-----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, E4QHcQfgEW+l7m0dgZd5VfxvqhYcUnbM78p6iNZdOaVqyca4whkN9h4q5EmmjmZm LyNHXn4OYhHTMZpmbFwG3g== 0000900421-99-000045.txt : 19990816 0000900421-99-000045.hdr.sgml : 19990816 ACCESSION NUMBER: 0000900421-99-000045 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99688950 BUSINESS ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7139757600 MAIL ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 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 2ND 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 JUNE 30, 1999 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 August 11, 1999: 7,000,863 TABLE OF CONTENTS PART I. - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheet at June 30, 1999 and December 31, 1998 Consolidated Statement of Operations for the three and six months ended June 30, 1999 and 1998 Consolidated Statement of Cash Flows for the six months ended June 30, 1999 and 1998 Condensed Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. - OTHER INFORMATION Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signatures APPENDIX A - GLOSSARY OF DEFINED TERMS MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 196.2 $ 294.2 Marketable securities 60.3 19.4 Receivables: Trade, net of allowance for doubtful accounts of $6.2 and $6.4, respectively 183.9 184.5 Other 110.8 122.6 Inventories 553.7 587.5 Prepaid expenses and other current assets 167.4 152.4 ------------ ------------ Total current assets 1,272.3 1,360.6 Property, plant and equipment, net of accumulated depreciation of $963.0 and $921.5, respectively 1,254.8 1,278.9 Timber and timberlands, net of accumulated depletion of $177.0 and $178.4, respectively 257.2 302.3 Investments in and advances to unconsolidated affiliates 117.3 146.5 Deferred income taxes 518.1 555.8 Restricted cash 294.0 17.5 Long-term receivables and other assets 552.5 413.6 ------------ ------------ $ 4,266.2 $ 4,075.2 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 158.1 $ 182.9 Accrued interest 72.2 72.4 Accrued compensation and related benefits 121.9 133.7 Other accrued liabilities 199.4 180.6 Payable to affiliates 79.7 77.1 Short-term borrowings and current maturities of long-term debt 44.2 37.0 ------------ ------------ Total current liabilities 675.5 683.7 Long-term debt, less current maturities 1,957.2 1,971.7 Accrued postretirement medical benefits 697.9 704.5 Other noncurrent liabilities 756.6 604.8 ------------ ------------ Total liabilities 4,087.2 3,964.7 ------------ ------------ Commitments and contingencies Minority interests 141.8 167.3 Stockholders' equity (deficit): Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A $.05 Non-Cumulative Participating Convertible Preferred Stock; shares issued: 669,435 0.3 0.3 Common stock, $.50 par value; 28,000,000 shares authorized; 10,063,359 shares issued 5.0 5.0 Additional capital 222.8 222.8 Accumulated deficit (81.7) (175.7) Treasury stock, at cost (shares held: preferred - 845; common: 3,062,496) (109.2) (109.2) ------------ ------------ Total stockholders' equity (deficit) 37.2 (56.8) ------------ ------------ $ 4,266.2 $ 4,075.2 ============ ============ 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 SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (UNAUDITED) Net sales: Aluminum operations $ 525.0 $ 614.8 $ 1,004.4 $ 1,211.8 Forest products operations 41.4 63.5 88.1 115.4 Real estate and racing operations 22.4 21.3 41.1 36.4 ------------ ------------ ------------ ------------ 588.8 699.6 1,133.6 1,363.6 ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales and operations: Aluminum operations 473.9 503.5 933.8 1,000.6 Forest products operations 36.2 39.5 76.0 72.6 Real estate and racing operations 13.6 11.7 24.5 21.4 Selling, general and administrative expenses 39.0 43.9 78.4 86.1 Depreciation, depletion and amortization 28.7 30.0 58.7 60.6 ------------ ------------ ------------ ------------ 591.4 628.6 1,171.4 1,241.3 ------------ ------------ ------------ ------------ Operating income (loss) (2.6) 71.0 (37.8) 122.3 Other income (expense): Gain on sale of Headwaters Timberlands - - 239.8 - Investment, interest and other income 15.2 10.2 24.5 21.8 Interest expense (49.2) (52.5) (98.6) (106.4) ------------ ------------ ------------ ------------ Income (loss) before income taxes and minority interests (36.6) 28.7 127.9 37.7 Credit (provision) for income taxes 11.6 (10.2) (55.8) (13.4) Minority interests 6.9 (6.1) 21.9 (10.0) ------------ ------------ ------------ ------------ Net income (loss) $ (18.1) $ 12.4 $ 94.0 $ 14.3 ============ ============ ============ ============ Earnings (loss) per share: Basic $ (2.59) $ 1.76 $ 13.42 $ 2.04 ============ ============ ============ ============ Diluted $ (2.59) $ 1.57 $ 12.01 $ 1.83 ============ ============ ============ ============ The accompanying notes are an integral part of these financial statements.
MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS OF DOLLARS)
SIX MONTHS ENDED JUNE 30, -------------------------- 1999 1998 ------------ ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 94.0 $ 14.3 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation, depletion and amortization 58.7 60.6 Gain on sale of Headwaters Timberlands (239.8) - Net gain on other asset dispositions (51.4) (6.3) Net sales (purchases) of marketable securities (31.3) 56.1 Net gain on marketable securities (9.6) (6.9) Minority interests (21.9) 10.0 Amortization of deferred financing costs and discounts on long-term debt 5.1 12.1 Equity in (earnings) loss of unconsolidated affiliates, net of dividends received (3.4) 0.2 Increase (decrease) in cash resulting from changes in: Receivables 17.7 54.4 Inventories 31.4 66.3 Prepaid expenses and other assets (21.7) 12.9 Accounts payable (25.1) (17.9) Accrued and deferred income taxes 48.0 3.3 Payable to affiliates and other accrued liabilities 3.8 (36.7) Long-term assets (32.1) (9.3) Long-term liabilities 40.4 (9.1) Other 3.1 2.1 ------------ ------------ Net cash provided by (used for) operating activities (134.1) 206.1 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sale of Headwaters Timberlands 298.4 - Net proceeds from other dispositions of property and investments 74.3 14.8 Capital expenditures (49.2) (53.5) Restricted cash withdrawals used to acquire timberlands 12.9 - Investment in subsidiaries and joint ventures - (1.6) Other (3.1) 3.1 ------------ ------------ Net cash provided by (used for) investing activities 333.3 (37.2) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 1.0 4.8 Redemptions, repurchases and principal payments on long-term debt (8.7) (19.0) Redemption of preference stock (1.4) (8.5) Restricted cash deposits (289.4) - Treasury stock repurchases - (35.1) Other 1.3 1.6 ------------ ------------ Net cash used for financing activities (297.2) (56.2) ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (98.0) 112.7 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 294.2 164.6 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 196.2 $ 277.3 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest $ 93.6 $ 94.9 Income taxes paid 8.9 9.0 The accompanying notes are an integral part of these financial statements.
MAXXAM INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 June 30, 1999, the consolidated results of operations for the three and six months ended June 30, 1999 and 1998 and consolidated cash flows for the six months ended June 30, 1999 and 1998. Certain reclassifications of prior period information have been made to conform to the current presentation. There were no reconciling items between net income and comprehensive income in either of the three and six month periods ended June 30, 1999 and 1998. Labor Related Costs Kaiser is currently operating five of its United States facilities with salaried employees and other workers as a result of the September 30, 1998 strike by the USWA and the subsequent "lock-out" by Kaiser in January 1999. However, Kaiser has continued to accrue certain benefits for the USWA members during the strike and subsequent lock-out. For purposes of computing the benefit-related costs and liabilities to be reflected in the accompanying consolidated financial statements, Kaiser based its accruals on the terms of the previously existing (expired) USWA contract. Any differences between any amounts accrued and any amounts ultimately agreed to during the collective bargaining process will be reflected in future results during the term of any new contract. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133 which requires companies to recognize all derivative instruments as assets or liabilities in the balance sheet and to measure those instruments at fair value. Under SFAS No. 133, the Company will be required to "mark-to-market" its hedging positions at each period end in advance of the period of recognition for the transaction to which the hedges relate. Changes in the fair value of the Company's open hedging positions will be reflected as an increase or reduction in stockholders' equity through comprehensive income. The impact of the changes in fair value of the Company's hedging positions will be reversed from comprehensive income (net of any fluctuations in other "open" positions) and will be reflected in traditional net income upon the occurrence of the transactions to which the hedges relate. Currently, the dollar amount of the Company's comprehensive income adjustments is not significant so there is no significant difference between "traditional" net income and comprehensive income. However, differences between comprehensive income and traditional net income may become significant in future periods as SFAS No. 133 will result in fluctuations in comprehensive income and stockholders' equity in periods of price volatility, despite the fact that the Company's cash flow and earnings will be "fixed" to the extent hedged. SFAS No. 133 initially required adoption on or before January 1, 2000. However, in June 1999, the FASB issued SFAS No. 137 which delayed the required implementation date of SFAS No. 133 to no later than January 1, 2001. The Company is currently evaluating how and when to implement SFAS No. 133. 2. SIGNIFICANT ACQUISITIONS AND DISPOSITIONS Headwaters Transactions As described in Note 7 below, on September 28, 1996, the Pacific Lumber Parties entered into the Headwaters Agreement with the United States and California which provided 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 were owned by Salmon Creek, with the remaining 700 acres being owned by Scotia LLC (Pacific Lumber owned the timber and related timber harvesting rights on this acreage). On March 1, 1999, the Pacific Lumber Parties, the United States and California consummated the Headwaters Agreement. Salmon Creek received $299.9 million for its 4,900 acres, and for its 700 acres, Pacific Lumber received the 7,700 acre Elk River Timberlands which Pacific Lumber contributed to Scotia LLC in June 1999. Of these proceeds, $285.0 million was deposited into an escrow account held by an escrow agent and are to be made available as necessary to support the Timber Notes, and may be released only under certain circumstances. As of June 30, 1999, the Escrowed Funds were $288.2 million, which includes interest earned. As a result of the disposition of the Headwaters Timberlands, the Company recognized a pre-tax gain of $239.8 million ($142.1 million net of deferred taxes or $18.17 per share) in the first quarter of 1999. This amount represents the gain attributable to the portion of the Headwaters Timberlands for which the Company received $299.9 million in cash. With respect to the remaining portion of the Headwaters Timberlands for which the Company received the Elk River Timberlands, no gain has been recognized as this represented an exchange of substantially similar productive assets. These timberlands have been reflected in the Company's financial statements at an amount which represents the Company's historical cost for the timberlands which were transferred to the United States. Scotia LLC and Pacific Lumber also entered into the Owl Creek Agreement and the Grizzly Creek Agreement with California regarding the future sale to California of the Owl Creek and Grizzly Creek groves. The Owl Creek Agreement provides for Scotia LLC to sell the Owl Creek grove to California, no later than June 30, 2002, for the lesser of the appraised fair market value or $79.7 million. At California's option, 25% of the payment may be paid upon closing with three equal annual installments thereafter and without interest. With respect to the Grizzly Creek Agreement, California may purchase from Pacific Lumber, no later than October 31, 2000, a portion of this grove for a purchase price determined based on fair market value, but not to exceed $19.9 million. The net proceeds from the Grizzly Creek grove will be placed into an escrow account (on the same basis as the net proceeds from the sale of the Headwaters Timberlands) unless, at the time of receipt of such proceeds, the Escrowed Funds are no longer held in an escrow account. California also has a five year option under the Grizzly Creek Agreement to purchase additional property adjacent to the Grizzly Creek grove. The sale of the Owl Creek grove or Grizzly Creek grove will not be reflected in the Company's financial statements until it has been concluded. Acquisition of Remaining Minority Interest in KLHP In February 1999, KACC, through a subsidiary, completed the acquisition of its joint venture partner's 45% interest in KLHP for a cash purchase price of approximately $10.0 million. As KACC already owned 55% of KLHP, the results of KLHP were already included in the Company's consolidated financial statements. Disposition of Interest in AKW On April 1, 1999, KACC completed the previously announced sale of its 50% interest in AKW, an aluminum wheels joint venture, to its partner, Accuride Corporation for $70.4 million. The sale resulted in the Company recognizing a net pre-tax gain of $50.5 million in the second quarter of 1999. The Company's equity in income of AKW for the quarter ended March 31, 1999 was $2.5 million. The Company's equity in income of AKW for the quarter and six-month periods ended June 30, 1998 was $2.3 million and $3.4 million, respectively. 3. INVENTORIES Inventories consist of the following (in millions):
JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ Aluminum Operations: Finished fabricated aluminum products $ 118.2 $ 112.4 Primary aluminum and work in process 171.6 205.6 Bauxite and alumina 118.9 109.5 Operating supplies and repair and maintenance parts 116.0 116.0 ------------ ------------ 524.7 543.5 ------------ ------------ Forest Products Operations: Lumber 24.2 36.0 Logs 4.8 8.0 ------------ ------------ 29.0 44.0 ------------ ------------ $ 553.7 $ 587.5 ============ ============
4. RESTRICTED CASH Cash and cash equivalents include restricted cash held as security for short positions in marketable securities and for debt service payments on the Timber Notes of $42.9 million and $96.1 million at June 30, 1999 and December 31, 1998, respectively. Long-term restricted cash at June 30, 1999 primarily consists of the Escrowed Funds and funds held in the Prefunding Account. Long-term restricted cash at December 31, 1998 primarily consists of funds held in the Prefunding Account. 5. LONG-TERM DEBT Long-term debt consists of the following (in millions):
JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ 12% MGHI Senior Secured Notes due August 1, 2003 $ 130.0 $ 130.0 Pacific Lumber Credit Agreement - - 6.55% Scotia LLC Class A-1 Timber Collateralized Notes due July 20, 2028 155.4 160.7 7.11% Scotia LLC Class A-2 Timber Collateralized Notes due July 20, 2028 243.2 243.2 7.71% Scotia LLC Class A-3 Timber Collateralized Notes due July 20, 2028 463.3 463.3 KACC Credit Agreement - - 10-7/8% KACC Senior Notes due October 15, 2006, including premium 225.7 225.7 9-7/8% KACC Senior Notes due February 15, 2002, net of discount 224.5 224.4 Alpart CARIFA Loans 60.0 60.0 12-3/4% KACC Senior Subordinated Notes due February 1, 2003 400.0 400.0 Other aluminum operations debt 52.5 52.9 Other notes and contracts, primarily secured by receivables, buildings, real estate and equipment 28.3 30.0 ------------ ------------ 1,982.9 1,990.2 Less: current maturities (25.7) (18.5) ------------ ------------ $ 1,957.2 $ 1,971.7 ============ ============
6. PER SHARE INFORMATION Basic earnings (loss) per share is calculated by dividing net income (loss) 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 were 7,000,863 shares and 7,000,597 shares for the three and six months ended June 30, 1999 and 1998, respectively. Diluted earnings (loss) per share calculations also include the dilutive effect of the Class A Preferred Stock (which is convertible into Common Stock) as well as common and preferred stock options. The weighted average number of common and common equivalent shares was 7,000,863 shares and 7,829,119 shares for the three months ended June 30, 1999 and 1998, respectively, and 7,824,871 shares and 7,813,317 shares for the six months ended June 30, 1999 and 1998, respectively. The impact of outstanding convertible stock and stock options of 831,309 was excluded from the weighted average share calculation for the three months ended June 30, 1999 as its effect would have been antidilutive. 7. CONTINGENCIES Aluminum Operations 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 claims 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 June 30, 1999, the balance of such accruals, which are primarily included in other noncurrent liabilities, was $50.1 million. 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 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 these environmental accruals will be approximately $3.0 million to $8.0 million for the years 1999 through 2003 and an aggregate of approximately $30.0 million 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. As the resolution of these matters is subject to further regulatory review and approval, no specific assurance 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 it has insurance coverage available to recover certain incurred and future environmental costs and is actively pursuing claims in this regard. No assurances can be given that Kaiser will be successful in its attempts to recover incurred or future costs from insurers or that the amount of recoveries received will ultimately be adequate to cover costs incurred. 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 sold for at least 20 years. At June 30, 1999, the number of claims pending was approximately 94,700, as compared to 86,400 at December 31, 1998. During 1998, approximately 22,900 of such claims were received and 13,900 were settled or dismissed. During the quarter and six-month periods ended June 30, 1999, approximately 7,000 and 16,300 of such claims were received and 3,600 and 8,000 of such claims were settled or dismissed. However, the foregoing claim and settlement figures as of and for the quarter and six-month periods ended June 30, 1999 do not reflect the fact that as of June 30, 1999, KACC reached agreements under which it will settle approximately 27,000 of the pending asbestos-related claims over an extended period. Kaiser maintains a liability for estimated asbestos-related costs for claims filed to date and an estimate of claims expected to be filed over a 10 year period (i.e., through 2009). Kaiser's estimate is based on Kaiser's view, at each balance sheet date, of the current and anticipated number of asbestos-related claims, the 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. However, there are inherent uncertainties involved in estimating asbestos-related costs and Kaiser's actual costs could exceed Kaiser's estimates due to changes in facts and circumstances after the date of each estimate. Further, while Kaiser does not presently believe there is a reasonable basis for estimating asbestos-related costs beyond 2009 and, accordingly, no accrual has been recorded for any costs which may be incurred beyond 2009, there is a reasonable possibility that such costs may continue beyond 2009, and that such costs could be substantial. As of June 30, 1999, an estimated asbestos-related cost accrual of $337.5 million, before consideration of insurance recoveries, has been reflected in the accompanying financial statements primarily in other noncurrent liabilities. Kaiser estimates that annual future cash payments for asbestos-related costs will be approximately $37.0 million to $54.0 million for each of the years 1999 through 2003, and an aggregate of approximately $123.0 million thereafter. Kaiser believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. Although Kaiser has settled asbestos-related coverage matters with certain of its insurance carriers, other carriers have not yet agreed to settlements. The timing and amount of ultimate recoveries from these insurance carriers will depend on the pace of claims review and processing by such carriers and on the resolution of any disputes regarding coverage under such policies. Kaiser believes that substantial recoveries from the insurance carriers are probable. Kaiser reached this conclusion after considering its prior insurance-related recoveries in respect of asbestos-related claims, existing insurance policies, and the advice of Heller Ehrman White & McAuliffe with respect to applicable insurance coverage law relating to the terms and conditions of those policies. Accordingly, an estimated aggregate insurance recovery of $272.5 million, determined on the same basis as the asbestos-related cost accrual, is recorded primarily in long- term receivables and other assets at June 30, 1999. Kaiser continues to monitor claims activity, the status of lawsuits (including settlement initiatives), legislative developments, 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. In the second quarter of 1999, this process resulted in the Company reflecting a $38.0 million charge (included in other income (expense)) for asbestos-related claims, net of expected insurance recoveries, based on recent cost and other trends experienced by KACC and other companies. 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, the Company 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. However, as Kaiser's estimates are periodically re-evaluated, additional charges may be necessary and such charges could be material to the results of the period in which they are recorded. Labor Matters In connection with the USWA strike and subsequent lock-out by KACC, certain allegations of ULP's were filed with the NLRB by the USWA. KACC responded to all such allegations and believed that they were without merit. In July 1999, all material charges were dismissed by the NLRB's Regional Director. The USWA has announced its intention to appeal the dismissal. If the allegations are sustained on appeal, KACC could be required to make locked-out employees whole for back wages from the date of the lock-out in January 1999. While uncertainties are inherent in the final outcome of such matters, the Company believes that the resolution of the alleged ULPs should not result in a material adverse effect on its consolidated financial position, results of operations, or liquidity. Forest Products Operations Regulatory and environmental matters play a significant role in the Company's business, which is subject to a variety of California and federal laws and regulations, as well as the Final HCP, Final SYP and Pacific Lumber's 1999 TOL, dealing with timber harvesting practices, threatened and endangered species and habitat for such species, and air and water quality. While regulatory and environmental concerns have resulted in restrictions on the geographic scope and timing of the Company's timber operations, increased operational costs and engendered litigation and other challenges to the Company's operations, prior to 1998 they had not had a significant adverse effect on the Company's financial position, results of operations or liquidity. However, the Company's results of operations for 1998 and for 1999 through the date of this report were adversely affected by certain regulatory and environmental matters, including during the second half of 1998 through the date of this report, the absence of a sufficient number of available THPs to enable the Company to conduct its operations at historic levels. On September 28, 1996, the Pacific Lumber Parties entered into the Headwaters Agreement with the United States and California which provided the framework for the acquisition of the Headwaters Timberlands by the United States and California. Consummation of the Headwaters Agreement was also conditioned upon, among other things, approval of an SYP, approval of a Multi-Species HCP and issuance of the Permits. As further described in Note 2 "Headwaters Transactions," on March 1, 1999, the Pacific Lumber Parties, the United States and California consummated the Headwaters Agreement. In addition to the transfer of the Headwaters Timberlands by the Pacific Lumber Parties described in Note 2, the Final SYP and the Final HCP were approved and the Permits were issued. The Pacific Lumber Parties and California also executed the California Agreement. The Final SYP complies with certain California Board of Forestry regulations requiring timber companies to project timber growth and harvest on their timberlands over a 100-year planning period and establish an LTSY harvest level. An SYP must demonstrate that the average annual harvest over any rolling ten-year period will not exceed the LTSY harvest level and that a timber company's projected timber inventory is capable of sustaining the LTSY harvest level in the last decade of the 100-year planning period. The Final SYP is effective for 10 years and may be amended by Pacific Lumber subject to approval by the CDF. The Final SYP is subject to review after five years. Revised SYPs would be prepared every decade that address the LTSY harvest level based upon reassessment of changes in the resource base and other factors. Several species, including the northern spotted owl, the marbled murrelet, the coho salmon and the steelhead trout, have been listed as endangered or threatened under the ESA and/or the CESA. The Final HCP and the Permits allow incidental "take" of these and certain other listed species so long as there is no "jeopardy" to the continued existence of such species. The Final HCP identifies the measures to be instituted in order to minimize and mitigate the anticipated level of take to the greatest extent practicable. The Final HCP not only provides for the Company's compliance with habitat requirements for the northern spotted owl, the marbled murrelet, the coho salmon and the steelhead trout, it also provides for issuance of Permits for thirteen additional species that are or may be listed in the future. The Final HCP and related Permits have a term of 50 years, and, among other things, include the following protective measures: (i) setting aside timberlands as marbled murrelet conservation areas; (ii) establishing streamside "no-cut" and limited cut buffers and identifying mass wasting areas of concern based on an assessment of each of the Company's watersheds to be completed within five years; (iii) limiting harvesting activities during certain times of the year and during wet weather conditions, and (iv) making certain specified improvements to the Company's roads. The Final SYP is also subject to the foregoing provisions. The Company believes that the Final SYP and the Final HCP should in the long-term expedite the preparation and facilitate approval of its THPs, although the Company is experiencing difficulties in the THP submission and approval process as it implements these agreements. Under the Federal Clean Water Act, the EPA is required to establish TMDLs in water courses that have been declared to be "water quality impaired." The EPA and the North Coast Regional Water Quality Control Board are in the process of establishing TMDLs for seventeen northern California rivers and certain of their tributaries, including certain water courses that flow within the Company's timberlands. The final TMDL requirements applicable to the Company's timberlands may require aquatic measures that are different from or in addition to the prescriptions to be developed pursuant to the watershed analysis process contained in the Final HCP. Lawsuits are pending and threatened which seek to prevent the Company from implementing the Final HCP and/or the Final SYP, implementing certain of the Company's approved THPs or carrying out certain other operations. On or about January 29, 1999, the Company received the EPIC Notice Letter which alleges various violations of the ESA and challenges, among other things, the validity and legality of the Permits. On or about May 21, 1999, EPIC and other environmental groups sent the Supplemental EPIC Notice Letter, incorporating the EPIC Notice Letter and threatening to sue the Company, Pacific Lumber, Scotia LLC, Salmon Creek and various government agencies for alleged violations of the ESA relating to various aspects of the Headwaters Agreement. Separately, on March 31, 1999, the EPIC-SYP/Permits lawsuit was filed which alleges various violations of the CESA and CEQA, and challenges, among other things, the validity and legality of the Permits issued by California and the Final SYP. On March 31, 1999, the USWA lawsuit was filed which also challenges the validity and legality of the Final SYP. The Company believes that appropriate procedures were followed throughout the public review and approval process concerning the Final Plans, and the Company is working with the relevant state and federal agencies to defend these challenges. Although uncertainties are inherent in the final outcome of the EPIC Notice Letter, the Supplemental EPIC Notice Letter, the EPIC-SYP/Permits lawsuit and the USWA lawsuit, the Company believes that the resolution of these matters should not result in a material adverse effect on its financial condition or results of operations or the ability to harvest timber. While the Company expects environmentally focused objections and lawsuits to continue, it believes that the Final HCP, Final SYP and the Permits should enhance its position in connection with these continuing challenges and, over time, reduce or minimize such challenges. 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. At the time of receivership, the Company owned approximately 13% of the voting stock 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 million 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 and concluded on March 1, 1999. Post trial briefing is expected to continue at least until December 1999. A recommended decision by the Administrative Law Judge is not expected any sooner than early 2000. A final agency decision would be issued by the OTS Director thereafter. Such decision would then be subject to appeal by any of the parties to the federal appellate court. On February 10, 1999, the OTS and FDIC settled with the all the respondents except Mr. Hurwitz, the Company and Federated for $1.0 million and limited cease and desist orders. 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 million 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 these contingencies. Accordingly, it is impossible to assess the ultimate outcome of the foregoing matters or their 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. 8. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS At June 30, 1999, the net unrealized loss on KACC's position in aluminum forward sales and option contracts (excluding the impact of those contracts discussed below which have been marked to market), energy forward purchase and option contracts, and forward foreign exchange contracts was approximately $15.5 million (based on comparisons to applicable quarter-end published market prices). As KACC's hedging activities are generally designed to lock-in a specified price or range of prices, gains or losses on the derivative contracts utilized in these hedging activities will generally be 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 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 and cash flows 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 June 30, 1999, KACC had sold forward, at fixed prices, approximately 12,000 tons of primary aluminum with respect to 1999. As of June 30, 1999, KACC had also entered into option contracts that established a price range for an additional 130,000, 353,000 and 124,000 tons of primary aluminum for 1999, 2000 and 2001, respectively. Additionally, through June 30, 1999, KACC had entered into a series of transactions with a counterparty that will provide KACC with a premium over the forward market prices at the date of the transaction for 4,000 tons of primary aluminum per month during the period July 1999 through June 2001. KACC also contracted with the counterparty to receive certain fixed prices (also above the forward market prices at the date of the transaction) on 8,000 tons of primary aluminum per month over a three year period commencing October 2001, unless market prices during certain periods decline below a stipulated "floor" price, in which case, the fixed price sales portion of the transactions terminate. The price at which the October 2001 and later transactions terminate is well below current market prices. While Kaiser believes that the October 2001 and later transactions are consistent with its stated hedging objectives, these positions do not qualify for treatment as a "hedge" under current accounting guidelines. Accordingly, these positions are "marked to market" each period. For the quarter and six-month periods ended June 30, 1999, Kaiser recorded mark-to- market charges of $13.5 million and $14.1 million in other income (expense) associated with the above transactions. As of June 30, 1999, KACC had sold forward virtually all of the alumina available to it in excess of its projected internal smelting requirements for 1999, 2000 and 2001 at prices indexed to future prices of primary aluminum. Energy KACC is exposed to energy price risk from fluctuating prices for fuel oil, diesel fuel 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 June 30, 1999, KACC had a combination of fixed price purchase and option contracts for the purchase of approximately 27,000 MMBtu of natural gas per day during the remainder of 1999. As of June 30, 1999, KACC also held a combination of fixed price purchase and option contracts for an average of 249,000 and 232,000 barrels per month of fuel oil and diesel fuel for 1999 and 2000, respectively. Foreign Currency KACC enters into forward exchange contracts to hedge material cash commitments to foreign subsidiaries or affiliates. At June 30, 1999, KACC had net forward foreign exchange contracts totaling approximately $138.9 million for the purchase of 208.7 million Australian dollars from July 1999 through May 2001, in respect of its Australian dollar-denominated commitments for the remainder of 1999 through May 2001. 9. SEGMENT INFORMATION The following table presents financial information by reportable segment (in millions).
FOREST REAL RACING CONSOLIDATED ALUMINUM PRODUCTS ESTATE OPERATIONS CORPORATE TOTAL ------------ ----------- ---------- ------------ ------------ ------------ Net sales to unaffiliated customers for the three months ended: June 30, 1999 $ 525.0 $ 41.4 $ 17.6 $ 4.8 $ - $ 588.8 June 30, 1998 614.8 63.5 17.3 4.0 - 699.6 Operating income (loss) for the three months ended: June 30, 1999 2.2 (3.3) 0.8 (0.1) (2.2) (2.6) June 30, 1998 56.8 14.7 2.7 (0.3) (2.9) 71.0 Depreciation, depletion and amortization for the three months ended: June 30, 1999 22.6 4.3 1.3 0.4 0.1 28.7 June 30, 1998 23.4 5.8 0.4 0.2 0.2 30.0 Net sales to unaffiliated customers for the six months ended: June 30, 1999 1,004.4 88.1 28.2 12.9 - 1,133.6 June 30, 1998 1,211.8 115.4 25.8 10.6 - 1,363.6 Operating income (loss) for the six months ended: June 30, 1999 (29.3) (4.7) (1.3) 2.2 (4.7) (37.8) June 30, 1998 103.1 24.8 0.2 0.6 (6.4) 122.3 Depreciation, depletion and amortization for the six months ended: June 30, 1999 45.5 9.2 3.2 0.6 0.2 58.7 June 30, 1998 47.3 11.4 1.1 0.5 0.3 60.6 Total assets as of: June 30, 1999 2,986.9 879.2 187.5 37.7 174.9 4,266.2 December 31, 1998 2,928.7 682.6 194.6 36.3 233.0 4,075.2
Operating income (loss) in the column entitled "Corporate" represents corporate general and administrative expenses not directly attributable to the reportable segments. This column also serves to reconcile the total of the reportable segments' amounts to totals in the Company's consolidated financial statements. The reconciling amounts for total assets for June 30, 1999 and December 31, 1998 are primarily related to deferred tax assets. The increase in assets for the forest products segment between periods is primarily due to the deposit of $285.0 million of Escrowed Funds related to the sale of the Headwaters Timberlands. 10. SUBSEQUENT EVENT On July 5, 1999, KACC's Gramercy, Louisiana alumina refinery was extensively damaged by an explosion in the digestion area of the plant. Approximately 24 employees were injured in the incident, several of them severely. The cause of the incident is under investigation by KACC and governmental agencies. KACC expects that production at the plant will be curtailed for many months. KACC has declared force majeure with respect to its sales and purchase contracts, but continues to work with customers to assist them in securing alternative sources of alumina. More than 30 lawsuits have been filed against KACC alleging, among other things, property damage and personal injury as a result of the incident. In addition, a claim for alleged business interruption losses has been made by a neighboring business. The aggregate amount of damages sought in the lawsuits and other claims cannot be determined at this time. KACC has significant amounts of property damage, business interruption, liability and workers compensation insurance coverage relating to the Gramercy incident. Deductibles and self-retention provisions under the insurance coverage for the Gramercy incident total $5.0 million. The incident will cause KACC to incur incremental costs for clean-up and other activities in the second half of 1999 and will cause the affected operations to incur certain operating losses until production can be restored. Further, depending on the outcome of the ongoing investigations by various regulatory agencies, KACC could also be subject to certain fines or penalties, which may not be covered by insurance. However, based on what is known to date, Kaiser currently believes that the financial impact of this incident (in excess of the deductibles and self-retention provisions) will be largely offset by insurance coverage. The accompanying consolidated financial statements as of and for the periods ended June 30, 1999 do not include any provisions for the Gramercy incident. 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 Quarterly Report on Form 10-Q contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this section, in Item 3. "Quantitative and Qualitative Disclosures About Market Risk" and in Part II. Item 1. "Legal Proceedings." 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 Form 10-Q 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 four 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 MPC; and racing operations through SHRP, Ltd. 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," "MPC" and "SHRP, Ltd." 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 four business segments: bauxite and alumina, primary aluminum, flat-rolled products and engineered products. Kaiser uses a portion of its bauxite, alumina and primary aluminum production for additional processing at certain of its downstream facilities. Intersegment transfers are valued at estimated market prices. Recent Events and Developments Incident at Gramercy Facility On July 5, 1999, KACC's Gramercy, Louisiana alumina refinery was extensively damaged by an explosion in the digestion area of the plant. Approximately 24 employees were injured in the incident, several of them severely. The cause of the incident is under investigation by KACC and government agencies. KACC's continuing investigation suggests that the incident was caused by a power distribution interruption involving the plant's on-site power house that caused process flow pumps to cease operating. KACC has also identified certain other conditions that were present at the time of the incident and continues to investigate these and other matters. KACC expects that production at the plant will be curtailed for many months. KACC has declared force majeure with respect to its sales and purchase contracts but continues to work with customers to assist them in securing alternative sources of alumina. More than 30 lawsuits have been filed against KACC alleging, among other things, property damage and personal injury as a result of the incident. In addition, a claim for alleged business interruption losses has been made by a neighboring business. The aggregate amount of damages sought in the lawsuits and other claims cannot be determined at this time. KACC has significant amounts of property damage, business interruption, liability and workers compensation insurance coverage relating to the Gramercy incident. Deductibles and self-retention provisions under the insurance coverage for the Gramercy incident total $5.0 million. The incident will cause KACC to incur incremental costs for clean-up and other activities in the second half of 1999 and will cause the affected operations to incur certain operating losses until production can be restored. Further, depending on the outcome of the ongoing investigations by various regulatory agencies, KACC could also be subject to certain fines or penalties, which may not be covered by insurance. However, based on what is known to date, Kaiser currently believes that the financial impact of this incident (in excess of the deductibles and self-retention provisions) will be largely offset by insurance coverage. The accompanying consolidated financial statements as of and for the periods ended June 30, 1999 do not include any provisions for the Gramercy incident. KACC has announced that its intention is to rebuild the Gramercy facility assuming that it is able to reach acceptable agreements with the various stakeholders to ensure the plant's competitive future. KACC hopes to have the plant operating at a reduced production level in mid-2000 and to have the plant completely operational by the end of 2000. However, there can be no assurance that the Gramercy facility will be made operational on this schedule. Labor Matters Substantially all of KACC's hourly workforce at its Gramercy, Louisiana, alumina refinery, Mead and Tacoma, Washington, aluminum smelters, Trentwood, Washington, rolling mill, and Newark, Ohio, extrusion facility were covered by a master labor agreement with the USWA which expired on September 30, 1998. The parties did not reach an agreement prior to the expiration of the master agreement and the USWA chose to strike. In January 1999 KACC declined an offer by the USWA to have the striking workers return to work at the five plants without a new agreement. KACC imposed a lock-out to support its bargaining position and continues to operate the plants with salaried employees and other workers as it has since the strike began. As a result of the USWA strike, KACC temporarily curtailed three out of a total of eleven potlines at its Mead and Tacoma, Washington, aluminum smelters at September 30, 1998 (representing approximately 70,000 tons per year of production capacity out of a total combined production capacity of 273,000 tons per year at the facilities). The first of the two Mead potline restarts began in March 1999 and was completed during the second quarter of 1999. Restart activities on the second of the two Mead potlines commenced during the second quarter of 1999, and Kaiser expects the line to be fully operational before the end of the third quarter of 1999. The timing for any restart of the Tacoma potline has yet to be determined and will depend upon market conditions and other factors. While Kaiser initially experienced an adverse strike-related impact on its profitability, Kaiser currently believes that KACC's operations at the affected facilities have been substantially stabilized and will be able to run at, or near, full capacity, and that the effect of the incremental costs associated with operating the affected plants during the dispute was eliminated or substantially reduced as of January 1999 (excluding the impacts of the restart costs discussed above and the effect of market factors such as the continued market-related curtailment at the Tacoma smelter). However, no assurances can be given that KACC's efforts to run the plants on a sustained basis, without a significant business interruption or material adverse impact on Kaiser's operating results, will be successful. KACC and the USWA continue to communicate. A series of bargaining sessions are scheduled for August 1999. The objective of KACC has been, and continues to be, to negotiate a fair labor contract that is consistent with its business strategy and the commercial realities of the marketplace. Strategic Initiatives Kaiser has devoted significant efforts toward analyzing its existing asset portfolio with the intent of focusing its efforts and capital in sectors of the industry that are considered most attractive, and in which Kaiser believes it is well positioned to capture value. The initial steps of this process resulted in the June 1997 acquisition of the Bellwood extrusion facility, the May 1997 formation of AKW, the rationalization of certain of Kaiser's engineered products operations, Kaiser's investment to expand its production capacity for heat treat flat- rolled products at its Trentwood, Washington, rolling mill, and Kaiser's fourth quarter 1998 decision to seek a strategic partner for further development and deployment of KACC's Micromill(TM) technology. This process has continued in 1999. In February 1999, KACC completed the acquisition of the remaining 45% interest in KLHP, an alumina marketing venture, from its joint venture partner for a cash purchase price of approximately $10.0 million. Additionally, in April 1999, KACC completed the sale of its interest in AKW, an aluminum wheel joint venture, to its partner, Accuride Corporation for $70.4 million. The cash sale represents a continuation of Kaiser's strategy to focus its resources and efforts in industry segments that are considered most attractive and in which it believes it is well positioned to capture value. Another area of emphasis has been a continuing focus on managing Kaiser's legacy liabilities, including Kaiser's active pursuit of claims in respect of insurance coverage for certain incurred and future environmental costs, as evidenced by Kaiser's fourth quarter 1998 receipt of recoveries totaling approximately $35.0 million related to current and future claims against certain of its insurers. Valco Operating Level Kaiser's 90%-owned Valco smelter operated only one of its five potlines during most of 1998. Each of Valco's potlines is capable of producing approximately 40,000 tons per year of primary aluminum. Valco earned compensation in 1998 (in the form of energy credits to be utilized over the last half of 1998 and during 1999) from the VRA in lieu of the power necessary to run two of the potlines that were curtailed during 1998. The compensation substantially mitigated the financial impact in 1998 of the curtailment of such lines. However, Valco did not receive any compensation from the VRA for one additional potline which was curtailed in January 1998. Valco currently expects to operate an average of three lines during 1999, an operating rate that it reached during the second quarter of 1999. Valco has notified the VRA that it believes it had the contractual rights at the beginning of 1998 and 1999 to sufficient energy to run four and one-half potlines for the balance of both years. Valco continues to seek compensation from the VRA with respect to the 1998 and 1999 reductions in 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 in the future. No assurances can be given as to the success of these discussions. Summary The following table presents selected operational and financial information for the three and six months ended June 30, 1999 and 1998.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES) Shipments:(1) Alumina: Third party 611.4 652.5 1,098.4 1,077.1 Intersegment 189.3 196.6 339.6 412.4 ------------ ------------ ------------ ------------ Total alumina 800.7 849.1 1,438.0 1,489.5 ------------ ------------ ------------ ------------ Primary aluminum: Third party 69.0 68.3 131.9 148.8 Intersegment 46.3 42.5 85.8 86.1 ------------ ------------ ------------ ------------ Total primary aluminum 115.3 110.8 217.7 234.9 ------------ ------------ ------------ ------------ Flat-rolled products 59.0 63.6 111.5 123.3 ------------ ------------ ------------ ------------ Engineered products 43.5 44.2 84.9 90.0 ------------ ------------ ------------ ------------ Average realized third party sales price: (2) Alumina (per ton) $ 170 $ 197 $ 171 $ 198 Primary aluminum (per pound) .66 .70 .65 .71 Net sales: Bauxite and alumina: Third party (includes net sales of bauxite) $ 110.8 $ 136.9 $ 200.5 $ 230.2 Intersegment 29.6 36.1 52.6 78.3 ------------ ------------ ------------ ------------ Total bauxite and alumina 140.4 173.0 253.1 308.5 ------------ ------------ ------------ ------------ Primary aluminum: Third party 100.5 105.8 189.6 232.0 Intersegment 63.1 61.0 112.2 127.8 ------------ ------------ ------------ ------------ Total primary aluminum 163.6 166.8 301.8 359.8 ------------ ------------ ------------ ------------ Flat-rolled products 155.3 197.0 303.6 391.3 Engineered products 137.8 156.0 271.3 318.6 Minority interests 20.6 19.2 39.4 39.8 Eliminations (92.7) (97.2) (164.8) (206.2) ------------ ------------ ------------ ------------ Total net sales $ 525.0 $ 614.8 $ 1,004.4 $ 1,211.8 ============ ============ ============ ============ Operating income (loss) $ 2.2 $ 56.8 $ (29.3) $ 103.1 ============ ============ ============ ============ Income (loss) before income taxes and minority interests $ (24.0) $ 27.3 $ (81.9) $ 46.3 ============ ============ ============ ============ Capital expenditures and investments in unconsolidated affiliates $ 13.8 $ 23.0 $ 30.3 $ 36.7 ============ ============ ============ ============ (1) Shipments are expressed in thousands of metric tons. A metric ton is equivalent to 2,204.6 pounds. (2) Average realized prices for Kaiser's flat-rolled products and engineered products segments are not presented as such prices are subject to fluctuations due to changes in product mix. Average realized third party sales prices for alumina and primary aluminum include the impact of hedging activities.
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. See Note 8 to the Consolidated Financial Statements for a discussion of KACC's hedging activities. During 1998, the AMT Price experienced a steady decline during the year, beginning the year in the $.70 to $.75 per pound range and ending the year in the low $.60 per pound range. During the first quarter of 1999, the AMT Price was in the $.57 to $.59 per pound range most of the quarter, but increased in March 1999 and ended the second quarter at approximately $.67 per pound. The AMT Price for the week ended July 30, 1999 was approximately $.68 per pound. Net sales Bauxite and alumina. Third party net sales of alumina declined 19% for the quarter ended June 30, 1999 as compared to the same period in 1998 as a result of a 14% decline in third party average realized price and a 6% decline in third party alumina shipments. The decline in 1999 third party average realized prices resulted from lower first quarter 1999 market prices for primary aluminum on Kaiser's alumina sales contracts, substantially all of which are linked (on a lagged basis of up to three months) to changes in primary aluminum market prices. Although market prices for primary aluminum recovered somewhat during the second quarter of 1999, the beneficial impacts of these price increases on the segment's operating income will not be fully realized until the third quarter of 1999. The impact of lower prices for primary aluminum in 1999 on Kaiser's third party average realized prices was partially offset by allocated net gains from the KACC hedging activities. The decline in third party shipments of alumina between the second quarter of 1999 and 1998 resulted primarily from differences in the timing of shipments rather than any specific operating trend. Intersegment net sales for the second quarter of 1999 declined by 22% as compared to the same period in 1998. The decline in net sales was primarily due to a 14% decline in intersegment average realized price due to lower primary aluminum prices as well as a decline in intersegment shipments, resulting from potline curtailments at Kaiser's Washington and Valco smelters. For the six-month period ended June 30, 1999, third party net sales of alumina were 12% lower than the comparable period in 1998 as a 14% decline in average realized prices was only partially offset by a 2% increase in third party shipments. The decline in average realized prices during the first six months of 1999 as compared to 1998 was attributable to the linkage of third party sales contracts to primary aluminum prices as more fully described above, offset by allocated net gains from KACC's hedging activities. The increase in year-over-year shipments was the result of the timing of individual shipments, rather than a specific operating trend. Intersegment net sales for the six-month period ended June 30, 1999 declined by 33% as compared to the same period in 1998. The decline in net sales was primarily due to the 14% decline in intersegment average realized price due to lower primary aluminum prices as well as reduced intersegment shipments, resulting from potline curtailments at Kaiser's Washington and Valco smelters. Primary aluminum. Third party net sales of primary aluminum for the second quarter of 1999 were down 5% as compared to the same period in 1998 primarily as a result of a 6% decrease in average realized third party sales prices, reflecting lower market prices offset, in part, by allocated net gains from KACC's hedging activities. Partially offsetting the decline in average realized price was a 1% increase in third party shipments. Intersegment net sales in the second quarter of 1999 were up approximately 4% over 1998. Intersegment shipments increased 9% from the comparable prior year period while average realized price dropped by 5%. The decline in average realized price resulted from lower market prices for primary aluminum in 1999. The increase in intersegment shipments between 1999 and 1998 was due to the timing of shipments to Kaiser's fabricated business units, as on a year-to-date basis intersegment shipments were essentially flat. For the six-month period ended June 30, 1999, third party net sales of primary aluminum declined approximately 16% from the comparable period in 1998, reflecting an 8% decline in third party average realized prices and an 11% reduction in third party shipments. The decline in third party average realized price reflects lower 1999 market prices for primary aluminum offset, in part, by allocated net gains from KACC's hedging activities. The reduction in third party shipments reflects the impact of the potline curtailments at KACC's Washington smelters. Intersegment net sales for the first half of 1999 were down 12% as compared to the same period in 1998. Intersegment average realized prices were down 12% reflecting lower market prices for aluminum. Intersegment shipments were essentially flat. Flat-rolled products. Net sales of flat-rolled products for the second quarter of 1999 declined by 21% compared to the second quarter of 1998 as a result of a 14% decline in average realized prices and a 7% decline in shipments. The reduction in shipments was due to reduced demand in 1999 for aerospace heat treat products, offset, in small part, by increased shipments of general engineering products. The decline in 1999 average realized prices resulted from a shift of product mix (from aerospace products, which have a higher price and operating margin, to other products) as well as the impact of lower market prices for primary aluminum. For the six-month period ended June 30, 1999, net sales of flat- rolled products declined by 22% from the comparable period in 1998 as a result of a 14% decline in average realize price and a 10% decline in product shipments. The declines in year-to-date 1999 prices and shipments as compared to 1998 were attributable to the same factors described above for the second quarter of 1999. Engineered products. Second quarter 1999 net sales of engineered products declined by approximately 12% compared to the second quarter of 1998, reflecting a 10% decline in average realized prices and a 2% decline in product shipments. The decline in quarterly shipments was due to reduced demand in 1999 for aerospace products offset almost entirely by a strong increase in 1999 demand for ground transportation products. The reduction in average realized price between periods was attributable to the change in product mix (lower aerospace shipments offset by higher ground transportation shipments) as well as lower 1999 market prices for primary aluminum. For the six-month period ended June 30, 1999, net sales of engineered products declined by approximately 15% from the comparable period in 1998, as a result of a 10% decline in average realized prices and a 6% decline in product shipments. The reasons for the year-to-date price and volume declines were the same as the factors that affected the second quarter of 1999. Operating income (loss) Bauxite and alumina. Operating income for the quarter and six- month periods ended June 30, 1999 was down significantly from the comparable periods of 1998 primarily as a result of the price and, to a lesser extent, the volume factors discussed above. Primary aluminum. Operating income for the quarter and six-month periods ended June 30, 1999 was down significantly from the comparable periods of 1998. The most significant component of this decline was the reduction in average realized prices discussed above. However, also included in 1999 results were the adverse impact of the Valco and Washington smelter potline curtailments (including the fact that there is no mitigating compensation being earned in 1999 for the Valco potline curtailments) and costs of approximately $2.5 million and $9.6 million for the quarter and six-month periods ended June 30, 1999, respectively, associated with preparing and restarting potlines at the Valco and Washington smelters. Flat-rolled products. Operating income decreased significantly in the second quarter and first six months of 1999 primarily as a result of the price, volume and product mix factors discussed above. Engineered products. Operating income for the 1999 quarter and year-to-date periods declined from the comparable periods in 1998 as a result of the reduced equity in earnings from AKW as well as the product mix shift discussed above. Eliminations. Eliminations of intersegment profit vary from period to period depending on fluctuations in market prices as well as the amount and timing of the affected segments' production and sales. 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 and six months ended June 30, 1999 and 1998.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES) Shipments: Lumber: (1) Redwood upper grades 6.4 11.9 14.2 22.1 Redwood common grades 28.9 59.6 67.6 113.5 Douglas-fir upper grades 2.5 1.6 4.5 3.5 Douglas-fir common grades 12.4 12.1 27.7 21.3 Other 1.9 3.2 4.4 5.7 ------------ ------------ ------------ ------------ Total lumber 52.1 88.4 118.4 166.1 ============ ============ ============ ============ Wood chips (2) 31.2 48.6 76.6 80.8 ============ ============ ============ ============ Average sales price: Lumber: (3) Redwood upper grades $ 1,499 $ 1,513 $ 1,454 $ 1,503 Redwood common grades 625 550 588 529 Douglas-fir upper grades 1,322 1,296 1,299 1,281 Douglas-fir common grades 450 331 410 340 Wood chips (4) 74 75 78 70 Net sales: Lumber, net of discount $ 36.6 $ 57.3 $ 78.2 $ 105.8 Wood chips 2.3 3.7 5.9 5.7 Cogeneration power 0.7 1.2 1.3 1.8 Other 1.8 1.3 2.7 2.1 ------------ ------------ ------------ ------------ Total net sales $ 41.4 $ 63.5 $ 88.1 $ 115.4 ============ ============ ============ ============ Operating income (loss) $ (3.3) $ 14.7 $ (4.7) $ 24.8 ============ ============ ============ ============ Operating cash flow (5) $ 1.0 $ 20.5 $ 4.5 $ 36.2 ============ ============ ============ ============ Income (loss) before income taxes (6) $ (9.7) $ (2.7) $ 216.5 $ (6.9) ============ ============ ============ ============ Capital expenditures $ 5.2 $ 3.2 $ 17.6 $ 6.0 ============ ============ ============= ============ - --------------- (1) Lumber shipments are expressed in millions of board feet. (2) Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds. (3) Dollars per thousand board feet. (4) Dollars per bone dry unit. (5) Operating income before depletion and depreciation, also referred to as "EBITDA." (6) 1999 results include a $239.8 million gain on the sale of the Headwaters Timberlands.
Net sales Net sales for the three and six month periods ended June 30, 1999 decreased from the comparable 1998 periods due primarily to lower shipments of upper and common grade redwood lumber offset somewhat by higher prices for common grade redwood and Douglas-fir lumber. The decrease in shipments of redwood lumber is largely due to continuing reductions in the volume of logs available for the production of lumber products. As was the case in the first quarter of 1999, the diminished supply of approved THPs, combined with seasonal restrictions on logging operations, continued to affect log supplies in the second quarter. See "--Trends" for further discussion of the factors affecting the supply of approved THPs. Operating income (loss) The Forest Products segment had an operating loss for the three and six months ended June 30, 1999 as compared to operating income for the comparable 1998 periods, primarily due to decreases in net sales discussed above. Results for the first half of 1999 were also affected by higher costs and expenses due to higher logging costs and manufacturing inefficiencies resulting from production curtailments at the sawmills due to the lack of logs. Income (loss) before income taxes Loss before income taxes for the three months ended June 30, 1999 increased from the comparable 1998 period, primarily due to the operating loss discussed above. The impact of the loss was partially offset by an increase in investment, interest and other income as a result of investing the net proceeds from the sale of the Headwaters Timberlands, as well as higher earnings from marketable securities. Income before income taxes for the first half of 1999 increased from the comparable prior year period, principally due to the gain on the sale of the Headwaters Timberlands of $239.8 million ($142.1 million net of deferred taxes or $18.17 per share), offset by the operating loss discussed above. Income before income taxes for the first half of 1999 was also favorably affected by the increase in investment, interest and other income discussed above. REAL ESTATE AND RACING OPERATIONS The Company, principally through its wholly owned subsidiaries, invests in and develops residential and commercial real estate primarily in Puerto Rico, Arizona and California. 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- -------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (IN MILLIONS OF DOLLARS) Net sales: Real estate $ 17.6 $ 17.3 $ 28.2 $ 25.8 SHRP, Ltd. 4.8 4.0 12.9 10.6 ------------ ------------ ------------ ------------ Total net sales $ 22.4 $ 21.3 $ 41.1 $ 36.4 ============ ============ ============ ============ Operating income (loss): Real estate $ 0.8 $ 2.7 $ (1.3) $ 0.2 SHRP, Ltd. (0.1) (0.3) 2.2 0.6 ------------ ------------ ------------ ------------ Total operating income $ 0.7 $ 2.4 $ 0.9 $ 0.8 ============ ============ ============ ============ Income (loss) before income taxes and minority interests: Real estate $ 3.3 $ 10.8 $ 2.8 $ 10.6 SHRP, Ltd. - (1.0) 2.0 (0.8) ------------ ------------ ------------ ------------ Total income before income taxes and minority interests $ 3.3 $ 9.8 $ 4.8 $ 9.8 ============ ============ ============ ============
Net sales Net sales for the quarter and six months ended June 30, 1999 increased from the same prior year periods primarily due to increases in pari-mutual wagering at Sam Houston Race Park. In addition, net sales for the six months ended June 30, 1999 increased due to higher revenues from the Company's real estate development project in Puerto Rico. Operating income (loss) Operating income decreased for the quarter ended June 30, 1999 from the same period in 1998 primarily due to lower margins on real estate sales. Operating income was substantially unchanged for the six months ended June 30, 1999 from the comparable 1998 period as improved results for the Sam Houston Race Park were offset by a decline in margins on real estate sales. Income before income taxes Income before income taxes for the quarter and six months ended June 30, 1999 decreased when compared to income for the same periods in 1998 which included a gain on the sale of a portion of the Company's Waterwood development project. OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (IN MILLIONS OF DOLLARS) Operating loss $ (2.2) $ (2.9) $ (4.7) $ (6.4) Loss before income taxes and minority interests (6.2) (5.7) (11.5) (11.5)
The operating losses represent corporate general and administrative expenses that are not allocated to the Company's industry segments. 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, which are not attributable to the Company's industry segments. Minority interests Minority interests primarily represents the minority stockholders' interest in the Company's aluminum operations and minority partners' interest in SHRP, Ltd. FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES 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. PARENT COMPANY AND MGHI The various credit instruments of KACC, MGHI, Pacific Lumber and Scotia LLC 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 June 30, 1999, no dividends could be paid by MGHI. Pursuant to the terms of the KACC Credit Agreement, Kaiser and KACC are prohibited from paying any dividends with respect to their common stock. As of June 30, 1999, the Company's other subsidiaries (principally real estate) had an aggregate of nonrestricted cash and unused borrowing availability of approximately $32.0 million which could have been paid to the Company. 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 June 30, 1999, the Company (excluding its subsidiaries) had cash and marketable securities of approximately $41.7 million. The Company believes that its existing resources, together with the cash available from subsidiaries and financing sources, 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 adverse outcome of the litigation described in Note 7 to the Consolidated Financial Statements could materially adversely affect the Company's consolidated financial position, results of operations or liquidity. ALUMINUM OPERATIONS At June 30, 1999, Kaiser had long-term debt of $962.7 million compared with $963.0 million at December 31, 1998. At June 30, 1999, $273.7 million (of which $73.7 million could have been used for letters of credit) was available to KACC under the KACC Credit Agreement and no amounts were outstanding. 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. 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 six months ended June 30, 1999 were $30.3 million. The only significant expenditure was the purchase of the remaining 45% interest in KLHP for approximately $10.0 million. Total 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 $70.0 million and $90.0 million per annum in each of 1999 through 2001, prior to any consideration of plans to rebuild the Gramercy facility. The level of capital expenditures may be adjusted from time to time depending on Kaiser's price outlook for primary aluminum and other products, KACC's ability to assure future cash flows through hedging or other means, Kaiser's financial position and other factors. 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 June 30, 1999, MGI and its subsidiaries had consolidated long-term debt primarily related to the Timber Notes of $847.2 million (net of current maturities) compared to $860.2 million at December 31, 1998. As of June 30, 1999, $21.3 million of total availability existed under the Pacific Lumber Credit Agreement, no borrowings were outstanding and letters of credit outstanding amounted to $12.1 million. The Escrowed Funds, including accumulated interest, were $288.2 million as of June 30, 1999 and are to be made available as necessary to support Scotia LLC's Timber Notes. The Escrowed Funds will be released by the Escrow Agent only in accordance with the terms of the Escrow Agreement. On July 16, 1999, Scotia LLC's Line of Credit Agreement was extended for an additional year to July 16, 2000. Interest on initial borrowings outstanding for less than six months was increased to the Base Rate (as defined in the agreement) plus 0.25% or a one month or six month LIBOR rate plus 1%. On the July 20, 1999 note payment date, Scotia LLC had $6.5 million in cash available to pay the $31.6 million in interest due on the Timber Notes. Scotia LLC borrowed the remaining $25.1 million in funds under the terms of the Line of Credit Agreement. In addition, Scotia LLC paid approximately $2.8 million of principal on the Timber Notes (the amount equal to Scheduled Amortization) using funds received as a capital contribution from Pacific Lumber. Funds for the $2.8 million principal payment were provided from the Escrowed Funds and were released in accordance with the terms of the Escrow Agreement. The indenture governing the Timber Notes was amended to allow the capital contribution from Pacific Lumber to be applied as a principal payment. MGI and its subsidiaries anticipate that existing cash, cash equivalents, marketable securities, funds available under the Escrow Agreement 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, dividends from Scotia LLC to Pacific Lumber will be limited for at least the next two to three years, and therefore, absent any release to Pacific Lumber of the Escrowed Funds, Pacific Lumber will not have adequate funds to support all of its working capital and capital expenditure requirements, and it will require contributions from MGI to meet any deficiencies. Although MGI and its subsidiaries (and in turn MGHI) believe that their existing cash and cash equivalents should provide sufficient funds to meet the working capital and capital expenditure requirements until such time as Pacific Lumber has adequate cash flows from operations, dividends from Scotia LLC and/or funds released from the Escrowed Funds, there can be no assurance that this will be the case. Furthermore, due to its highly leveraged condition, MGI is more sensitive than less leveraged companies to factors affecting its operations, including governmental regulation and litigation affecting its timber harvesting practices (see Note 7 to the Consolidated Financial Statements), increased competition from other lumber producers or alternative building products and general economic conditions. REAL ESTATE AND RACING OPERATIONS As of June 30, 1999, the Company's real estate subsidiaries had approximately $12.5 million available for use under a $14.0 million revolving bank credit facility. There were no outstanding borrowings, and letters of credit outstanding amounted to $0.7 million. The Company believes that the existing cash and credit facilities of its real estate 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. As of June 30, 1999, SHRP, Ltd. had cash and cash equivalents of $10.4 million and a $1.7 million line of credit available to fund its operating activities. Long-term debt, excluding $44.2 million of debt held by affiliates, was $1.3 million as of June 30, 1999. SHRP, Ltd. is able to defer cash interest payments on its long-term debt until September 1, 2001 or until certain conditions are met, and to defer the payment of management fees until two consecutive interest payments on its long-term debt have been paid in cash. The deferral of these items has significantly improved SHRP Ltd.'s liquidity. With respect to long-term liquidity, although only $1.3 million of SHRP Ltd.'s debt is owned by non-affiliates, there can be no assurance that SHRP, Ltd. will be able to repay or refinance its long-term debt or that alternative sources of funding will be available, if needed. TRENDS This section contains statements which constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See above for cautionary information with respect to such forward-looking statements. FOREST PRODUCTS OPERATIONS The Company's forest products operations are conducted by Pacific Lumber and Britt. Regulatory and environmental matters play a significant role in Pacific Lumber's operations which are subject to a variety of California and federal laws and regulations, as well as the Final HCP, Final SYP and Pacific Lumber's 1999 TOL, dealing with timber harvesting practices, threatened and endangered species and habitat for such species, and air and water quality. Moreover, these laws and regulations are modified from time to time and are subject to judicial and administrative interpretation. Compliance with such laws, regulations and judicial and administrative interpretations, and related litigation have increased the cost of logging operations. The Company's forest products segment has also been adversely affected by a lack of available logs as a result of a severely diminished supply of available THPs. Prior to the consummation of the Headwaters Agreement on March 1, 1999, the reduced number of approved THPs was attributable to several factors, including a significantly reduced level of THPs submitted by Pacific Lumber to the CDF during 1998 and during the first two months of 1999 due to (a) the extensive amount of time devoted by Pacific Lumber's foresters, wildlife and fisheries biologists and other personnel to (i) amending a significant number of previously submitted THPs to incorporate various new requirements which Pacific Lumber agreed to as part of the Pre-Permit Agreement, (ii) preparing the Combined Plan and all the related data, responding to comments on the Combined Plan, assessing and responding to federal and state proposals and changes concerning the Combined Plan and evaluating the Final Plans, (iii) responding to comments received by Pacific Lumber from various federal and state governmental agencies with respect to its filed THPs in light of the new and more stringent requirements that Pacific Lumber agreed to observe pursuant to the Pre-Permit Agreement, and (iv) responding to newly filed litigation involving certain of Pacific Lumber's approved THPs and (b) implementation of a provision contained in the Pre-Permit Agreement which required, for the first time, a licensed geologist to review virtually all of Pacific Lumber's THPs prior to submission to the CDF. Pacific Lumber also experienced an unexpected significantly slower rate of review and approval with respect to its filed THPs due, in large part, to the issues that emerged in applying the requirements embodied in the Pre-Permit Agreement to Pacific Lumber's THPs, certain of which requirements imposed new forestry practices that applied solely to Pacific Lumber's operations. With the consummation of the Headwaters Agreement, Pacific Lumber has completed its work in connection with preparation of the Final Plans; however, significant additional work continues to be required in connection with their implementation. The remainder of 1999 will be a transition year for Pacific Lumber with respect to the filing and approval of its THPs. Certain of the THPs which were approved by the CDF prior to March 1, 1999 were grandfathered under the Implementation Agreement, and are harvestable subject to the harvesting restrictions prescribed under the THPs and satisfaction of certain agreed conditions. The remaining THPs which were in the process of being reviewed but were not yet approved by the CDF at the time of the consummation of the Final Plans each require varying degrees of revisions. Pacific Lumber believes that the rate of submissions of THPs and the review and approval of THPs during at least the third quarter will continue to be slower than Pacific Lumber has historically experienced as Pacific Lumber, the CDF and other agencies develop procedures for implementing the Final Plans. Nevertheless, Pacific Lumber anticipates that after a transition period, the implementation of the Final Plans will streamline the process of preparing THPs and potentially shorten the time to obtain approval of THPs. There can be no assurance that Pacific Lumber will not continue to experience difficulties in receiving approvals of its THPs similar to those it has been experiencing. Furthermore, there can be no assurance that certain pending legal, regulatory and environmental matters or future governmental regulations, legislation or judicial or administrative decisions, or adverse weather conditions, would not have a material adverse effect on the Company's financial position, results of operations or liquidity. See Part II. Item 1. "Legal Proceedings" and Note 7 to the Consolidated Financial Statements for further information regarding regulatory and legal proceedings affecting the Company's operations. YEAR 2000 The Company utilizes software and related technologies throughout its business that will be affected by the date change to the year 2000. There may also be technology embedded in certain of the equipment owned or used by the Company that is susceptible to the year 2000 date change as well. Each of the Company's segments have implemented programs to assess the impact of the year 2000 date change. Year 2000 progress and readiness has also been the subject of the Company's normal, recurring internal audit function. Kaiser has implemented a company-wide program to coordinate the year 2000 efforts of its individual business units and to track their progress. The intent of the program is to make sure that critical items are identified on a sufficiently timely basis to assure that the necessary resources can be committed to address any material risk areas that could prevent its systems and assets from being able to meet Kaiser's business needs and objectives. Each of Kaiser's business units has developed year 2000 plans specifically tailored to its individual situation. A wide range of solutions are being implemented, including modifying existing systems and, in limited cases where it is cost effective, purchasing new systems. Spending related to these projects, which began in 1997 and is expected to continue through 1999, is currently estimated to be in the $10-15 million range. As of June 30, 1999, Kaiser estimates that approximately $3 million of year 2000 expenditures are yet to be incurred. Such remaining amounts will be incurred over the balance of 1999, primarily in the third quarter of the year. System modification costs are being expensed as incurred. Costs associated with new systems are being capitalized and will be amortized over the life of the system. In total, Kaiser believes that its remediation and testing efforts are approximately 85% complete at July 31, 1999. The balance is expected to be substantially complete by the end of the third quarter of the year. Kaiser plans to commit the necessary resources for these efforts. In addition to addressing Kaiser's internal systems, its company- wide program involves identification of key suppliers, customers, and other third party relationships that could be impacted by year 2000 issues. A general survey has been conducted of Kaiser's supplier and customer base. Direct contact has been made, or is in progress, with parties which are deemed to be particularly critical including financial institutions, power suppliers and customers, with which Kaiser has a material relationship. Each business unit, including the corporate group, is developing a contingency plan covering the steps that would be taken if a year 2000 problem were to occur despite Kaiser's best efforts to identify and remedy all critical at-risk items. Formal contingency plans have been completed for approximately 75% of Kaiser's facilities and their individual systems as of July 31, 1999. Contingency plans for the remaining facilities and systems are expected to be completed by October 31, 1999. When complete, each contingency plan will address, among other things, matters such as alternative suppliers for critical inputs, incremental standby labor requirements at the millennium to address any problems as they occur, and backup processing capabilities for critical equipment or processes. The goal of the contingency plans will be to minimize any business interruptions and the associated financial implications. MGI has established a team to address the potential impacts of the year 2000 on each of its critical business functions. The team has completed its assessment of MGI's critical information technology and embedded technology, including its geographic information system and the equipment and systems used in operating its sawmills and cogeneration plant, and is now in the process of making the required modifications for these systems to be year 2000 compliant. The modification costs are expected to be immaterial, costing less than $100,000 and, except for MGI's cogeneration plant and the financial systems for Britt, all modifications and testing have been completed. Modifications and testing of the cogeneration plant and the financial systems for Britt are expected to be completed by the end of the third quarter of 1999. System modification costs are being expensed as incurred. Costs associated with new systems are being capitalized and will be amortized over the life of the product. In addition to addressing MGI's internal systems, the team has identified key vendors that could be impacted by year 2000 issues, and surveys have been conducted regarding their compliance efforts. Management is evaluating the responses to the surveys and making direct contact with parties which are deemed to be critical. These inquiries are being made by MGI's own staff, and the costs associated with this program are expected to be minimal. The Company's real estate segment has completed the process of evaluating its information technology systems, and has substantially completed the modifications to make these systems compliant at the end of 1998. The costs were not material. Other assets with embedded technology are not significant to the business operations of this segment. Several financial institutions provide various services to this segment which are critical to its business operations, and inquiries as to the status of their year 2000 compliance evaluations are in the process of being conducted. SHRP, Ltd. is currently in the process of assessing both its information technology systems and its embedded technology in order to determine that they are, or will be, year 2000 compliant. Management has already determined that its financial data processing hardware and software are compliant and is presently working with certain key third parties and support groups of its embedded technology to ensure that they are taking appropriate measures to assure compliance. SHRP, Ltd. believes that the total cost to make these systems year 2000 compliant will not exceed $100,000. The most significant area still being evaluated pertains to certain key third parties, in particular, the firm that provides its totalizator services (computerized wagering system) to it and others in the horse racing industry. These data processing services are required in order for SHRP, Ltd. to conduct pari-mutuel wagering in Texas. Management, as well as the thoroughbred racing industry's association, has received assurances that such systems will be compliant by the third quarter of 1999. However, management is evaluating other third party providers of these and other services and equipment in the event that any such vendors can not provide assurance of year 2000 compatibility in sufficient time to effect a change. While the Company believes that its programs are sufficient to identify the critical issues and associated costs necessary to address possible year 2000 problems in a timely manner, there can be no assurance that the programs, or underlying steps implemented, will be successful in resolving all such issues prior to the year 2000. If the steps taken by the Company (or critical third parties) are not made in a timely manner, or are not successful in identifying and remedying all significant year 2000 issues, business interruptions or delays could occur and could have a material adverse impact on the Company's results and financial condition. However, based on the information the Company has gathered to date and its expectations of its ability to remedy problems encountered, the Company believes that it will not experience significant business interruptions that would have a material impact on its results or financial condition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Part I. Item 7a. "Quantitative and Qualitative Disclosures About Market Risk" in the Form 10-K. PART II. OTHER INFORMATION 1. LEGAL PROCEEDINGS Reference is made to Item 3 of the Form 10-K for information concerning material legal proceedings with respect to the Company. The following material developments have occurred with respect to such legal proceedings subsequent to the filing of the Form 10-K. KAISER LITIGATION 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 portion of Note 7 to the Consolidated Financial Statements contained in this report under the heading "Asbestos Contingencies" is incorporated herein by reference. See Part I, Item 3. "Legal Proceedings--Kaiser Litigation--Asbestos-related Litigation" in the Company's Form 10-K for the year ended December 31, 1998. PACIFIC LUMBER LITIGATION With respect to the Mateel action, this case has been set for trial on November 15, 1999. On March 31, 1999, the EPIC-SYP/Permits lawsuit was filed against Pacific Lumber, Salmon Creek, Scotia LLC and others in the Superior Court of Sacramento County (subsequently transferred to the Superior Court of Humboldt County pursuant to Pacific Lumber's motion). This action alleges, among other things, that the CDF and the CDFG violated the CEQA and the CESA with respect to the Final SYP and the Permits issued by California. The plaintiffs seek, among other things, injunctive relief to set aside the CDF's and the CDFG's decisions approving the Final SYP and the Permits issued by California. On March 31, 1999, the USWA lawsuit was also filed against Pacific Lumber, Salmon Creek and Scotia LLC in the California Superior Court of Sacramento County (subsequently transferred to the Superior Court of Humboldt County pursuant to Pacific Lumber's motion). This action alleges, among other things, violations of the Forest Practice Act in connection with the CDF's approval of the Final SYP. The plaintiffs seek to prohibit the CDF from approving any THPs relying on the Final SYP. The Company believes that appropriate procedures were followed throughout the public review and approval process concerning the Final Plans, and the Company is working with the relevant state and federal agencies to defend the USWA lawsuit and the EPIC-SYP/Permits lawsuit. Although uncertainties are inherent in the final outcome of the EPIC- SYP/Permits lawsuit and the USWA lawsuit, the Company believes that the resolution of these matters should not result in a material adverse effect on its financial condition or results of operations or the ability to harvest timber. With respect to the Hunsaker action described in the Form 10-K, on March 30, 1999, the Court dismissed the lawsuit with prejudice and ordered the plaintiffs to pay the defendants' costs with respect to the lawsuit. On April 30, 1999, the plaintiffs filed a notice of appeal. With respect to the EPIC lawsuit described in the Form 10-K, on May 5, 1999, the Court dissolved the preliminary injunction, granted the defendants' motion for summary judgment and dismissed the case as moot. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders of the Company was held on May 19, 1999, at which meeting the stockholders voted to elect Messrs. Rosenberg, Cruikshank and Hurwitz, management's slate of nominees, as directors of the Company, and voted to reapprove the MAXXAM 1994 Omnibus Employee Incentive Plan. Stockholders voted against a proposal to declassify the Company's Board of Directors and against a proposal regarding cumulative voting for the election of the Company's Common Directors. The results of the matters voted at the meeting are shown below. NOMINEES FOR DIRECTOR The nominees for election as directors of the Company are listed below, together with voting information for each nominee. Mr. Paul N. Schwartz and Mr. Ezra G. Levin continued as directors for the Company. NOMINEES FOR ELECTION BY HOLDERS OF COMMON STOCK Stanley D. Rosenberg - 4,276,098 votes for, 207,096 votes withheld and -0- broker non-votes. Robert J. Cruikshank - 4,276,211 votes for, 206,983 votes withheld and -0- broker non-votes. Howard M. Metzenbaum - 949,457 votes for, 41,421 votes withheld and -0- broker non-votes. Abner J. Mikva - 949,457 votes for, 41,421 votes withheld and -0- broker non-votes. NOMINEES FOR ELECTION BY HOLDERS OF COMMON STOCK AND CLASS A PREFERRED STOCK Charles E. Hurwitz - 10,854,304 votes for, 216,599 votes withheld and -0- broker non-votes. PROPOSAL TO REAPPROVE THE MAXXAM 1994 OMNIBUS EMPLOYEE INCENTIVE PLAN 10,779,032 votes for, 1,180,816 votes against, 100,932 votes abstaining and -0- broker non-votes. PROPOSAL TO DECLASSIFY THE COMPANY'S BOARD OF DIRECTORS 1,810,373 votes for, 10,234,009 votes against, 16,398 votes abstaining and -0- broker non-votes. PROPOSAL REGARDING CUMULATIVE VOTING FOR THE ELECTION OF THE COMPANY'S COMMON DIRECTORS 1,596,453 votes for, 10,447,028 votes against, 17,299 votes abstaining and -0- broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS: *3.1 Amended and Restated By-laws of MAXXAM Inc. dated May 17, 1999 4.1 First Supplemental Indenture, dated as of July 16, 1999, to the Indenture between Scotia LLC and State Street Bank and Trust Company regarding Scotia LLC's Class A-1, Class A-2 and Class A-3 Timber Collateralized Notes (incorporated herein by reference to Exhibit 4.1 to the Scotia LLC June 1999 Form 10-Q) 4.2 First Amendment, dated as of July 16, 1999, to the Line of Credit Agreement among Scotia LLC, the financial institutions party thereto and Bank of America National Trust and Savings Association, as agent (incorporated herein by reference to Exhibit 4.2 to the Scotia LLC June 1999 Form 10-Q) *27 Financial Data Schedule for the six months ended June 30, 1999 * Included with this filing B. REPORTS ON FORM 8-K: On July 1, 1999, the Company filed a current report on Form 8-K (under Item 5) dated June 29, 1999, concerning a press release issued by Kaiser, in which the Company, directly or indirectly, holds an approximate 63% voting interest. On July 9, 1999, the Company filed a current report on Form 8-K (under Item 5) dated July 5, 1999, concerning press statements issued by KACC, a wholly owned subsidiary of Kaiser. 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 have signed this report on behalf of the Registrant and as the principal financial and accounting officers of the Registrant. MAXXAM INC. Date: August 13, 1999 By: PAUL N. SCHWARTZ Paul N. Schwartz President, Chief Financial Officer and Director (Principal Financial Officer) Date: August 13, 1999 By: ELIZABETH D. BRUMLEY Elizabeth D. Brumley Controller (Principal Accounting Officer) APPENDIX A GLOSSARY OF DEFINED TERMS AKW: AKW L.P., an aluminum wheels joint venture AMT Price: Average Midwest United States transaction price for primary aluminum Britt: Britt Lumber Co., Inc., an indirect wholly owned subsidiary of MGI California Agreement: An agreement between the Pacific Lumber Parties and California regarding the enforcement of the California bill which authorized state funds for the purchase of the Headwaters Timberlands while imposing certain environmental restrictions on the remaining timberlands held by the Pacific Lumber Parties CDF: California Department of Forestry and Fire Protection CDFG: California Department of Fish and Game CERCLA: Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 CEQA: California Environmental Quality Act CESA: California Endangered Species Act Class A Preferred Stock: Class A $.05 Non-Cumulative Participating Convertible Preferred Stock of the Company Combined Plan: The Combined SYP and Multi-Species HCP released by Pacific Lumber and Scotia LLC for public review and comment in July 1998 Common Stock: $0.50 par value common stock of the Company Company: MAXXAM Inc. Elk River Timberlands: The 7,700 acres of timberlands transferred to Pacific Lumber upon the consummation of the Headwaters Agreement EPA: Environmental Protection Agency EPIC: Environmental Protection Information Center, Inc. EPIC lawsuit: An action entitled Environmental Protection Information Center, Inc., Sierra Club v. The Pacific Lumber Company, Scotia Pacific Holding Company and Salmon Creek Corporation (No. C-98-3129) filed August 12, 1998 in the United States District Court for the Northern District of California EPIC Notice Letter: A notice received by the Company on or about January 29, 1999 from EPIC and the Sierra Club of their intent to sue Pacific Lumber and several federal agencies under the ESA EPIC-SYP/Permits lawsuit: An action entitled Environmental Protection Information Association, Sierra Club v. California Department of Forestry and Fire Protection, California Department of Fish and Game, The Pacific Lumber Company, Scotia Pacific Company LLC, Salmon Creek Corporation, et al. (No. 99CS00639) filed March 31, 1999 in the Superior Court of Sacramento County and transferred to the Superior Court of Humboldt County on July 13, 1999 (No. CV-990445) ESA: The federal Endangered Species Act Escrow Agent: The agent holding the Escrowed Funds under the Escrow Agreement Escrow Agreement: The agreement covering the Escrowed Funds Escrowed Funds: Proceeds of $285.0 million received by Salmon Creek in connection with the sale of the Headwaters Timberlands, plus accrued interest, which have been deposited into an escrow account pursuant to the Escrow Agreement as necessary to support the Timber Notes FASB: The Financial Accounting Standards Board FDIC: Federal Deposit Insurance Corporation FDIC action: An 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 (No. H-95-3956) in the U.S. District Court for the Southern District of Texas Federated: Federated Development Company, a principal stockholder of the Company Final HCP: The Multi-Species HCP approved on March 1, 1999 in connection with the consummation of the Headwaters Agreement Final Plans: The Final HCP and the Final SYP Final SYP: The SYP approved on March 1, 1999 in connection with the consummation of the Headwaters Agreement Forest Practice Act: The California Forest Practice Act 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, 1998 Grizzly Creek Agreement: The agreement entered into by Pacific Lumber with California regarding the future sale of a portion of the Grizzly Creek grove Grizzly Creek Grove: A grove of approximately 1,000 acres of primarily old growth timber owned by Pacific Lumber on land owned by Scotia LLC Headwaters Agreement: The September 28, 1996 agreement between the Pacific Lumber Parties, the United States and California which provided 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 which were sold to the United States and California on March 1, 1999 Hunsaker action: An action entitled William Hunsaker, et al. v. Charles E. Hurwitz, The Pacific Lumber Company, MAXXAM Group Inc., MXM Corp., Federated Development Company and Does (1-50) (No. C98-4515) filed November 24, 1998 in the United States District Court for the Northern District of California Implementation Agreement: The Implementation Agreement with Regard to Habitat Conservation Plan agreed to in connection with the consummation of the Headwaters Agreement KACC: Kaiser Aluminum & Chemical Corporation, Kaiser's principal operating subsidiary KACC Credit Agreement: The credit facility between KACC and a group of lenders 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 KLHP: Kaiser LaRoche Hydrate Partners Line of Credit Agreement: The agreement between a group of lenders and Scotia LLC pursuant to which Scotia LLC may borrow in order to pay interest on the Timber Notes LTSY: Long-term sustained yield Mateel action: An action entitled Mateel Environmental Justice Foundation v. Pacific Lumber, Scotia Pacific Holding Company, Salmon Creek Corporation and MAXXAM Group Inc. (No. DR 980301) brought on May 27, 1998 in the Superior Court of Humboldt County MPC: MAXXAM Property Company, a wholly-owned subsidiary of the Company MGHI: MAXXAM Group Holdings Inc., a wholly owned subsidiary of the Company MGI: MAXXAM Group Inc., a wholly owned subsidiary of MGHI Multi-Species HCP: A habitat conservation plan covering multiple species NLRB: The National Labor Relations Board 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 Owl Creek Agreement: The agreement entered into by Scotia LLC with California regarding the future sale of the Owl Creek grove Owl Creek Grove: A grove of approximately 900 acres of primarily old growth timber owned by Scotia LLC 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 $60.0 million, all of which may be used for revolving borrowings, $20.0 million of which may be used for standby letters of credit and $30.0 million of which may be used for timberland acquisitions. Pacific Lumber Parties: Pacific Lumber, including its subsidiaries and affiliates, and the Company Permits: The incidental take permits issued by the United States and California pursuant to the Final HCP Prefunding Account: Restricted cash held in an account by the trustee under the indenture governing the Timber Notes to enable Scotia LLC to acquire timberlands Pre-Permit Agreement: The February 27, 1998 Pre-Permit Application Agreement in Principle entered into by Pacific Lumber, the Company and various government agencies regarding certain understandings that they had reached regarding the Multi-Species HCP, the Permits and the SYP Salmon Creek: Salmon Creek Corporation, a wholly owned subsidiary of Pacific Lumber Scotia LLC: Scotia Pacific Company LLC, a limited liability company wholly owned by Pacific Lumber Scotia LLC June 1999 Form 10-Q: Scotia LLC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, File No. 333-63825 Scotia Pacific: Scotia Pacific Holding Company, a wholly owned subsidiary of Pacific Lumber, which was merged into Scotia LLC on July 20, 1998 SFAS No. 133: Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" SFAS No. 137: Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133" SHRP, Ltd.: Sam Houston Race Park, Ltd., a 98.2%-owned subsidiary of the Company Supplemental EPIC Notice Letter: A notice sent to the Company, Pacific Lumber, Scotia LLC, Salmon Creek and various government agencies on or about May 21, 1999 from EPIC, the Sierra Club and other environmental groups incorporating the EPIC Notice Letter and alleging violations of the ESA relating to various aspects of the Headwaters Agreement 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: Scotia LLC's $867.2 million original aggregate principal amount of 6.55% Series B Class A-1 Timber Collateralized Notes, 7.11% Series B Class A-2 Timber Collateralized Notes and 7.71% Series B Class A-3 Timber Collateralized Notes due July 20, 2028 TMDLs: Total maximum daily load limits TOL: Timber operator's license allowing the holder to conduct timber harvesting operations UFG: United Financial Group, Inc. ULPs: Unfair labor practices USAT: United Savings Association of Texas USWA: United Steelworkers of America USWA lawsuit: An action entitled United Steelworkers of America, AFL-CIO, CLC, and Donald Kegley v. California Department of Forestry and Fire Protection, The Pacific Lumber Company, Scotia Pacific Company LLC and Salmon Creek Corporation (No. 99CS00626) filed on March 31, 1999 in the Superior Court of Sacramento County and transferred to the Superior Court of Humboldt County on July 13, 1999 (No. CV-990452) Valco: Volta Aluminium Company Limited, Kaiser's 90%-owned entity which owns a smelter facility in Ghana VRA: Volta River Authority, an electric power supplier to Valco EX-3 2 EXHIBIT 3.1 TO MAXXAM 10-Q AMENDED AND RESTATED BY-LAWS OF MAXXAM INC. Amended May 17, 1999 ARTICLE I OFFICES Section 1. Registered Office. The corporation shall maintain a registered office in the State of Delaware as required by law. Section 2. Other Offices. The corporation may also have offices at other places, within or without the State of Delaware, as the Board of Directors may from time to time designate or the business of the corporation may require. ARTICLE II STOCKHOLDERS Section 1. Place of Meetings. All meetings of stockholders shall be held at such places, either within or without the State of Delaware, as may be fixed from time to time by the Board of Directors. Section 2. Annual Meeting. Annual meetings of stockholders shall be held on such date during the month of May or June of each year, or such other date as may be determined by the Board of Directors, and at such time as may be fixed from time to time by the Board of Directors. At each annual meeting of stockholders, the stockholders shall elect directors by a plurality vote, and may transact such other business as may properly be brought before the meeting. The Board of Directors acting by resolution may postpone and reschedule any previously scheduled annual meeting of stockholders. Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the corporation's notice of meeting, (b) by or at the direction of the Board of Directors, or (c) by any stockholder of the corporation who was a stockholder of record at the time of giving of notice, who is entitled to vote at the meeting and who complied with the applicable notice procedures. The provisions governing the required notice are set forth in (i) the Fifteenth paragraph of the corporation's Restated Certificate of Incorporation for purposes of nominations for directors, and (ii) this By- Law for purposes of proposal of other business. For business, other than nominations for directors, to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of the foregoing paragraph of this By-Law, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the corporation not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth, as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the nomination or proposal is made as well as (i) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner, if applicable, and (ii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner, if applicable. In addition to the information required in the Fifteenth paragraph of the corporation's Restated Certificate of Incorporation, any stockholder's notice relating to nominations for directors shall set forth all information relating to such person that is required to be disclosed in solicitation of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected). Notwithstanding anything herein to the contrary, in the event that the number of directors to be elected to the Board of Directors of the corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the corporation at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the corporation. Only such persons who are nominated in accordance with the procedures set forth in the corporation's Restated Certificate of Incorporation and these By-Laws shall be eligible to serve as directors and only such business shall be conducted at an annual meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. The chairman of the meeting shall have the power and duty to determine whether any nomination or business proposed to be brought before the meeting was made in accordance with the procedures set forth in the corporation's Restated Certificate of Incorporation or these By-Laws, as applicable, and if any proposed nomination or business is not in compliance with the corporation's Restated Certificate of Incorporation or these By-Laws, as applicable, to declare that such defective nomination or proposal shall be disregarded. For purposes of this By-Law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Services, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act. Notwithstanding the Fifteenth paragraph of the corporation's Restated Certificate of Incorporation or the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in the Fifteenth paragraph of the corporation's Restated Certificate of Incorporation and this By-Law. Nothing in the Fifteenth paragraph of the corporation's Restated Certificate of Incorporation or this By-Law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 3. Special Meetings. Special meetings of the stockholders for any purpose or purposes may only be called by the Board of Directors as required by the Sixteenth paragraph of the corporation's Restated Certificate of Incorporation. The power of stockholders to call a special meeting is specifically denied in the corporation's Restated Certificate of Incorporation. Business transacted at all special meetings shall be confined to the specific purpose or purposes of the persons authorized to request such special meeting as set forth in this Section 3 and only such purpose or purposes shall be set forth in the notice of such meeting. The Board of Directors acting by resolution may postpone and reschedule any previously scheduled special meeting of stockholders. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected (a) pursuant to the corporation's notice of meeting (b) by or at the direction of the Board of Directors or (c) by any stockholder of the corporation who is a stockholder of record at the time of giving of notice provided for in this By-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. Nominations by stockholders of persons for election to the Board of Directors may be made at such a special meeting of stockholders if the stockholder's notice required by the third paragraph of Section 2 of Article II of these By-Laws shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. Only such persons who are nominated in accordance with the procedures set forth in these By-Laws shall be eligible to serve as directors and only such business shall be conducted at a special meeting of the stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. The chairman of the meeting shall have the power and duty to determine whether any nomination or business proposed to be brought before the meeting was made in compliance with the procedures set forth in this By-Law, and if any proposed nomination or business is not in compliance, to declare that such defective nomination or proposal shall be disregarded. Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 4. Notice of Meetings. Written or printed notice of all meetings of the stockholders shall be mailed or delivered to each stockholder entitled to vote thereat at least ten, but not more than sixty, days prior to the meeting. Notice of any special meeting shall state in general terms the purpose or purposes for which the meeting is to be held, and no other business shall be transacted thereat except as stated in such notice. Section 5. Quorum; Adjournments of Meetings. The holders of outstanding shares of stock of the Corporation entitled to cast a majority of the votes entitled to be cast by the holders of all classes of capital stock of the Corporation entitled to vote generally in elections of directors, considered for this purpose as one class, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the stockholders, but if there be less than a quorum, the holders of shares of stock of the Corporation entitled to cast a majority of the votes entitled to be cast by the holders of all classes of the Corporation's capital stock so present or represented may adjourn the meeting from time to time until a quorum shall be present, whereupon the meeting may be held, as adjourned, without further notice, except as required by law, and any business may be transacted thereat that might have been transacted on the original date of the meeting. In the event that at any meeting there are not present, in person or by proxy, holders of shares of stock of the Corporation entitled to cast that number of votes which may be required by the laws of the State of Delaware, or other applicable statute, the Certificate of Incorporation or these By-Laws, for action upon any given matter, action may nevertheless be taken at such meeting upon any other matter or matters which may properly come before the meeting if there shall be present thereat, in person or by proxy, holders of shares of stock of the Corporation entitled to cast that number of votes required for action in respect of such other matter or matters. Section 6. Voting. At any meeting of the stockholders every registered owner of shares entitled to vote may vote in person or by proxy and, except as otherwise provided by statute, in the Certificate of Incorporation or these By-Laws, shall have one vote for each such share standing in his/her or its name on the books of the corporation. Except as otherwise required by statute, the Certificate of Incorporation or these By-Laws, all matters, other than the election of directors, brought before any meeting of the stockholder shall be decided by a vote of a majority in interest of the stockholders of the corporation present in person or by proxy at such meeting and voting thereon, a quorum being present. Section 7. Inspectors of Election. The Board of Directors, or, if the Board shall not have made the appointment, the chairman presiding at any meeting of stockholders, shall have power to appoint one or more persons to act as inspectors of election, to receive, canvass and report the votes cast by the stockholders at such meeting or any adjournment thereof, but no candidate for the office of director shall be appointed as an inspector at any meeting for the election of directors. Section 8. Chairman of Meetings. The Chairman of the Board of Directors, or any officer or director of the Corporation so designated by the Chairman of the Board of Directors, or in the absence of either of the foregoing, the President, shall preside at all meetings of the stockholders. In the absence of the Chairman of the Board, his designee and the President, a majority of the members of the Board of Directors present in person at such meeting may appoint any other officer or director to act as chairman of any meeting. Section 9. Secretary of Meetings. The Secretary or an Assistant Secretary of the corporation shall act as secretary of all meetings of the stockholders, and, in their absence, the chairman of the meeting shall appoint any other person to act as secretary of the meeting. Section 10. List of Stockholders. It shall be the duty of the officer of the corporation who has charge of the stock ledger of the corporation to prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting (the "stockholder list"), arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in his/her or its name. The stockholder list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for such ten day period either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where said meeting is to be held. The stockholder list shall also be produced and kept at the place of the meeting during the whole time thereof, and may be inspected by any stockholder who may be present at said meeting. Section 11. Procedural Rules. The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business of the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies, and such other persons as the chairman of the meeting shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comment by participants and regulation of the opening and closing of the polls for balloting determined by the Board of Directors or the chairman of the meeting. Meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. ARTICLE III BOARD OF DIRECTORS Section 1. General Powers. Except as otherwise provided in the Certificate of Incorporation or these By-Laws, the property, business and affairs of the corporation shall be managed and controlled by the Board of Directors. The Board may exercise all such authority and powers of the corporation and do all such lawful acts and things as are not by statute or the Certificate of Incorporation directed or required to be exercised or done by the stockholders. Section 2. Number of Directors. The number of directors of the corporation (exclusive of directors to be elected by the holders of any one or more classes or series of Preferred Stock of the corporation or any other class or series of stock of the corporation, which may at some time be outstanding, voting separately as a class or classes) shall not be less than three nor more than fourteen, and may be changed from time to time by action of not less than a majority of the members of the Board then in office. Whenever the words "whole Board," "entire Board" or "total number of directors" are used in these By-Laws, such words shall mean the number of directors fixed by the Board and then in effect in accordance with the provisions of the Certificate of Incorporation or these By-Laws. Section 3. Annual Meeting. The annual meeting of the Board of Directors, of which no notice shall be necessary, shall be held immediately following the annual meeting of stockholders or any adjournment thereof at the principal office, if any, of the corporation in the city in which the annual meeting of stockholders was held at which any of such directors were elected, or at such other place as a majority of the members of the newly elected Board who are then present shall determine, for the election or appointment of officers for the ensuing year and the transaction of such other business as may be brought before such meeting. Section 4. Regular Meetings. Regular meetings of the Board of Directors, other than the annual meeting, shall be held at such times and places, and on such notice, if any, as the Board of Directors may from time to time determine. Section 5. Special Meetings. Special meetings of the Board of Directors may be called by order of the Chairman of the Board or the President or may be called at the request of any two directors. Notice of the time and place of each special meeting shall be given by or at the direction of the Secretary of the corporation or an Assistant Secretary of the corporation, or, in their absence, by the person or persons calling the meeting by mailing the same at least five days before the meeting or by telephoning, telegraphing or delivering personally the same at least twenty-four hours before the meeting to each director. Except as otherwise specified in the notice thereof, or as required by statute, the Certificate of Incorporation or these By-Laws, any and all business may be transacted at any special meeting. Section 6. Attendance By Communications Equipment. Unless otherwise restricted by the Certificate of Incorporation, members of the Board of Directors or of any committee designated by the Board may participate in a meeting of the Board or any such committee by means of conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other. Participation in any meeting by such means shall constitute presence in person at such meeting. Any meeting at which one or more members of the Board of Directors or of any committee designated by the Board shall participate by means of conference telephone or similar communications equipment shall be deemed to have been held at the place designated for such meeting, provided that at least one member is at such place while participating in the meeting. Section 7. Organization. Every meeting of the Board of Directors shall be presided over by the Chairman of the Board or, in his absence, the President. In the absence of the Chairman of the Board and the President, a presiding officer shall be chosen by a majority of the directors present. The Secretary of the corporation, or, in his absence, an Assistant Secretary of the corporation, shall act as secretary of the meeting, but, in their absence, the presiding officer may appoint any person to act as secretary of the meeting. Section 8. Quorum; Vote. A majority of the directors then in office (but in no event less than one-third of the total number of directors) shall constitute a quorum for the transaction of business, but less than a quorum may adjourn any meeting to another time or place from time to time until a quorum shall be present, whereupon the meeting may be held, as adjourned, without further notice. Except as otherwise required by statute, the Certificate of Incorporation or these By-Laws, all matters coming before any meeting of the Board of Directors shall be decided by the vote of a majority of the directors present at the meeting, a quorum being present. Section 9. Compensation. The directors shall receive such compensation for their services as directors and as members of any committee appointed by the Board as may be prescribed by the Board of Directors and shall be reimbursed by the Corporation for ordinary and reasonable expenses incurred in the performance of their duties, and the foregoing shall not be construed as prohibiting the payment to any director of compensation for services rendered in any other capacity. ARTICLE IV COMMITTEES Section 1. Executive Committee. The Board of Directors may, by resolution passed by a majority of the whole Board, designate from among its members an Executive Committee to consist of three or more members and may designate one of such members as chairman. The Board may also designate one or more of its members as alternates to serve as a member or members of the Executive Committee in the absence of a regular member or members. Except as provided in Section 4 of this Article IV, the Executive Committee shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and the Executive Committee may authorize the seal of the corporation to be affixed to all papers which may require it. Section 2. Other Committees. The Board of Directors, acting by a majority of the whole Board, may also appoint from among its own members or otherwise such other committees as the Board may determine, to have such powers and duties as shall from time to time be prescribed by the Board and which, in the discretion of the Board, may be designated as committees of the Board. Section 3. Quorum and Discharge. A majority of the entire committee shall constitute a quorum for the transaction of business of any committee and may fix its rules of procedure. The Board of Directors may discharge any committee either with or without cause at any time. Section 4. Powers of Committees. No committee designated or appointed by the Board of Directors shall have the power or authority of the Board in reference to (a) amending the Certificate of Incorporation, (b) adopting an agreement of merger or consolidation, (c) recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (d) recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, (e) amending the By-Laws of the corporation, (f) declaring dividends, (g) designating committees, (h) filling vacancies among committee members or (i) removing officers. The Executive Committee shall have the power and authority of the Board to authorize the issuance of shares of capital stock of the corporation of any class or any series of any class. Section 5. Committee Meetings. Regular meetings of any committee designated or appointed by the Board of Directors shall be held at such times and places and on such notice, if any, as the committee may from time to time determine. Special meetings of any committee designated or appointed by the Board may be called by order of the Chairman of the Board, Vice Chairman of the Board, President of the corporation, Chairman of the committee or any two members of any such committee. Notice shall be given of the time and place of each special meeting by mailing the same at least two days before the meeting or by telephoning, telegraphing or delivering personally the same at least twenty-four hours before the meeting to each committee member. Except as otherwise specified in the notice thereof or as required by law, the Certificate of Incorporation or these By-Laws, any and all business may be transacted at any regular or special meeting of a committee. The Secretary of the corporation shall keep the minutes of the meetings of all committees designated or appointed by the Board of Directors and shall be the custodian of all corporation records. ARTICLE V OFFICERS Section 1. General. The Board of Directors shall elect the following executive officers: a Chairman of the Board, a President, one or more Vice Presidents and a Secretary; and it may elect or appoint from time to time such other or additional officers as in its opinion are desirable for the conduct of the business of the corporation. Section 2. Term of Office: Removal and Vacancy. Each officer shall hold his/her office until his/her successor is elected and qualified or until his/her earlier resignation or removal. Any officer or agent shall be subject to removal with or without cause at any time by the Board of Directors. Vacancies in any office, whether occurring by death, resignation, removal or otherwise, may be filled at any regular or special meeting of the Board of Directors. Section 3. Powers and Duties. Each of the officers of the corporation shall, unless otherwise ordered by the Board of Directors, have such powers and duties as generally pertain to his/her respective office as well as such powers and duties as from time to time may be conferred upon him/her by the Board of Directors. Unless otherwise ordered by the Board of Directors after the adoption of these By-Laws, the Chairman of the Board, or, when the office of Chairman of the Board is vacant, the President, shall be the chief executive officer of the corporation. Section 4. Power to Vote Stock. Unless otherwise ordered by the Board of Directors, the Chairman of the Board and the President each shall have full power and authority on behalf of the corporation to attend and to vote at any meeting of stockholders of any corporation in which this corporation may hold stock, and may exercise on behalf of this corporation any and all of the rights and powers incident to the ownership of such stock at any such meeting and shall have power and authority to execute and deliver proxies, waivers and consents on behalf of the corporation in connection with the exercise by the corporation of the rights and powers incident to the ownership of such stock. The Board of Directors, from time to time, may confer like powers upon any other person or persons. ARTICLE VI CAPITAL STOCK Section 1. Certificates of Stock. Certificates for stock of the corporation shall be in such form as the Board of Directors may from time to time prescribe and shall be signed by the Chairman of the Board or a Vice Chairman of the Board or the President or a Vice President and by the Secretary of the corporation or an Assistant Secretary of the corporation. Section 2. Transfer of Stock. Shares of capital stock of the corporation shall be transferable on the books of the corporation only by the holder of record thereof, in person or by duly authorized attorney, upon surrender and cancellation of certificates for a like number of shares, with an assignment or power of transfer endorsed thereon or delivered therewith, duly executed, and with such proof of the authenticity of the signature and of authority to transfer, and of payment of transfer taxes, as the corporation or its agents may require. Section 3. Ownership of Stock. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the owner thereof in fact and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law. ARTICLE VII MISCELLANEOUS Section 1. Corporate Seal. The seal of the corporation shall be circular in form and shall contain the name of the corporation and the year and State of incorporation. The Secretary of the corporation shall be the custodian of the seal of the corporation. Section 2. Fiscal Year. The Board of Directors shall have power to fix, and from time to time to change, the fiscal year of the corporation. Section 3. Waiver of Notice. Any notice required to be given under the provisions of these By-Laws or otherwise may be waived by the stockholder, director, member of any committee or officer to whom such notice is required to be given, before or after the meeting or other action of which notice was required to be given. ARTICLE VIII AMENDMENT The Board of Directors shall have the power to make, alter or repeal the By-Laws of the corporation subject to the power of the stockholders to alter or repeal the By-Laws made or altered by the Board of Directors. ARTICLE IX INDEMNIFICATION Section 1. Obligation to Indemnify. This corporation shall, to the fullest extent permitted by Delaware law, as in effect from time to time (but, in the case of any amendment of the Delaware General Corporation Law or the Delaware Limited Liability Company Act, only to the extent that such amendment permits this corporation to provide broader indemnification rights than said laws permitted this corporation to provide prior to such amendment), indemnify each person who is or was a director, manager or officer of this corporation or of any of its wholly owned subsidiaries at any time on or after August 1, 1988, who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, or was or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director, manager, officer, employee or agent of this corporation or of any of its wholly owned subsidiaries, or is or was at any time serving, at the request of this corporation or any of its wholly owned subsidiaries, any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity against all expense, liability and loss (including, but not limited to, attorneys' fees, judgments, fines, excise taxes or penalties (with respect to any employee benefit plan or otherwise), and amounts paid or to be paid in settlement) incurred or suffered by such director, manager, officer, employee or agent in connection with such proceeding; provided, however, that, except as provided in Section 5 of this ARTICLE IX, this corporation shall not be obligated to indemnify any person under this ARTICLE IX in connection with a proceeding (or part thereof) if such proceeding (or part thereof) was not authorized by the Board of Directors of this corporation and was initiated by such person against (i) this corporation or any of its subsidiaries, (ii) any person who is or was a director, manager, officer, employee or agent of this corporation or any of its subsidiaries and/or (iii) any person or entity which is or was controlled, controlled by, or under common control with, this corporation or has or had business relations with this corporation or any of its subsidiaries. Section 2. Contract Right; Advance Payment of Expenses. The right to indemnification conferred in this ARTICLE IX shall be a contract right, shall continue as to a person who has ceased to be a director, manager or officer of this corporation or of any of its wholly owned subsidiaries and shall inure to the benefit of his or her heirs, executors and administrators, and shall include the right to be paid by this corporation the expenses incurred in connection with the defense or investigation of any such proceeding in advance of its final disposition; provided, however, that, if and to the extent that Delaware law so requires, the payment of such expenses in advance of the final disposition of a proceeding shall be made only upon delivery to this corporation of an undertaking, by or on behalf of such director, manager or officer or former director, manager or officer, to repay all amounts so advanced if it shall ultimately be determined that such director, manager or officer or former director, manager or officer is not entitled to be indemnified by this corporation. Section 3. Vesting of Rights. The corporation's obligation to indemnify and to pay expenses in advance of the final disposition of a proceeding under this ARTICLE IX shall arise, and all rights and protections granted to directors, managers and officers under this ARTICLE IX shall vest, at the time of the occurrence of the transaction or event to which any proceeding relates, or at the time that the action or conduct to which any proceeding relates was first taken or engaged in (or omitted to be taken or engaged in), regardless of when any proceeding is first threatened, commenced or completed. Section 4. Continuing of Obligations. Notwithstanding any other provision of these By-laws or the Restated Certificate of Incorporation of this corporation, no action by this corporation, either by amendment to or repeal of this ARTICLE IX or the Restated Certificate of Incorporation of this corporation or otherwise shall diminish or adversely affect any right or protection granted under this ARTICLE IX to any director, manager or officer or former director, manager or officer of this corporation or of any of its wholly-owned subsidiaries which shall have become vested as aforesaid prior to the date that any such amendment, repeal or other corporate action is taken. Section 5. Right to Sue for Unpaid Claims. If a claim for indemnification and/or for payment of expenses in advance of the final disposition of a proceeding arising under this ARTICLE IX is not paid in full by this corporation within thirty days after a written claim has been received by this corporation, the claimant may at any time thereafter bring suit against this corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. Section 6. Non-Exclusivity. The right to indemnification and the payment of expenses incurred in connection with the defense or investigation of a proceeding in advance of its final disposition conferred in this ARTICLE IX shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the By-Laws, Restated Certificate of Incorporation, agreement, vote of stockholders or disinterested directors or otherwise. This corporation may also indemnify all other persons to the fullest extent permitted by Delaware law. Section 7. Effective Date. The provisions of this ARTICLE IX shall apply to any proceeding commenced on or after August 1, 1988. The provisions of this ARTICLE IX of this corporation's By-Laws, as in effect on July 31, 1988, shall govern indemnification in respect of any proceeding commenced prior to August 1, 1988 and in respect of any rights to indemnification or prepayment of expenses granted under the provisions of said ARTICLE IX which shall have become vested. ARTICLE X LIABILITY INSURANCE The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of ARTICLE IX hereof. EX-27 3 FINANCIAL DATA SCHEDULE TO MAXXAM 10-Q
5 This schedule contains summary financial information extracted from the Company's consolidated balance sheet and consolidated statement of operations and is qualified in its entirety by reference to such consolidated financial statements together with the related footnotes thereto. 1,000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-1-1999 JUN-30-1999 1 196,200 60,300 300,900 6,200 553,700 1,272,300 2,217,800 963,000 4,266,200 675,500 2,001,400 0 300 5,000 31,900 4,266,200 1,133,600 1,133,600 1,034,300 1,034,300 137,100 0 98,600 127,900 55,800 94,000 0 0 0 94,000 13.42 12.01
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