400.0 400.0 Alpart CARIFA Loans 60.0 60.0 Other aluminum operations debt 60.6 61.6 Other notes and contracts, primarily secured by receivables, buildings, real estate and equipment 35.3 36.1 ------------- ------------- 1,910.4 1,919.4 Less: current maturities (32.8) (31.4) ------------- ------------- $ 1,877.6 $ 1,888.0 ============= =============
5. PER SHARE INFORMATION Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period including the weighted average impact of the shares of common stock issued and treasury stock acquired during the year from the date of issuance or repurchase. The weighted average common shares outstanding was 7,000,597 shares and 8,656,948 shares for the three months ended March 31, 1998 and 1997, respectively. Diluted earnings per share calculations also include the dilutive effect of the Class A Preferred Stock which are convertible into Common Stock as well as common and preferred stock options. The weighted average number of common and common equivalent shares was 7,797,515 shares and 9,427,584 shares for the three months ended March 31, 1998 and 1997, respectively. 6. CONTINGENCIES Environmental Contingencies Kaiser and KACC are subject to a number of environmental laws and regulations, to fines or penalties assessed for alleged breaches of the environmental laws and regulations, and to claims and litigation based upon such laws. KACC is currently subject to a number of lawsuits under CERCLA and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based on 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 March 31, 1998, the balance of such accruals, which are primarily included in noncurrent liabilities, was $29.8. These environmental accruals represent Kaiser's estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology and Kaiser's assessment of the likely remediation action 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 these environmental accruals will be approximately $2.0 to $9.0 for the years 1998 through 2002 and an aggregate of approximately $7.0 thereafter. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. Kaiser believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $18.0. As the resolution of these matters is subject to further regulatory review and approval, no specific assurances can be given as to when the factors upon which a substantial portion of this estimate is based can be expected to be resolved. However, Kaiser is working to resolve these matters. Kaiser believes that KACC has insurance coverage available to recover certain incurred and future environmental costs and is actively pursuing claims in this regard. However, no accruals have been made for any such insurance recoveries, and no assurances can be given that Kaiser will be successful in its attempt to recover incurred or future costs. While uncertainties are inherent in the final outcome of these environmental matters, and it is impossible to 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 the Company's consolidated financial position, results of operations or liquidity. Asbestos Contingencies KACC is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 20 years. At March 31, 1998, the number of claims pending was approximately 81,500 compared to 77,400 at December 31, 1997. During 1997, approximately 15,600 of such claims were received and approximately 9,300 were settled or dismissed. During the quarter ended March 31, 1998, approximately 5,400 of such claims were received and 1,300 of such claims were settled or dismissed. However, the foregoing claim and settlement figures as of and for the quarter ended March 31, 1998, do not reflect the fact that as of March 31, 1998, KACC reached agreements under which the Company will settle approximately 25,000 of the pending asbestos-related claims over an extended period. Based on 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 through 2008. There are inherent uncertainties involved in estimating asbestos-related costs and KACC's actual costs could exceed these estimates. Kaiser's accrual was calculated based on the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, and the advice of Wharton, Levin, Ehrmantraut, Klein & Nash, P.A. with respect to the current state of the law related to asbestos claims. Accordingly, an asbestos-related cost accrual of $155.6, before consideration of insurance recoveries, is included primarily in other noncurrent liabilities at March 31, 1998. While Kaiser does not believe there is a reasonable basis for estimating such costs beyond 2008 and, accordingly, no accrual has been recorded for such costs which may be incurred beyond 2008, there is a reasonable possibility that such costs may continue beyond 2008, and such costs may be substantial. Kaiser estimates that annual future cash payments in connection with such litigation will be approximately $13.0 to $20.0 for each of the years 1998 through 2002, and an aggregate of approximately $80.0 thereafter. Kaiser believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. Claims for recovery from some of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, which have resulted in delays in recovering costs from the insurance carriers. The timing and amount of ultimate recoveries from these insurance carriers are dependent upon the resolution of these disputes. Kaiser believes, based on prior insurance-related recoveries with respect to asbestos- related claims, existing insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges LLP with respect to applicable insurance coverage law relating to the terms and conditions of these policies, that substantial recoveries from the insurance carriers are probable. Accordingly, an estimated aggregate insurance recovery of $115.7, determined on the same basis as the asbestos-related cost accrual, is recorded primarily in long-term receivables and other assets at March 31, 1998. During the first quarter of 1998, KACC reached agreements on asbestos-related coverage matters with two insurance carriers under which KACC collected a total of approximately $17.5 million. Kaiser continues to monitor claims activity, the status of lawsuits (including settlement initiatives), legislative progress, and costs incurred in order to ascertain whether an adjustment to the existing accruals should be made to the extent that historical experience may differ significantly from Kaiser's underlying assumptions. While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and insurance recoveries that will be received, Kaiser currently believes that, based on the factors discussed in the preceding paragraphs, the resolution of asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. OTS Contingency and Related Matters On December 26, 1995, the OTS initiated a formal administrative proceeding against the Company and others by filing the Notice. The Notice alleges, among other things, misconduct by the Company, Federated, Mr. Charles Hurwitz and others (the "respondents") with respect to the failure of USAT, a wholly owned subsidiary of UFG. The Notice claims that the Company was a savings and loan holding company, that with others it controlled USAT, and that it was therefore obligated to maintain the net worth of USAT. The Notice makes numerous other allegations against the Company and the other respondents, including, among other things, allegations that through USAT it was involved in prohibited transactions with Drexel, Burnham, Lambert Inc. The OTS, among other things, seeks unspecified damages in excess of $560.0 from the Company and Federated, civil money penalties and a removal from, and prohibition against the Company and the other respondents engaging in, the banking industry. The hearing on the merits of this matter commenced on September 22, 1997, adjourned on December 19, 1997, and is scheduled to recommence on June 16, 1998. On August 2, 1995, the FDIC filed the FDIC action in the U.S. District Court for the Southern District of Texas. The original complaint against Mr. Hurwitz alleged damages in excess of $250.0 based on the allegation that Mr. Hurwitz was a controlling shareholder, de facto senior officer and director of USAT, and was involved in certain decisions which contributed to the insolvency of USAT. The original complaint further alleged, among other things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and the Company maintained the net worth of USAT. On January 15, 1997, the FDIC filed an amended complaint which seeks, conditioned on the OTS prevailing in its administrative proceeding, unspecified damages from Mr. Hurwitz relating to amounts the OTS does not collect from the Company and Federated with respect to their alleged obligations to maintain USAT's net worth. The Company's bylaws provide for indemnification of its officers and directors to the fullest extent permitted by Delaware law. The Company is obligated to advance defense costs to its officers and directors, subject to the individual's obligation to repay such amount if it is ultimately determined that the individual was not entitled to indemnification. In addition, the Company's indemnity obligation can, under certain circumstances, include amounts other than defense costs, including judgments and settlements. The Company has concluded that it is unable to determine a reasonable estimate of the loss (or range of loss), if any, that could result from this contingency. Accordingly, it is impossible to assess the ultimate outcome of the foregoing matters or its potential impact on the Company; however, any adverse outcome of these matters could have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Other Matters The Company is involved in various other claims, lawsuits and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 7. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS At March 31, 1998, the net unrealized gain on KACC's position in aluminum forward sales and option contracts, (based on an average price of $1,643 per ton ($.75 per pound) of primary aluminum), natural gas, fuel oil and diesel fuel forward purchase and option contracts, and forward foreign exchange contracts, was approximately $11.5. Any gain or losses on the derivative contracts utilized in KACC's hedging activities are offset by losses or gains, respectively, on the transactions being hedged. Alumina and Aluminum Kaiser's earnings are sensitive to changes in the 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. Primary aluminum prices have historically been subject to significant cyclical fluctuations. Since 1993, the AMT Price for primary aluminum has ranged from approximately $.50 to $1.00 per pound. Alumina prices as well as fabricated aluminum product prices (which vary considerably among products) are significantly influenced by changes in the price of primary aluminum but generally lag behind primary aluminum price changes by up to three months. From time to time in the ordinary course of business, KACC enters into hedging transactions to provide price risk management in respect of the net exposure of earnings resulting from (i) anticipated sales of alumina, primary aluminum and fabricated aluminum products, less (ii) expected purchases of certain items, such as aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with the price of primary aluminum. Forward sales contracts are used by KACC to effectively fix the price that KACC will receive for its shipments. KACC also uses option contracts (i) to establish a minimum price for its product shipments, (ii) to establish a "collar" or range of prices for KACC's anticipated sales, and/or (iii) to permit KACC to realize possible upside price movements. As of March 31, 1998, KACC had sold forward, at fixed prices, approximately 76,450, and 24,000 tons of primary aluminum with respect to 1998, and 1999, respectively. As of March 31, 1998, KACC had also purchased put options to establish a minimum price for approximately 33,750 tons of primary aluminum with respect to 1998 and had entered into option contracts that established a price range for an additional 173,700, and 124,500 tons for 1998 and 1999, respectively. Additionally, at March 31, 1998, KACC also held fixed price purchase contracts for 79,800 tons of primary aluminum with respect to 1998. As of March 31, 1998, KACC had sold forward virtually all of the alumina available to it in excess of its projected internal smelting requirements for 1998, 1999 and 2000 at prices indexed to future prices of primary aluminum. Energy KACC is exposed to energy price risk from fluctuating prices for fuel oil and natural gas consumed in the production process. Accordingly, KACC from time to time in the ordinary course of business enters into hedging transactions with major suppliers of energy and energy related financial instruments. As of March 31, 1998, KACC had a combination of fixed price purchase and option contracts for the purchase of approximately 45,000 MMBtu of natural gas per day during the remainder of 1998. As of March 31, 1998, KACC also held a combination of fixed price purchase and option contracts for an average of 232,000 and 39,000 barrels per month of fuel oil and diesel fuel for 1998 and 1999, respectively. Foreign Currency KACC enters into forward exchange contracts to hedge material cash commitments to foreign subsidiaries or affiliates. At March 31, 1998, KACC had net forward foreign exchange contracts totaling approximately $198.5 for the purchase of 277.0 Australian dollars from April 1998, through December 2000, in respect of its commitments for 1998 and 1999 expenditures denominated in Australian dollars. 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 are defined in the "Glossary of Defined Terms" contained in Appendix A. 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 several 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 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 operates in three principal industries: aluminum, through its majority owned subsidiary, Kaiser, an integrated aluminum producer; forest products, through MGI and its wholly owned subsidiaries, principally Pacific Lumber and Britt; real estate investment and development, managed through MAXXAM Property Company; and other commercial operations through various other wholly owned subsidiaries. MGHI owns 100% of MGI and is a wholly owned subsidiary of the Company. All references to the "Company," "Kaiser," "MGHI," "MGI" and "Pacific Lumber" refer to the respective companies and their subsidiaries, unless otherwise indicated or the context indicates otherwise. ALUMINUM OPERATIONS Aluminum operations account for a substantial portion of the Company's revenues and operating results. Kaiser, through its principal subsidiary KACC, operates in two business segments: bauxite and alumina, and aluminum processing. As an integrated aluminum producer, Kaiser uses a portion of its bauxite, alumina and primary aluminum production for additional processing at certain of its facilities. Recent Events and Developments During the quarter ended March 31, 1998, KACC reached agreements to settle approximately 25,000 of the pending asbestos-related claims over an extended period. Also during the first quarter of 1998, KACC reached agreements on asbestos-related coverage matters with two insurance carriers under which Kaiser collected a total of approximately $17.5 million. As the amounts related to the claim settlements and insurance recoveries were consistent with Kaiser's year-end 1997 accrual assumptions, these events are not expected to have a material impact on the Kaiser's financial position, results of operations, or liquidity. During April 1998, Kaiser's 90%-owned Valco smelter in Ghana announced that it had reached an agreement with the VRA to receive compensation in lieu of the power necessary to run an additional potline that was curtailed on April 6, 1998. The compensation is expected to substantially mitigate the financial impact of the curtailment. As a result of the curtailment, Valco will be operating one if its five potlines, as compared to 1997, when Valco operated four potlines. Valco had previously curtailed two of its potlines in 1998, one in January, for which it received no compensation, and one in February, for which it will be compensated. As previously announced, Kaiser has notified the VRA that it believes it had the contractual rights at the beginning of 1998 to sufficient energy to run four and one-half potlines for the balance of the year. Valco continues to seek compensation from the VRA with respect to the January 1998 reduction of its power allocation. Valco and the VRA also are in continuing discussions concerning other matters, including steps that might be taken to reduce the likelihood of power curtailments beyond 1998. No assurances can be given as to the success of these discussions, the possibility of requests from the VRA for additional curtailments, or as to the operating level of Valco for the remainder of 1998 or beyond. Summary The following table presents selected operational and financial information for the three months ended March 31, 1998 and 1997. The information presented in the table is in millions of dollars except shipments and prices, and intracompany shipments have been excluded.
Three Months Ended March 31, -------------------------- 1998 1997 ------------- ------------ Shipments: (1) Alumina 424.6 385.5 Aluminum products: Primary aluminum 80.5 78.5 Fabricated aluminum products 105.5 93.9 ------------- ------------ Total aluminum products 186.0 172.4 ============= ============ Average realized sales price: Alumina (per ton) $ 201 $ 190 Primary aluminum (per pound) .71 .75 Net sales: Bauxite and alumina: Alumina $ 85.5 $ 73.2 Other (2) (3) 25.7 26.6 ------------- ------------ Total bauxite and alumina 111.2 99.8 ------------- ------------ Aluminum processing: Primary aluminum 126.2 129.2 Fabricated aluminum products 356.9 314.4 Other (3) 2.7 4.0 ------------- ------------ Total aluminum processing 485.8 447.6 ------------- ------------- Total net sales $ 597.0 $ 547.4 ============= ============ Operating income $ 46.3 $ 32.8 ============= ============ Income before income taxes and minority interests $ 19.0 $ 7.9 ============= ============ Capital expenditures $ 13.7 $ 21.8 ============= ============ - --------------- (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.
Overview Kaiser's operating results are sensitive to changes in the prices of alumina, primary aluminum and fabricated aluminum products, and also depend to a significant degree on the volume and mix of all products sold and on KACC's hedging strategies. Primary aluminum prices have historically been subject to significant cyclical fluctuations. Alumina prices as well as fabricated aluminum product prices (which vary considerably among products) are significantly influenced by changes in the price of primary aluminum but generally lag behind primary aluminum price changes by up to three months. During 1997, the AMT Price for primary aluminum remained relatively stable in the $.75 to $.80 per pound range through November and then declined during December to the $.70 to $.75 per pound range. During the first three months of 1998, the AMT Price for primary aluminum was generally in the $.68 to $.73 per pound range. The AMT Price for primary aluminum for the week ended April 17, 1998 was approximately $.70 per pound. Net Sales - Bauxite and Alumina Net sales of alumina increased by 16% for the quarter ended March 31, 1998, from the comparable period in the prior year, as a result of a 6% increase in average realized prices from the sale of alumina and a 10% increase in alumina shipments. The fluctuations in shipment volumes as compared to the quarter ended March 31, 1997, was primarily attributable to the timing of shipments. Net Sales - Aluminum Processing Net sales of primary aluminum for the quarter ended March 31, 1998, decreased by 2% from the comparable prior year period as a result of a 5% decrease in average realized prices, offset by a 3% increase in shipments. Net sales of fabricated aluminum products for the quarter ended March 31, 1998, were up 14% as compared to the prior year period as a result of a 12% increase in shipments and a 2% increase in average realized prices. The increase in fabricated aluminum product shipments over the first quarter of 1997 was the result of Kaiser's June 1997 acquisition of the Bellwood extrusion facility in Richmond, Virginia, as well as increased shipments of heat-treat products. Operating Income Operating income increased as improvements in the average realized price of alumina, improvements in the alumina, primary aluminum and fabricated aluminum products operations and reduced power costs more than offset the impact of the decline in the average realized price for primary aluminum and the impacts of the Valco potline curtailments discussed above. The quarter-over-quarter improvement in the Company's fabricated aluminum products operations reflect the impacts of the Bellwood acquisition, continued demand for heat-treat products, and an improvement in operating performance. The impact of the Valco potline curtailments was only partially reflected in operating results as one of the potlines was curtailed after quarter-end and as the two lines curtailed prior to March 31, 1998, operated for only part of the quarter. Reduced operating results attributable to such first quarter 1998 curtailments, as well as incremental charges recorded in the quarter associated with potline shut-down costs, were partially offset by compensation which will be received over an 18-month period beginning in June 1998 for one of the two lines curtailed during the quarter. Operating income for the three months ended March 31, 1997 included approximately $5.0 million related to the settlement of certain energy service contracts. FOREST PRODUCTS OPERATIONS The Company's forest products operations are conducted by MGI through its principal operating subsidiaries. MGI's business is seasonal in that the forest products business generally experiences lower first 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 months ended March 31, 1998 and 1997. The information presented in the table is in millions of dollars except shipments and prices.
Three Months Ended March 31, --------------------------- 1998 1997 ------------ ------------- Shipments: Lumber: (1) Redwood upper grades 10.2 13.0 Redwood common grades 53.9 57.2 Douglas-fir upper grades 1.9 2.5 Douglas-fir common grades 9.2 19.4 Other 2.5 3.9 ------------ ------------- Total lumber 77.7 96.0 ============ ============= Logs (2) - 2.5 ============ ============= Wood chips (3) 32.2 60.2 ============ ============= Average sales price: Lumber: (4) Redwood upper grades $ 1,491 $ 1,322 Redwood common grades 506 505 Douglas-fir upper grades 1,269 1,211 Douglas-fir common grades 352 486 Logs (4) 382 478 Wood chips (5) 62 75 Net sales: Lumber, net of discount $ 48.5 $ 59.1 Logs - 1.2 Wood chips 2.0 4.5 Cogeneration power .6 1.0 Other .8 1.0 ------------ ------------- Total net sales $ 51.9 $ 66.8 ============ ============= Operating income $ 10.1 $ 18.8 ============ ============= Operating cash flow (6) $ 15.7 $ 25.4 ============ ============= Income (loss) before income taxes $ (4.2) $ .3 ============ ============= Capital expenditures $ 2.8 $ 2.3 ============ ============= - --------------- (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 quarter ended March 31, 1998 decreased from the comparable prior year quarter due primarily to lower shipments of lumber, logs, and chips and to lower average realized prices for common grade Douglas-fir lumber. This impact was partially offset by higher average realized prices for upper and common grade redwood lumber. The decrease in volumes was due largely to well-above-normal rainfall during the 1998 period which reduced demand, hindered logging operations, slowed production, and inhibited shipments. Operating income Operating income for the three months ended March 31, 1998 decreased from the comparable prior year period, principally due to the decrease in net sales discussed above. Income (loss) before income taxes and minority interests Income (loss) before income taxes for the three months ended March 31, 1998 decreased from the comparable 1997 period principally due to lower operating income discussed above. This impact was partially offset by higher earnings on marketable securities and a gain on the sale of a non-timber property. REAL ESTATE AND OTHER OPERATIONS The Company, principally through its wholly owned subsidiaries, invests in and develops residential and commercial real estate primarily in Arizona, California, Texas and Puerto Rico. The Company, through its subsidiaries, also has majority ownership in SHRP, Ltd., a Texas limited partnership, which owns and operates a Class 1 horse racing facility in Houston, Texas.
Three Months Ended March 31, -------------------------- 1998 1997 ------------ ------------ (In millions of dollars) Net sales: Real estate $ 8.5 11.4 SHRP, Ltd. 6.6 6.0 ------------ ------------ Total net sales $ 15.1 $ 17.4 ============ ============ Operating income (loss): Real estate $ (2.5) $ - SHRP, Ltd. .9 .4 ------------ ------------ Total operating income (loss) $ (1.6) $ .4 ============ ============ Income (loss) before income taxes and minority interests: Real estate $ (.2) $ 3.4 SHRP, Ltd. .2 (.3) ------------ ------------ Total income (loss) before income taxes and minority interests $ - 3.1 ============ ============
Net sales Net sales decreased for the three months ended March 31, 1998 from the same period in 1997 primarily due to lower revenues from real estate development and commercial operations, reflecting various asset dispositions during the first quarter of 1997 and a 1997 bulk land sale at the Fountain Hills, Arizona development. Operating loss The operating loss for the first quarter of 1998 was primarily due to lower net sales discussed above. Income (loss) before income taxes and minority interests The decrease in income before income taxes and minority interests for the three months ended March 31, 1998 compared to the same period in 1997 is primarily due to lower gains from RTC Portfolio sales, in addition to the operating loss discussed above. OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS
Three Months Ended March 31, -------------------------- 1998 1997 ------------ ------------ (In millions of dollars) Operating loss $ (3.5) $ (3.0) Loss before income taxes and minority interests (5.8) (4.5)
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 first quarter of 1998 was substantially unchanged from the same period in 1997. Loss before income taxes and minority interests The loss before income taxes and minority interests includes operating losses, investment, interest and other income (expense) and interest expense, including amortization of deferred financing costs, that are not attributable to the Company's industry segments. The losses for the first quarter of 1998 increased from the same periods in 1997, principally due to higher interest expense related to short-term borrowings. Minority interests Minority interests represent the minority stockholders' interest in the Company's aluminum operations and minority partners' interest in SHRP, Ltd. FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES PARENT COMPANY AND MGHI 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. The various credit instruments of MGHI, KACC, MGI, Pacific Lumber and Scotia Pacific contain various covenants which, among other things, limit the ability of such entities to incur additional indebtedness and liens, to engage in transactions with affiliates, to pay dividends and to make investments. As of March 31, 1998, $3.0 million of dividends could be paid by MGHI and $2.6 million of dividends could be paid by MGI. Pursuant to the terms of the KACC Credit Agreement, Kaiser is prohibited from paying any dividends with respect to its common stock. The most restrictive covenants governing debt of the Company's real estate and other subsidiaries would not restrict payment to the Company of all nonrestricted cash and unused borrowing availability for such subsidiaries (approximately $11.6 million could be paid as of March 31, 1998). Kaiser has an effective shelf registration statement covering the offering of up to 10 million shares of Kaiser common stock owned by the Company. As of March 31, 1998, the Company (excluding its subsidiaries) had cash and marketable securities of approximately $71.7 million and available borrowings under the Custodial Trust Agreement and Salomon Smith Barney facility of $47.5 million in aggregate. The Company believes that its existing resources, together with the cash available from subsidiaries and other sources of financing, will be sufficient to fund its working capital requirements for the next year. With respect to its long- term liquidity, the Company believes that its existing cash and cash resources, together with the cash proceeds from the sale of assets and distributions from its subsidiaries should be sufficient to meet its working capital requirements. However, there can be no assurance that the Company's cash resources, together with the cash proceeds from the sale of assets, distributions from its subsidiaries and other sources of financing, will be sufficient for such purposes. Any substantially adverse outcome of the litigation described in Note 6 to the Consolidated Financial Statements could materially adversely affect the Company's consolidated financial position, results of operations or liquidity. See Note 6 to the Consolidated Financial Statements for a discussion of the Company's material contingencies. ALUMINUM OPERATIONS At March 31, 1998, Kaiser had long-term debt of $970.6 million, compared with $971.7 million at December 31, 1997. At March 31, 1998, $272.1 million (of which $52.9 million could have been used for letters of credit) was available to KACC under the KACC Credit Agreement. Loans under the KACC Credit Agreement bear interest at a spread (which varies based on the results of a financial test) over either a base rate or LIBOR, at Kaiser's option. During the three months ended March 31, 1998, the average per annum interest rates on loans outstanding under the KACC Credit Agreement were approximately 9%. Kaiser has an effective shelf registration statement covering the offering from time to time of up to $150.0 million of equity securities. Kaiser's capital expenditures during the three months ended March 31, 1998, were $13.7 million, and were used primarily to improve production efficiency, reduce operating costs, expand capacity at existing facilities, and construct new facilities. Total consolidated capital expenditures (of which approximately 8% is expected to be funded by Kaiser's minority partners in certain foreign joint ventures) are expected to be between $75.0 and $125.0 million per annum in each of 1998 through 2000. During the first quarter of 1998, the Micromill(TM) facility, which was constructed in Nevada during 1996 as a demonstration and production facility, delivered its first commercial product shipments to customers, but the amount of such shipments was minimal. Additional product trials for international and domestic customers are ongoing and Kaiser currently expects increased commercial deliveries from the facility during the second quarter of 1998. However, the Micromill(TM) technology has not yet been fully implemented or commercialized and there can be no assurances that full implementation or commercialization will be successful. Management continues to evaluate numerous projects, including the Micromill(TM) technology, all of which require substantial capital in both the United States and overseas. Kaiser believes that its existing cash resources, together with cash flow from operations and borrowings under the KACC Credit Agreement, will be sufficient to satisfy its working capital and capital expenditure requirements for the next year. With respect to its long-term liquidity, Kaiser believes that operating cash flow, together with its ability to obtain both short- and long-term financing, should provide sufficient funds to meet its long-term working capital and capital expenditure requirements. FOREST PRODUCTS OPERATIONS As of March 31, 1998, $30.3 million of borrowings was available under the Pacific Lumber Credit Agreement, of which $4.9 million was available for letters of credit and $20.6 million was restricted to timberland acquisitions. As of March 31, 1998, $9.4 million of borrowings were outstanding and letters of credit outstanding amounted to $15.1 million. MGI 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, MGI and its subsidiaries believe that their existing cash and cash equivalents, together with their ability to generate sufficient levels of cash from operations and their ability to obtain both short- and long-term financing, should provide sufficient funds to meet their working capital and capital expenditure requirements. However, due to their highly leveraged condition, MGI and its subsidiaries (and in turn MGHI) are more sensitive than less leveraged companies to factors affecting their operations, including litigation and governmental regulation affecting their timber harvesting practices (see "--Trends" below), increased competition from other lumber producers or alternative building products and general economic conditions. REAL ESTATE AND OTHER OPERATIONS As of March 31, 1998, the Company's real estate and other subsidiaries had approximately $9.4 million available for use under the MCOP Credit Agreement. The Company believes that the existing cash and credit facilities of its real estate and other subsidiaries are sufficient to fund the working capital and capital expenditure requirements of such subsidiaries for the next year. With respect to the long-term liquidity of such subsidiaries, the Company believes that their ability to generate cash from the sale of their existing real estate, together with their ability to obtain financing, should provide sufficient funds to meet their working capital and capital expenditure requirements. TRENDS FOREST PRODUCTS OPERATIONS Pacific Lumber's business is subject to a variety of California and federal laws and regulations dealing with timber harvesting, threatened and endangered species and habitat for such species, and air and water quality. Compliance with such laws and regulations plays a significant role in Pacific Lumber's business. While 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 costs of Pacific Lumber, they have not had a significant adverse effect on the Company's financial position, results of operations or liquidity. However, these laws and related administrative actions and legal challenges have severely restricted the ability of Pacific Lumber to harvest virgin old growth timber, and to a lesser extent, residual old growth timber on its timberlands. On September 28, 1996, the Pacific Lumber Parties entered into the Headwaters Agreement with the United States and California which provides the framework for the acquisition by the United States and California of the Headwaters Timberlands. A substantial portion of the Headwaters Timberlands contains virgin old growth timber. Approximately 4,900 of these acres are owned by Salmon Creek, with the remaining acreage being owned by Scotia Pacific (Pacific Lumber having harvesting rights on approximately 300 of such acres). The Headwaters Timberlands would be transferred in exchange for (a) cash or other consideration from the United States and California having an aggregate fair market value of $300 million, and (b) approximately 7,800 acres of timberlands to be acquired from a third party. As part of the Headwaters Agreement, the Pacific Lumber Parties agreed to not enter the Headwaters Timberlands to conduct any logging or salvage operations. Closing of the Headwaters Agreement is subject to various conditions, including federal and California funding, approval of an SYP, approval of a Multi-Species HCP, issuance of the Permits and the issuance of certain tax agreements satisfactory to the Pacific Lumber Parties. In November 1997, President Clinton signed an appropriations bill which contains authorization for the expenditure of $250 million of federal funds towards consummation of the Headwaters Agreement. On February 27, 1998, Pacific Lumber, MAXXAM and various government agencies entered into the HCP/SYP Agreement regarding certain understandings that they had reached regarding the Multi-Species HCP, the Permits and the SYP. The HCP/SYP Agreement provides that the Permits and Multi-Species HCP would have a term of 50 years, and would limit the activities which could be conducted by Pacific Lumber in twelve forest groves to those which would not be detrimental to marbled murrelet habitat. These groves aggregate approximately 8,000 acres and consist of substantial quantities of virgin and residual old growth redwood and Douglas-fir timber. The Company believes that the HCP/SYP Agreement is a favorable development that enhances its position in connection with legal and regulatory challenges to Pacific Lumber's THPs as well as the prospects for consummation of the Headwaters Agreement, the approval of the Multi-Species HCP and SYP and the issuance of the Permits. Several species, including the northern spotted owl, the marbled murrelet and the coho salmon, have been listed as endangered or threatened under the ESA and/or the CESA. Pacific Lumber has developed federal and state northern spotted owl management plans which permit harvesting activities to be conducted so long as Pacific Lumber adheres to certain measures designed to protect the northern spotted owl. The potential impact of the listings of the marbled murrelet and the coho salmon is more uncertain. If the Multi-Species HCP is approved, Pacific Lumber would be issued the Permits, which would allow limited incidental "take" of listed species so long as there was no "jeopardy" to the continued existence of the species and the Multi-Species HCP would identify the measures to be instituted in order to minimize and mitigate the anticipated level of take to the greatest extent possible. The Multi-Species HCP would not only provide for Pacific Lumber's compliance with habitat requirements for currently listed species, it would also provide greater certainty and protection for Pacific Lumber with regard to identified species that may be listed in the future. Pacific Lumber is attempting to include in the Multi-Species HCP a resolution of the effect of potential regulatory limits by the EPA on sedimentation, temperature and other factors for seventeen northern California rivers and certain of their tributaries, including rivers within Pacific Lumber's timberlands. These limitations would be aimed at protecting water quality. Lawsuits are pending or threatened which seek to prevent Pacific Lumber from implementing certain of its approved THPs or other operations. While challenges with respect to Pacific Lumber's young growth timber have historically been limited, a lawsuit relating to the coho salmon was recently filed under the ESA which relates to a significant number of THPs covering young growth timber of Pacific Lumber. While the Company expects these environmentally focused objections and lawsuits to continue, it believes that the HCP/SYP Agreement will enhance Pacific Lumber's position in connection with these challenges. The Company also believes that the Multi-Species HCP would expedite the preparation and facilitate approval of its THPs. The HCP/SYP Agreement also contains certain provisions relating to the SYP. The Company expects Pacific Lumber to propose an LTSY which is approximately 10% less than Pacific Lumber's average timber harvest over the last three years. If the SYP is approved by the CDF, Pacific Lumber will have complied with certain BOF regulations requiring that timber companies project timber growth and harvest on their timberlands over a 100-year planning period and establish an LTSY harvest level. The SYP must demonstrate 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. An approved SYP is expected to be valid for ten years, although it would be subject to review after five years. Thereafter, revised SYPs will be prepared every decade that address the LTSY harvest level based upon reassessment of changes in the resource base and other factors. The final terms of the SYP, the Multi-Species HCP and the Permits are subject to additional negotiation and agreement among the parties as well as public review and comment. While the parties are working diligently to complete the Multi-Species HCP and the SYP as well as the other closing conditions contained in the Headwaters Agreement, there can be no assurance that the Headwaters Agreement will be consummated or that an SYP, Multi-Species HCP or Permits acceptable to Pacific Lumber will be approved. If the Headwaters Agreement is not consummated and Pacific Lumber is unable to harvest or is severely limited in harvesting on various of its timberlands, it intends to continue and/or expand its takings litigation seeking just compensation from the appropriate governmental agencies on the grounds that such restrictions constitute an uncompensated governmental taking of private property for public use. In the event that a Multi-Species HCP is not approved, Pacific Lumber will not enjoy the benefits of a more streamlined THP preparation and review process. Furthermore, if a Multi-Species HCP acceptable to Pacific Lumber is not approved, it is impossible for the Company to determine the potential adverse effect of the listings of the marbled murrelet and coho salmon or the EPA's potential regulatory limitations on river sedimentation on the Company's financial position, results of operations or liquidity until such time as the various regulatory and legal issues are resolved; however, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on significant amounts of its timberlands, such effect could be materially adverse to the Company. 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. No material developments have occurred with respect to such legal proceedings subsequent to the filing of the Form 10-K. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A EXHIBITS: 10 Form of Deferred Fee Agreement between Kaiser, KACC, and directors of Kaiser and KACC (incorporated herein by reference to Exhibit 10 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, File No. 1-9447) *11 Computation of Net Income Per Common and Common Equivalent Share *27.1 Financial Data Schedule for the quarter ended March 31, 1998 *27.2 Restated Financial Data Schedule for the fiscal year ended December 31, 1996 *27.3 Restated Financial Data Schedule for the fiscal year ended December 31, 1995 - --------------- *Included with this filing B REPORTS ON FORM 8-K: None. SIGNATURE 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 INC. Date: May 1, 1998 By: /S/ PAUL N. SCHWARTZ Paul N. Schwartz President, Chief Financial Officer and Director Date: May 1, 1998 By: /S/ ELIZABETH D. BRUMLEY Elizabeth D. Brumley Assistant Controller (Principal Accounting Officer) APPENDIX A GLOSSARY OF DEFINED TERMS AMT Price: Average Midwest United States transaction price for primary aluminum BOF: California Board of Forestry Britt: Britt Lumber Co., Inc., a wholly owned subsidiary of MGI CDF: California Department of Forestry CERCLA: Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 CESA: California Endangered Species Act Class A Preferred Stock: Class A $.05 Non-Cumulative Participating Convertible Preferred Stock of the Company Common Stock: $.50 par value common stock of the Company Company: MAXXAM Inc. Custodial Trust Agreement: A loan and pledge agreement between the Company and the Custodial Trust Company providing for up to $25.0 million in borrowings EPA: Environmental Protection Agency ESA: The federal Endangered Species Act FDIC: Federal Deposit Insurance Corporation FDIC action: A civil action filed by the FDIC on August 2, 1995 entitled Federal Deposit Insurance Corporation, as manager of the FSLIC Resolution Fund v. Charles E. Hurwitz Federated: Federated Development Company Form 10-K: The Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1997 HCP: Habitat conservation plan HCP/SYP Agreement: A February 27, 1998 Pre-Permit Application Agreement in Principle entered into by Pacific Lumber, MAXXAM and various government agencies regarding certain understandings that they had reached regarding the Multi-Species HCP, the Permits and the SYP Headwaters Agreement: The September 28, 1996 agreement between the Pacific Lumber Parties, the United States and California which provides the framework for the acquisition by the United States and California of the Headwaters Timberlands Headwaters Timberlands: Approximately 5,600 acres of Pacific Lumber timberlands consisting of two forest groves commonly referred to as the Headwaters Forest and the Elk Head Springs Forest KACC: Kaiser Aluminum & Chemical Corporation , Kaiser's principal operating subsidiary KACC Credit Agreement: The revolving credit facility with KACC and a bank under which KACC is able to borrow by means of revolving credit advances and letters of credit (up to $125.0 million) in an aggregate amount equal to the lesser of $325.0 million or a borrowing base relating to eligible accounts receivable plus eligible inventory Kaiser: Kaiser Aluminum Corporation, a subsidiary of the Company engaged in aluminum operations LTSY: Long-term sustained yield MCOP Credit Agreement: $14.0 million revolving credit facility between the Company's real estate and other subsidiaries and a bank MGHI: MAXXAM Group Holdings Inc. MGI: MAXXAM Group Inc. Multi-Species HCP: The habitat conservation plan covering multiple species contemplated by the Headwaters Agreement NMFS: National Marine Fisheries Service Notice: A Notice of Charges filed on December 26, 1995 by the OTS against the Company and others with respect to the failure of USAT OTS: the United States Department of Treasury's Office of Thrift Supervision Pacific Lumber: The Pacific Lumber Company, an indirect, wholly owned subsidiary of MGI Pacific Lumber Credit Agreement: The revolving credit agreement between Pacific Lumber and a bank which provides for borrowings of up to $60,000,000, of which $20,000,000 may be used for standby letters of credit and $30,000,000 is restricted to timberland acquisitions Pacific Lumber Parties: Pacific Lumber, including its subsidiaries and affiliates, and MAXXAM Permits: The incidental take permits related to the Multi-Species HCP RTC Portfolio: A portfolio originally consisting of 27 parcels of income producing real property and 28 loans purchased from the Resolution Trust Corporation in June 1991 Salmon Creek: Salmon Creek Corporation, a wholly owned subsidiary of Pacific Lumber Scotia Pacific: Scotia Pacific Holding Company, a wholly owned subsidiary of Pacific Lumber SFAS No. 130: Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" SHRP, Ltd.: Sam Houston Race Park, Ltd., a 90.5%-owned subsidiary of MAXXAM SYP: Sustained yield plan establishing long-term sustained yield harvest levels for a company's timberlands THP: Timber harvesting plan required to be filed with and approved by the CDF prior to the harvesting of timber Timber Notes: The 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015 UFG: United Financial Group, Inc. USAT: United Savings Association of Texas USFWS: United States Fish and Wildlife Service Valco: Volta Aluminium Company Limited, Kaiser's 90%-owned smelter facility in Ghana VRA: Volta River Authority, an electric power supplier to Valco EX-11 2 EXH. 11 TO MAXXAM 1998 1ST QUARTER 1O-Q EXHIBIT 11 MAXXAM INC. COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Three Months Ended March 31, ---------------------------- 1998 1997 -------------- ------------- Weighted average common shares outstanding 7,000,597 8,656,948 Common equivalent shares attributable to stock options and convertible securities 796,918 770,636 -------------- ------------- Total common and common equivalent shares 7,797,515 9,427,584 ============== ============= Earnings per share information: Basic: Net income $ 0.28 $ .08 ============== ============= Diluted: Net income per common and common equivalent share $ 0.25 $ .07 ============== =============
EX-27 3 EXHIBIT 27.1
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-31-1998 JAN-01-1998 MAR-31-1998 1 148,600 84,100 275,800 5,900 584,100 1,342,500 2,187,500 870,000 4,022,900 668,500 1,948,000 0 300 5,000 (6,300) 4,022,900 664,000 664,000 542,400 542,400 70,300 0 53,900 9,000 3,200 1,900 0 0 0 1,900 .28 .25
EX-27 4 EXHIBIT 27.2
5 This schedule contains summary financial information extracted from the Company's consolidated balance sheet and consolidated statement of operations and is qualified in its entirety by reference to such consolidated financial statements together with the related footnotes thereto. 1,000 U.S. DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 336,600 50,300 205,900 5,200 634,800 1,477,400 2,067,400 769,500 4,115,700 743,500 1,951,500 0 300 5,000 (56,100) 4,115,700 2,543,300 2,543,300 2,085,000 2,085,000 327,000 0 184,500 (12,100) (44,900) 22,900 0 0 0 22,900 2.63 2.42
EX-27 5 EXHIBIT 27.3
5 This schedule contains summary financial information extracted from the Company's consolidated balance sheet and consolidated statement of operations and is qualified in its entirety by reference to such consolidated financial statements together with the related footnotes thereto. 1,000 U.S. DOLLARS 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1 104,200 45,900 251,700 5,500 606,800 1,231,700 1,910,000 678,100 3,832,300 684,900 1,610,200 5,000 0 300 (69,600) 3,832,300 2,565,200 2,565,200 1,990,900 1,990,900 316,700 0 181,300 94,500 14,800 57,500 0 0 0 57,500 6.60 6.08
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