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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1994
Commission File Number 1-3924
MAXXAM INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 95-2078752
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
5847 SAN FELIPE, SUITE 2600
HOUSTON, TEXAS 77057
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (713) 975-7600
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Number of shares of common stock outstanding at August 1, 1994: 8,698,464
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MAXXAM INC.
INDEX
PAGE
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at June 30, 1994 and
December 31, 1993 . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Operations for the three and
six months ended June 30, 1994 and 1993 . . . . . . . 4
Consolidated Statement of Cash Flows for the six months ended
June 30, 1994 and 1993 . . . . . . . . . . . . . . . . 5
Condensed Notes to Consolidated Financial Statements . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 12
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 22
Item 5. Other Information . . . . . . . . . . . . . . . . . . 23
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 23
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, December 31,
1994 1993
------------- -------------
(Unaudited)
(In millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $109.2 $83.9
Marketable securities . . . . . . . . . . . . . 69.8 44.7
Receivables:
Trade, net of allowance for doubtful
accounts of $3.9 and $3.2 at June 30,
1994 and December 31, 1993,
respectively . . . . . . . . . . . . . . 176.5 175.3
Other . . . . . . . . . . . . . . . . . . . 72.2 90.8
Inventories . . . . . . . . . . . . . . . . . . 470.9 503.6
Prepaid expenses and other current assets . . . 117.7 93.3
------------ -----------
Total current assets . . . . . . . . . . . 1,016.3 991.6
Property, plant and equipment, net of
accumulated depreciation of $531.9 and $481.3 at
June 30, 1994 and December 31, 1993,
respectively . . . . . . . . . . . . . . . . . . 1,230.0 1,245.0
Timber and timberlands, net of depletion of $115.7 and
$108.2 at June 30, 1994 and December 31, 1993,
respectively . . . . . . . . . . . . . . . . . . 332.8 338.6
Investments in and advances to unconsolidated
affiliates . . . . . . . . . . . . . . . . . . . 176.4 183.2
Real estate . . . . . . . . . . . . . . . . . . . . . 96.4 113.3
Deferred income taxes . . . . . . . . . . . . . . . . 407.0 359.9
Long-term receivables and other assets . . . . . . . 363.5 340.4
------------- -----------
$3,622.4 $3,572.0
============= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . $125.2 $135.6
Accrued interest . . . . . . . . . . . . . . . . 61.6 53.7
Accrued compensation and related benefits . . . 126.0 114.2
Other accrued liabilities . . . . . . . . . . . 157.2 161.5
Payable to affiliates . . . . . . . . . . . . . 74.4 74.0
Long-term debt, current maturities . . . . . . . 35.1 38.3
------------ -----------
Total current liabilities . . . . . . . . . 579.5 577.3
Long-term debt, less current maturities . . . . . . . 1,587.4 1,567.9
Accrued postretirement benefits . . . . . . . . . . . 727.3 720.1
Other noncurrent liabilities . . . . . . . . . . . . 660.9 650.3
----------- -----------
Total liabilities . . . . . . . . . . . . . 3,555.1 3,515.6
----------- -----------
Commitments and contingencies
Minority interests . . . . . . . . . . . . . . . . . 317.4 224.3
Stockholders' deficit:
Preferred stock, $.50 par value; 12,500,000
shares authorized; Class A $.05 Non-
Cumulative Participating Convertible
Preferred Stock; shares issued: 679,084 . . .3 .3
Common stock, $.50 par value; 28,000,000 shares
authorized; shares issued: 10,063,359 . . . 5.0 5.0
Additional capital . . . . . . . . . . . . . . . 52.1 51.2
Accumulated deficit . . . . . . . . . . . . . . (263.9) (180.8)
Pension liability adjustment . . . . . . . . . . (23.9) (23.9)
Treasury stock, at cost (shares held: preferred -
845; common - 1,364,895) . . . . . . . . . (19.7) (19.7)
----------- -----------
Total stockholders' deficit . . . . . . . . (250.1) (167.9)
----------- -----------
$3,622.4 $3,572.0
=========== ===========
CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -------------------------
1994 1993 1994 1993
----------- ---------- ----------- -------------
(Unaudited)
Net sales:
Aluminum operations . . . . . . . $459.5 $432.2 $874.6 $874.8
Forest products operations . . . . 63.0 58.0 119.7 110.7
Real estate operations . . . . . . 21.3 17.7 38.5 36.1
----------- ----------- ----------- -----------
543.8 507.9 1,032.8 1,021.6
----------- ----------- ----------- -----------
Costs and expenses:
Costs of sales and operations
(exclusive of depreciation and
depletion):
Aluminum operations . . . . . 419.0 391.0 806.8 791.1
Forest products operations . 31.0 31.6 64.2 57.9
Real estate operations . . . 15.8 13.4 28.2 32.8
Depreciation and depletion . . . . 30.0 30.3 61.2 60.0
Selling, general and administrative 41.5 42.7 80.9 82.7
expenses . . . . . . . . . . ----------- ----------- ----------- -----------
537.3 509.0 1,041.3 1,024.5
----------- ----------- ----------- -----------
Operating income (loss) . . . . . . . . 6.5 (1.1) (8.5) (2.9)
Other income (expense):
Investment, interest and other
income (expense) . . . . . . (19.1) 7.2 (7.7) 16.7
Interest expense . . . . . . . . . (44.2) (46.9) (87.7) (96.2)
----------- ----------- ----------- -----------
Loss before income taxes, minority
interests, extraordinary item and
cumulative effect of changes
in accounting principles . . . . . (56.8) (40.8) (103.9) (82.4)
Credit for income taxes . . . . . . . . 19.3 22.9 35.8 37.0
Minority interests . . . . . . . . . . (5.7) 2.1 (9.6) 3.7
----------- ---------- ----------- -----------
Loss before extraordinary item and
cumulative effect of changes in
accounting principles . . . . . . (43.2) (15.8) (77.7) (41.7)
Extraordinary item:
Loss on early extinguishment of
debt, net of related benefits
for minority interests of $nil
and $2.8 and income taxes of
$2.9 and $24.2 in 1994 and
1993, respectively . . . . . - - (5.4) (44.1)
Cumulative effect of changes in
accounting principles:
Postretirement benefits other than
pensions and postemployment
benefits, net of related
benefits for minority
interests of $64.6 and income
taxes of $240.2 . . . . . . . - - - (444.3)
Accounting for income taxes . . . - - - 26.6
----------- ----------- ----------- -----------
Net loss . . . . . . . . . . . . . . . $(43.2) $(15.8) $(83.1) $(503.5)
=========== =========== =========== ===========
Per common and common equivalent share:
Loss before extraordinary item and
cumulative effect of changes
in accounting principles . . $(4.57) $(1.67) $(8.22) $(4.41)
Extraordinary item . . . . . . . . - - (.57) (4.66)
Cumulative effect of changes in - - - (44.14)
accounting principles . . . . ----------- ----------- ----------- -----------
Net loss . . . . . . . . . . . . . $(4.57) $(1.67) $(8.79) $(53.21)
=========== =========== =========== ===========
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
Six Months Ended
June 30,
-------------------------------
1994 1993
--------------- --------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (83.1) $ (503.5)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and depletion . . . . . . . . . . . . . . . . . 61.2 60.0
Amortization of deferred financing costs and discounts on
long-term debt . . . . . . . . . . . . . . . . . . . . . 9.9 9.9
Minority interests . . . . . . . . . . . . . . . . . . . . . 9.6 (3.7)
Extraordinary loss on early extinguishment of debt, net . . . 5.4 44.1
Equity in losses of unconsolidated affiliates . . . . . . . . 1.0 6.5
Incurrence of financing costs . . . . . . . . . . . . . . . . (18.7) (39.3)
Cumulative effect of changes in accounting principles, net . - 417.7
Decrease in inventories . . . . . . . . . . . . . . . . . . . 33.8 2.0
Decrease in receivables . . . . . . . . . . . . . . . . . . . 10.3 22.5
Increase in accrued interest . . . . . . . . . . . . . . . . 8.0 3.1
Increase in payable to affiliates and other liabilities . . . 2.6 12.5
Increase in accrued and deferred income taxes . . . . . . . . (41.7) (40.6)
Decrease in accounts payable . . . . . . . . . . . . . . . . (10.4) (8.9)
Decrease (increase) in prepaid expenses and other assets . . (4.9) 8.7
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 (4.4)
--------------- --------------
Net cash used for operating activities . . . . . . . . . (14.1) (13.4)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposition of property and investments . . . . 6.6 10.0
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (30.9) (33.3)
Net sales (purchases) of marketable securities . . . . . . . . . . (26.9) 4.4
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.0) (1.0)
-------------- --------------
Net cash used for investing activities . . . . . . . . . (54.2) (19.9)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt . . . . . . . . . . . . . 225.5 1,022.8
Net payments under revolving credit agreements and
short-term borrowings . . . . . . . . . . . . . . . . . (193.4) (136.7)
Redemptions, repurchase of and principal payments on long-term
debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21.8) (951.1)
Redemption of preference stock . . . . . . . . . . . . . . . . . . (8.4) (4.0)
Proceeds from issuance of Kaiser capital stock . . . . . . . . . . 100.4 119.3
Restricted cash deposits . . . . . . . . . . . . . . . . . . . . . - (35.0)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8.7) -
-------------- --------------
Net cash provided by financing activities . . . . . . . 93.6 15.3
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . 25.3 (18.0)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . 83.9 81.9
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . $ 109.2 $ 63.9
============== ==============
Supplementary schedule of non-cash investing and financing activities:
Net margin borrowings (repayments) for marketable securities . . . $ (.5) $ 3.1
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest . . . . . . . . . . . . $ 69.9 $ 83.1
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . 6.5 7.3
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. GENERAL
The information contained in the following notes to the
consolidated financial statements is condensed from that which would appear
in the annual consolidated financial statements; accordingly, the
consolidated financial statements included herein should be reviewed in
conjunction with the consolidated financial statements and related notes
thereto contained in the Annual Report on Form 10-K filed by MAXXAM Inc.
with the Securities and Exchange Commission for the fiscal year ended
December 31, 1993 (the "Form 10-K"). All references to the "Company"
include MAXXAM Inc. and its subsidiary companies unless otherwise indicated
or the context indicates otherwise. Accounting measurements at interim
dates inherently involve greater reliance on estimates than at year end.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the entire year.
The consolidated financial statements included herein are
unaudited; however, they include all adjustments of a normal recurring
nature which, in the opinion of management, are necessary to present fairly
the consolidated financial position of the Company at June 30, 1994, the
consolidated results of operations for the three and six months ended June
30, 1994 and 1993 and consolidated cash flows for the six months ended June
30, 1994 and 1993. Certain reclassifications of prior period information
have been made to conform to the current presentation.
2. CASH AND CASH EQUIVALENTS
At June 30, 1994 and December 31, 1993, cash and cash equivalents
includes $13.4 and $20.3, respectively, which is reserved for debt service
payments on the 7.95% Timber Collateralized Notes due 2015.
3. INVENTORIES
Inventories consist of the following:
June 30, December 31,
1994 1993
------------- ------------
Aluminum Operations:
Finished fabricated products . . . . . . . . . . . . . . $63.6 $ 83.7
Primary aluminum and work in process . . . . . . . . . . 149.0 141.4
Bauxite and alumina . . . . . . . . . . . . . . . . . . 77.0 94.0
Operating supplies and repair and maintenance parts . . 104.9 107.8
------------- ------------
394.5 426.9
------------- ------------
Forest Products Operations:
Lumber . . . . . . . . . . . . . . . . . . . . . . . . . 63.1 58.4
Logs . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3 18.3
------------- ------------
76.4 76.7
------------- ------------
$470.9 $ 503.6
============= ============
4. LONG-TERM DEBT
Long-term debt consists of the following:
June 30, December 31,
1994 1993
---------------- ----------------
Corporate:
14% Senior Subordinated Reset Notes due May 20, 2000 . . . . . $ 25.0 $ 25.0
12-1/2% Subordinated Debentures due December 15, 1999, net of
discount . . . . . . . . . . . . . . . . . . . . . . . . 20.7 25.2
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 .5
Aluminum Operations:
1994 Credit Agreement . . . . . . . . . . . . . . . . . . . . - -
1989 Credit Agreement:
Revolving Credit Facility . . . . . . . . . . . . . . . . - 188.0
9-7/8% Senior Notes due February 15, 2002, net of discount . . 223.5 -
Alpart CARIFA Loan . . . . . . . . . . . . . . . . . . . . . . 60.0 60.0
12-3/4% Senior Subordinated Notes due February 1, 2003 . . . . 400.0 400.0
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72.7 78.1
Forest Products Operations:
7.95% Timber Collateralized Notes due July 20, 2015 . . . . . 368.9 377.0
11-1/4% Senior Secured Notes due August 1, 2003 . . . . . . . 100.0 100.0
12-1/4% Senior Secured Discount Notes due August 1, 2003, net
of discount . . . . . . . . . . . . . . . . . . . . . . . 78.0 73.5
10-1/2% Senior Notes due March 1, 2003 . . . . . . . . . . . . 235.0 235.0
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 2.9
Real Estate Operations:
Secured notes due December 31, 1997, interest at prime
plus 3% . . . . . . . . . . . . . . . . . . . . . . . . . 15.7 17.2
Other notes and contracts, primarily
secured by receivables,
buildings, real estate and equipment . . . . . . . . . . 21.8 23.8
---------------- ----------------
1,622.5 1,606.2
Less: current maturities . . . . . . . . . . . . . . . . . . . . . (35.1) (38.3)
---------------- ----------------
$ 1,587.4 $ 1,567.9
================ ================
The 1994 Credit Agreement
On February 17, 1994, Kaiser Aluminum Corporation ("Kaiser," a
majority owned subsidiary of the Company) and its principal operating
subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), entered into a
credit agreement with BankAmerica Business Credit, Inc. (as agent for
itself and other lenders), Bank of America National Trust and Savings
Association and certain other lenders (the "1994 Credit Agreement"). The
1994 Credit Agreement replaced Kaiser's previous credit agreement (as
amended,the "1989 Credit Agreement") and consists of a $250.0 five-year
secured revolving line of credit which matures in 1999. Kaiser is able to
borrow under the facility by means of revolving credit advances and letters
of credit (up to $125.0) in an aggregate amount equal to the lesser of
$250.0 or a borrowing base relating to eligible accounts receivable and
inventory. As of June 30, 1994, $184.2 of borrowing capacity was unused
under the 1994 Credit Agreement (of which $59.2 could also have been used
for letters of credit). The 1994 Credit Agreement is unconditionally
guaranteed by Kaiser and by all significant subsidiaries of KACC. Loans
under the 1994 Credit Agreement bear interest at a rate per annum,
at KACC's election, equal to (i) a Reference Rate plus 1-1/2% or (ii) LIBOR
plus 3-1/4%. After June 30, 1995, the interest rate margins applicable to
borrowings under the 1994 Credit Agreement may be reduced by up to 1-1/2%
based upon a financial test, determined quarterly. The 1994 Credit
Agreement was amended as of July 21, 1994. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Financial
Condition and Investing and Financing Activities -- Aluminum Operations."
Kaiser recorded a pre-tax extraordinary loss of $8.3 for the six months
ended June 30, 1994, consisting primarily of the write-off of unamortized
deferred financing costs related to the 1989 Credit Agreement.
9-7/8% Senior Notes (the "KACC Senior Notes")
Concurrent with the offering by Kaiser of the 8.255% Preferred
Redeemable Increased Dividend Equity Securities (the "PRIDES") (see Note
5), KACC issued $225.0 of the KACC Senior Notes. The net proceeds from the
offering of the KACC Senior Notes were used to reduce outstanding
borrowings under the Revolving Credit Facility of the 1989 Credit Agreement
immediately prior to the effectiveness of the 1994 Credit Agreement and for
working capital and general corporate purposes.
5. MINORITY INTERESTS
During the first quarter of 1994, Kaiser consummated the public
offering of 8,855,550 shares of its PRIDES. The net proceeds from the sale
of the PRIDES were approximately $100.4. The Company accounted for
Kaiser's issuance of the PRIDES as additional minority interest.
6. INVESTMENT, INTEREST AND OTHER INCOME (EXPENSE)
On May 17, 1994, the Company and The Pacific Lumber Company
("Pacific Lumber," a wholly owned indirect subsidiary of the Company)
announced that an agreement in principle had been reached to settle class
and related individual claims brought by former stockholders of Pacific
Lumber against the Company, MAXXAM Group Inc. ("MGI," a wholly owned
subsidiary of the Company), Pacific Lumber, former directors of Pacific
Lumber and others concerning MGI's acquisition of Pacific Lumber. Of the
pending approximately $52.0 settlement, approximately $33.0 was paid by
insurance carriers of the Company and Pacific Lumber, approximately $14.8
was paid by Pacific Lumber and the balance was paid by other defendants and
through the assignment of certain claims. The settlement is subject to
certain contingencies, including a fairness hearing which will be held at a
yet unspecified time. The above described cash payments are being held in
the registry of the court pending satisfaction of these contingencies. In
the second quarter of 1994, the Company recorded a pre-tax loss of $21.2
related to the settlement and associated costs. This amount is included in
investment, interest and other income (expense).
In February 1994, Pacific Lumber received a franchise tax refund
of $7.2, the substantial portion of which represents interest, from the
State of California relating to tax years 1972 through 1985. This amount
is included in investment, interest and other income (expense) for the six
months ended June 30, 1994.
7. PER SHARE INFORMATION
Per share calculations are based on the weighted average number
of common shares outstanding in each period and, if dilutive, weighted
average common equivalent shares assumed to be issued from the exercise of
common stock options based upon the average price of the Company's common
stock during the period.
8. CONTINGENCIES
Environmental Contingencies
Kaiser and KACC are subject to a wide variety of environmental
laws and regulations and to fines or penalties assessed for alleged
breaches of the environmental laws and to claims and litigation based upon
such laws. KACC is currently subject to a number of lawsuits under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended by the Superfund Amendments Reauthorization Act of 1986
("CERCLA") and, along with certain other entities, has been named as a
potentially responsible party for remedial costs at certain third-party
sites listed on the National Priorities List under CERCLA.
Based upon Kaiser's evaluation of these and other environmental
matters, Kaiser has established environmental accruals primarily related to
potential solid waste disposal and soil and groundwater remediation
matters. At June 30, 1994, the balance of such accruals, which is
primarily included in other noncurrent liabilities, was $42.1.
These environmental accruals represent Kaiser's estimate of costs
reasonably expected to be incurred based upon presently enacted laws and
regulations, currently available facts, existing technology and Kaiser's
assessment of the likely remediation actions to be taken. Kaiser expects
that these remediation actions will be taken over the next several years
and estimates that expenditures to be charged to the environmental accrual
will be approximately $4.0 to $9.0 for the years 1994 through 1998 and an
aggregate of approximately $11.0 thereafter.
As additional facts are developed and definitive remediation
plans and necessary regulatory approvals for implementation of remediation
are established, or alternative technologies are developed, changes in
these and other factors may result in actual costs exceeding the current
environmental accruals by amounts which cannot presently be estimated.
While uncertainties are inherent in the ultimate outcome of these matters
and it is impossible to presently determine the actual costs that
ultimately may be incurred, management believes that the resolution of such
uncertainties should not have a material adverse effect on Kaiser's
consolidated financial position or results of operations.
Asbestos Contingencies
KACC is a defendant in a number of lawsuits in which the
plaintiffs allege that certain of their injuries were caused by exposure to
asbestos during, and as a result of, their employment with KACC or exposure
to products containing asbestos produced or sold by KACC. The lawsuits
generally relate to products KACC has not manufactured for at least 15
years. At June 30, 1994, the number of such lawsuits pending was
approximately 21,200.
Based upon prior experience, Kaiser estimates annual future cash
payments in connection with such litigation of approximately $8.0 to $13.0
for the years 1994 through 1998, and an aggregate of approximately $95.4
thereafter through 2007. Based upon past experience and reasonably
anticipated future activity, Kaiser has established an accrual for
estimated asbestos-related costs for claims filed and estimated to be filed
and settled through 2007. Kaiser does not presently believe there is a
reasonable basis for estimating such costs beyond 2007 and, accordingly, no
accrual has been recorded for such costs which may be incurred. This
accrual was calculated based upon the current and anticipated number of
asbestos-related claims, the prior timing and amounts of asbestos-related
payments, the current state of case law related to asbestos claims, the
advice of counsel and the anticipated effects of inflation and discounting
at an estimated risk-free rate. Accordingly, an asbestos-related cost
accrual of $102.6 is included primarily in other noncurrent liabilities at
June 30, 1994. The aggregate amount of the undiscounted liability at June
30, 1994 is $141.9, before consideration of insurance recoveries.
Kaiser believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs. While claims
for recovery from some of KACC's insurance carriers are currently subject
to pending litigation and other carriers have raised certain defenses,
Kaiser believes, based upon prior insurance-related recoveries in respect
of asbestos-related claims, existing insurance policies and the advice of
counsel, that substantial recoveries from the insurance carriers are
probable. Accordingly, estimated insurance recoveries of $97.9, determined
on the same basis as the asbestos-related cost accrual, are recorded
primarily in long-term receivables and other assets as of June 30, 1994.
Based upon the factors discussed in the two preceding paragraphs,
management currently believes that the resolution of the asbestos-related
uncertainties and the incurrence of asbestos-related costs net of insurance
recoveries should not have a material adverse effect on Kaiser's
consolidated financial position or results of operations.
Other Contingencies
The Company is involved in various other claims, lawsuits and
other proceedings relating to a wide variety of matters. While there are
uncertainties inherent in the ultimate outcome of such matters and it is
impossible to presently determine the actual costs that may be incurred,
management believes that the resolution of such uncertainties and the
incurrence of such costs should not have a material adverse effect on the
Company's consolidated financial position or results of operations.
9. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
Kaiser enters into a number of financial instruments with off-
balance-sheet risk in the normal course of business that are designed to
reduce its exposure to fluctuations in foreign exchange rates, alumina and
primary aluminum prices and the cost of purchased commodities.
Kaiser has significant expenditures which are denominated in
foreign currencies related to long-term purchase commitments with its
affiliates in Australia and the United Kingdom, which expose Kaiser to
certain exchange rate risks. In order to mitigate its exposure, Kaiser
periodically enters into forward foreign exchange and currency option
contracts in Australian Dollars and Pounds Sterling to hedge these
commitments. The forward foreign currency exchange contracts are
agreements to purchase or sell a foreign currency, for a price specified at
the contract date, with delivery and settlement in the future. At June 30,
1994, Kaiser had net forward foreign exchange contracts totaling
approximately $23.4 for the purchase of 34.8 million Australian Dollars
through May 1995. The option contracts are agreements that establish the
maximum price or establish a range of prices at which the foreign currency
may be acquired. At June 30, 1994, such options established a price range
of $30.2 to $31.7 for the purchase of 48.0 million Australian Dollars
through December 1994, and established a maximum price of $2.2 for the
purchase of 1.5 million Pounds Sterling through December 1994.
To mitigate its exposure to declines in the market prices of
alumina and primary aluminum, while retaining the ability to participate in
favorable pricing environments that may materialize, Kaiser has
developed strategies which include forward sales of primary aluminum at
fixed prices and the purchase or sale of options for primary aluminum.
Under the principal components of Kaiser's price risk management strategy,
which can be modified at any time, (i) varying quantities of Kaiser's
anticipated production are sold forward at fixed prices, (ii) call options
are purchased to allow Kaiser to participate in certain higher market
prices, should they materialize, for a portion of Kaiser's excess primary
aluminum and alumina sold forward, (iii) option contracts are entered into
to establish a price range Kaiser will receive for a portion of its excess
primary aluminum and alumina and (iv) put options are purchased to
establish minimum prices Kaiser will receive for a portion of its excess
primary aluminum and alumina. In this regard, in respect of its remaining
1994 anticipated primary aluminum and alumina production, as of June 30,
1994, Kaiser had sold forward 53,000 metric tons of primary aluminum at
fixed prices and had purchased call options in respect of 30,000 metric
tons of primary aluminum. Further, in respect of its 1995 anticipated
primary aluminum and alumina production, as of June 30, 1994, Kaiser had
sold forward 150,000 metric tons of primary aluminum at fixed prices,
purchased call options in respect of 87,000 metric tons of primary aluminum
and had entered into option contracts that established a price range for
54,000 metric tons of primary aluminum. Kaiser will not receive the
benefit of market price increases to the extent (i) the quantity of
production sold forward is greater than the tonnage covered by the
purchased call options; (ii) market prices exceed the prices at which
primary aluminum is sold forward, but are less than the strike price of the
purchased call options, on the tonnage covered by the options; or (iii)
market prices exceed the maximum of the price range on the tonnage covered
by the option contracts entered to establish a price range.
In addition, Kaiser enters forward fixed price arrangements with
certain customers which provide for the delivery of a specific quantity of
fabricated aluminum products over a specified future period of time. In
order to establish the cost of primary aluminum for a portion of such
sales, Kaiser may enter into forward and options contracts. In this
regard, at June 30, 1994, Kaiser had 13,500 metric tons of primary aluminum
forward purchase contracts at fixed prices.
Kaiser has also entered into a natural gas pricing contract to
fix future prices of a portion (20,000 million BTU's per day) of a plant's
natural gas supply through March 1995.
At June 30, 1994, the net unrealized gain on Kaiser's position in
forward foreign exchange and foreign currency options was $4.3 and the net
unrealized loss on aluminum forward sales and option contracts and the
natural gas pricing contract was $35.8, based on dealer quoted prices.
Gains and losses arising from the use of hedging instruments are reflected
in Kaiser's operating results concurrently with the consummation of the
underlying hedged transactions.
Kaiser is exposed to credit risk in the event of non-performance
by other parties to these currency and commodity contracts, but Kaiser does
not anticipate non-performance by any of these counterparties.
MAXXAM INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the response to
Part I, Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any
capitalized terms used but not defined in this Item have the same meaning
given to them in the Form 10-K.
RESULTS OF OPERATIONS
The Company operates in three industries: aluminum, through its
majority owned subsidiary Kaiser, a fully integrated aluminum producer;
forest products, through MGI and its wholly owned subsidiaries; and real
estate management and development, principally through MAXXAM Property
Company and various other wholly owned subsidiaries.
ALUMINUM OPERATIONS
Kaiser's operating results are sensitive to changes in prices of
alumina, primary aluminum and fabricated aluminum products, and also depend
to a significant degree upon the volume and mix of all products sold.
Kaiser, through its principal subsidiary KACC, operates in two business
segments: bauxite and alumina, and aluminum processing. Aluminum
operations account for a significant portion of the Company's revenues and
operating results. The following table presents selected operational and
financial information for the three and six months ended June 30, 1994 and
1993. The information presented in the table is in millions of dollars
except shipments and prices.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1994 1993 1994 1993
------------- ------------- ------------- -------------
Shipments(1):
Alumina . . . . . . . . . . . . . . . 574.2 472.3 1,042.4 931.6
Aluminum products:
Primary aluminum . . . . . . . . 63.1 53.6 127.4 128.1
Fabricated products . . . . . . . 104.9 95.5 201.7 187.1
------------- ------------- ------------- -------------
Total aluminum products . . 168.0 149.1 329.1 315.2
============= ============= ============= =============
Average realized sales price:
Alumina (per ton) . . . . . . . . . . $ 159 $ 170 $ 157 $ 172
Primary aluminum (per pound) . . . . . .55 .59 .55 .57
Net sales:
Bauxite and alumina:
Alumina . . . . . . . . . . . . . $ 91.3 $ 80.2 $ 163.8 $ 160.2
Other(2)(3) . . . . . . . . . . . 20.4 22.1 40.8 41.1
------------- ------------- ------------- -------------
Total bauxite and alumina . 111.7 102.3 204.6 201.3
------------- ------------- ------------- -------------
Aluminum processing:
Primary aluminum . . . . . . . . 76.8 69.4 154.1 160.6
Fabricated products . . . . . . . 267.4 257.2 508.9 506.3
Other(3) . . . . . . . . . . . . 3.6 3.3 7.0 6.6
------------- ------------- ------------- -------------
Total aluminum processing . 347.8 329.9 670.0 673.5
------------- ------------- ------------- -------------
Total net sales . . . . $ 459.5 $ 432.2 $ 874.6 $ 874.8
============= ============= ============= =============
Operating loss . . . . . . . . . . . . . . $ (12.7) $ (12.7) $ (36.8) $ (20.9)
============= ============= ============= =============
Loss before income taxes, minority
interests, extraordinary item and
cumulative effect of changes in
accounting principles . . . . . . . . $ (33.6) $ (31.0) $ (77.0) $ (56.7)
============= ============= ============= =============
Capital expenditures . . . . . . . . . . . $ 12.1 $ 13.3 $ 21.7 $ 23.3
============= ============= ============= =============
<FN>
- --------------------
(1) Shipments are expressed in thousands of metric tons. A metric ton is equivalent to 2,204.6 pounds.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority interests in consolidated subsidiaries.
Net sales
Bauxite and alumina. Revenues from net sales to third parties
for the bauxite and alumina segment were $111.7 million for the second
quarter of 1994 compared with $102.3 million for the second quarter of 1993
and $204.6 million for the six months ended June 30, 1994 compared with
$201.3 million for the six months ended June 30, 1993. Revenues from
alumina increased 14% to $91.3 million for the second quarter of 1994 from
$80.2 million for the second quarter of 1993, and increased 2% to $163.8
million for the six months ended June 30, 1994, from $160.2 million for the
six months ended June 30, 1993, principally due to increased shipments,
offset by lower average realized prices.
Aluminum processing. Revenues from net sales to third parties
for the aluminum processing segment were $347.8 million for the second
quarter of 1994 compared with $329.9 million for the second quarter of 1993
and $670.0 million for the six months ended June 30, 1994 compared with
$673.5 million for the six months ended June 30, 1993. Revenues from
primary aluminum increased 11% to $76.8 million for the second quarter of
1994 from $69.4 million for the second quarter of 1993 principally due to
increased shipments, partially offset by lower average realized prices, and
decreased 4% to $154.1 million for the six months ended June 30, 1994 from
$160.6 million for the six months ended June 30, 1993, primarily because of
lower average realized prices and, to a lesser extent, lower shipments.
Shipments of primary aluminum to third parties constituted approximately
38% and 39% of total aluminum products shipments for the second quarter of
1994 and six months ended June 30, 1994, respectively, compared with
approximately 36% and 41% for the second quarter of 1993 and six months
ended June 30, 1993. Revenues from fabricated aluminum products increased
4% to $267.4 million for the second quarter of 1994 from $257.2 million for
the second quarter of 1993 due to increased shipments, partially offset by
lower average realized prices, and remained approximately the same for the
six months ended June 30, 1994 compared with the six months ended June 30,
1993, as increased shipments were offset by lower average realized prices.
Operating loss
The operating loss for the second quarter of 1994 and the second
quarter of 1993 was $12.7 million. The operating loss for the six months
ended June 30, 1994 was $36.8 million, compared with $20.9 million for the
six months ended June 30, 1993. Kaiser's corporate general and
administrative expenses of $18.2 million and $18.3 million for the second
quarter of 1994 and 1993, respectively, and $35.4 million and $37.1 million
for the six months ended June 30, 1994 and 1993, respectively, were
allocated by the Company to the bauxite and alumina and aluminum processing
segments based upon those segments' ratio of sales to unaffiliated
customers.
Bauxite and alumina. The bauxite and alumina segment had an
operating loss of $3.9 million for the second quarter of 1994, compared
with $7.9 million for the second quarter of 1993. The operating loss for
the six months ended June 30, 1994 was $9.7 million, compared with $11.5
million for the six months ended June 30, 1993. These decreases in losses
were principally due to increased shipments of alumina, partially offset by
lower average realized prices for alumina.
Aluminum processing. The aluminum processing segment had an
operating loss of $8.8 million for the second quarter of 1994, compared
with $4.8 million for the second quarter of 1993. This increase was
principally due to lower average realized prices of primary aluminum and
fabricated aluminum products, partially offset by increased shipments of
these products. The operating loss for the six months ended June 30, 1994
was $27.1 million, compared with $9.4 million for the six months ended June
30, 1993. This increase was principally due to lower average realized
prices of primary aluminum and fabricated aluminum products, partially
offset by increased shipments of fabricated aluminum products.
Loss before income taxes, minority interests, extraordinary item
and cumulative effect of changes in accounting principles
The loss before income taxes, minority interests, extraordinary
item and cumulative effect of changes in accounting principles for the
second quarter of 1994 was $33.6 million, compared with $31.0 million for
the second quarter of 1993. The loss for the six months ended June 30,
1994 was $77.0 million, compared with $56.7 million for the six months
ended June 30, 1993. This increase resulted from the increased operating
loss previously described.
FOREST PRODUCTS OPERATIONS
The Company's forest products operations are conducted by MGI
through its principal operating subsidiaries, Pacific Lumber and Britt
Lumber Co., Inc. ("Britt"). MGI's business is highly seasonal in that the
forest products business has historically experienced lower first and
fourth quarter sales due largely to the general decline in construction
related activity during the winter months. Accordingly, MGI's results for
any one quarter are not necessarily indicative of results to be expected
for the full year. The following table presents selected operational and
financial information for the three and six months ended June 30, 1994 and
1993. The information presented in the table is in millions of dollars
except shipments and prices.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
Shipments:
Lumber(1):
Redwood upper grades . . . . . . . . . . 12.8 17.0 25.7 32.8
Redwood common grades . . . . . . . . . . 55.7 48.3 105.1 93.9
Douglas-fir upper grades . . . . . . . . 1.9 3.0 4.4 6.2
Douglas-fir common grades . . . . . . . . 16.5 12.7 31.9 27.5
------------ ------------ ------------ ------------
Total lumber . . . . . . . . . . . . 86.9 81.0 167.1 160.4
============ ============ ============ ============
Logs(2) . . . . . . . . . . . . . . . . . . . 4.8 0.8 10.3 0.8
============ ============ ============ ============
Wood chips(3) . . . . . . . . . . . . . . . . 64.9 34.7 95.2 71.2
============ ============ ============ ============
Average sales price:
Lumber(4):
Redwood upper grades . . . . . . . . . . $ 1,469 $ 1,270 $ 1,437 $ 1,242
Redwood common grades . . . . . . . . . . 458 496 453 477
Douglas-fir upper grades . . . . . . . . 1,373 1,224 1,391 1,167
Douglas-fir common grades . . . . . . . . 426 439 445 433
Logs(4) . . . . . . . . . . . . . . . . . . . 638 714 658 709
Wood chips(5) . . . . . . . . . . . . . . . . 85 78 81 79
Net sales:
Lumber, net of discount . . . . . . . . . . . $ 53.1 $ 53.4 $ 103.1 $ 102.1
Logs . . . . . . . . . . . . . . . . . . . . . 3.1 .6 6.8 .6
Wood chips . . . . . . . . . . . . . . . . . . 5.6 2.7 7.7 5.7
Cogeneration power . . . . . . . . . . . . . . .9 1.0 1.5 1.7
Other . . . . . . . . . . . . . . . . . . . . .3 .3 .6 .6
------------ ------------ ------------ ------------
Total net sales . . . . . . . . . . $ 63.0 $ 58.0 $ 119.7 $ 110.7
============ ============ ============ ============
Operating income . . . . . . . . . . . . . . . . . $ 23.1 $ 15.3 $ 36.5 $ 31.8
============ ============ ============ ============
Loss before income taxes, minority interests,
extraordinary item and cumulative effect of
changes in accounting principles . . . . . . . $ (15.5) $ (2.9) $ (13.5) $ (6.3)
============ ============ ============ ============
Capital expenditures . . . . . . . . . . . . . . . $ 2.5 $ 4.6 $ 6.5 $ 6.6
============ ============ ============ ============
<FN>
- ---------------------
(1) Lumber shipments are expressed in millions of board feet.
(2) Log shipments are expressed in millions of board feet, net Scribner scale.
(3) Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds.
(4) Dollars per thousand board feet.
(5) Dollars per bone dry unit.
Shipments
Lumber shipments for the second quarter of 1994 were 86.9 million
board feet, an increase of 7% from 81.0 million board feet for the second
quarter of 1993. This increase was principally due to a 15% increase in
redwood common lumber shipments, partially offset by a 25% decrease in
shipments of upper grade redwood lumber. Log shipments for the second
quarter of 1994 were 4.8 million feet (net Scribner scale), an increase
from .8 million feet for the second quarter of 1993.
Lumber shipments for the six months ended June 30, 1994 were
167.1 million board feet, an increase of 4% from 160.4 million board feet
for the six months ended June 30, 1993. This increase was principally due
to a 12% increase in redwood common lumber shipments, partially offset by a
22% decrease in shipments of upper grade redwood lumber. Log shipments for
the six months ended June 30, 1994 were 10.3 million feet (net Scribner
scale), an increase from .8 million feet for the six months ended June 30,
1993.
Old growth trees constitute Pacific Lumber's principal source of
upper grade redwood lumber. Due to the severe restrictions on Pacific
Lumber's ability to harvest virgin old growth timber on its property (see
"Trends" under Item 7 of the Form 10-K), Pacific Lumber's supply of upper
grade lumber has decreased in some premium product categories. Pacific
Lumber has been able to lessen the impact of these decreases by augmenting
its production facilities to increase its recovery of upper grade lumber
from smaller diameter logs and increasing the production of manufactured
upper grade lumber products through its end and edge glue facility (which
is currently being expanded). However, unless Pacific Lumber is able to
sustain the harvest level of old growth trees it has experienced in recent
years, Pacific Lumber expects that its supply of premium upper grade lumber
products will decrease from current levels and that its manufactured lumber
products will constitute a higher percentage of its shipments of upper
grade lumber products.
Net sales
Revenues from net sales of lumber and logs for the second quarter
of 1994 increased by approximately 4% from the second quarter of 1993.
This increase was principally due to increased shipments of redwood common
lumber, a 16% increase in the average realized price of upper grade redwood
lumber and increased log shipments, partially offset by decreased shipments
of upper grade redwood lumber and an 8% decrease in the average realized
price of redwood common lumber. The increase in other sales for the second
quarter of 1994 as compared to the second quarter of 1993 was attributable
to increased sales of wood chips.
Revenues from net sales of lumber and logs for the six months
ended June 30, 1994 increased by approximately 7% from the six months ended
June 30, 1993. This increase was principally due to increased log
shipments, increased shipments of redwood common lumber, a 16% increase in
the average realized price of upper grade redwood lumber and a 19% increase
in the average realized price of upper grade Douglas-fir lumber, partially
offset by decreased shipments of upper grade redwood lumber and a 5%
decrease in the average realized price of redwood common lumber. The
increase in other sales for the six months ended June 30, 1994 as compared
to the six months ended June 30, 1993 was attributable to increased sales
of wood chips.
Operating income
Operating income for the second quarter of 1994 increased by
approximately 51% as compared to the second quarter of 1993. Operating
income for the six months ended June 30, 1994 increased by approximately
15% as compared to the six months ended June 30, 1993. These increases
were principally due to higher sales of logs and wood chips, improved
sawmill productivity and lower purchases of lumber
and logs from third parties in 1994 compared to 1993. For the six months
ended June 30, 1993, cost of goods sold was reduced by $1.2 million for an
additional business interruption insurance claim as a result of the April
1992 earthquake.
Pacific Lumber's cost of producing lumber products has continued
to increase as a result of compliance with evolving environmental
regulations, litigation associated with its timber harvesting plans and
greater costs attributable to processing larger numbers of smaller diameter
logs and producing manufactured products.
Loss before income taxes, minority interests, extraordinary item
and cumulative effect of changes in accounting principles
The loss before income taxes, minority interests, extraordinary
item and cumulative effect of changes in accounting principles increased
for the second quarter of 1994 and the six months ended June 30, 1994 as
compared to the same periods in 1993. These increases resulted from the
loss on litigation settlement (see also "Pacific Lumber Merger Litigation"
under Part II, Item 1 of this Report), partially offset by the increases in
operating income and decreased interest expense. In addition, investment,
interest and other income (expense) for the six months ended June 30, 1994
includes the receipt of a franchise tax refund of $7.2 million (as
described in Note 6 to the Condensed Notes to Consolidated Financial
Statements). The litigation settlement in the second quarter of 1994 (as
described in Note 6 to the Condensed Notes to Consolidated Financial
Statements) resulted in a pre-tax loss of $21.2 million which consists of
Pacific Lumber's $14.8 million cash payment to the settlement fund, a $2.0
million accrual for additional contingent claims and $4.4 million of
related legal fees. The Company has recorded a net benefit of
approximately $6.3 million for federal and state income taxes related to
the settlement. Interest expense decreased due to lower interest rates
resulting from the refinancing of the long-term debt of Pacific Lumber and
MGI in March and August of 1993.
REAL ESTATE OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
(In millions of dollars)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 21.3 $ 17.7 $ 38.5 $ 36.1
Operating loss . . . . . . . . . . . . . . . . . . . . . . (1.5) (.4) (3.4) (7.0)
Loss before income taxes, minority interests, extraordinary
item and cumulative effect of changes in accounting
principles . . . . . . . . . . . . . . . . . . . . . . (.8) (1.2) (2.1) (8.4)
Net sales
Revenues from net sales for the second quarter of 1994 were $21.3
million, an increase of $3.6 million from the second quarter of 1993. Net
sales for the six months ended June 30, 1994 were $38.5 million, an
increase of $2.4 million from the six months ended June 30, 1993. These
increases were primarily due to increased lot sales at the Company's
Fountain Hills development in Arizona and bulk acreage sales in New Mexico,
partially offset by a decrease in rental revenues resulting from the sale
of sixteen apartment complexes in December 1993.
Operating loss
The operating loss for the second quarter of 1994 was $1.5
million, an increase of $1.1 million from the second quarter of 1993. This
increase was primarily due to higher overhead costs and decreased
revenues resulting from the sale of apartment complexes, partially offset
by the increased sales at Fountain Hills and the bulk acreage sales. The
operating loss for the six months ended June 30, 1994 was $3.4 million, a
decrease of $3.6 million from the six months ended June 30, 1993. This
decrease was primarily due to a $5.9 million writedown of certain of the
Company's nonstrategic real estate holdings to their estimated net
realizable value in 1993, the increased sales at Fountain Hills and the
bulk acreage sales, partially offset by decreased revenues resulting from
the sale of apartment complexes and higher overhead costs.
Loss before income taxes, minority interests, extraordinary item
and cumulative effect of changes in accounting principles
The loss before income taxes, minority interests, extraordinary
item and cumulative effect of changes in accounting principles for the
second quarter of 1994 was $.8 million, a decrease of $.4 million from the
second quarter of 1993. This decrease was due to lower interest expense,
partially offset by the increased operating loss discussed above. The loss
before income taxes, minority interests, extraordinary item and cumulative
effect of changes in accounting principles for the six months ended June
30, 1994 was $2.1 million, a decrease of $6.3 million from the six months
ended June 30, 1993. This decrease was primarily attributable to the
decreased operating loss discussed above, along with a decrease in interest
expense. The decreases in interest expense resulted from repayments on the
debt related to the RTC portfolio.
OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
(In millions of dollars)
Operating loss . . . . . . . . . . . . . $ (2.4) $ (3.3) $ (4.8) $ (6.8)
Loss before income taxes, minority
interests, extraordinary item and
cumulative effect of changes in
accounting principles . . . . . . . (6.9) (5.7) (11.3) (11.0)
Operating loss
The operating losses represent corporate general and
administrative expenses that are not allocated to the Company's industry
segments. The operating loss for the second quarter of 1994 was $2.4
million, a decrease of $.9 million from the second quarter of 1993. The
operating loss for the six months ended June 30, 1994 was $4.8 million, a
decrease of $2.0 million from the six months ended June 30, 1993. These
decreases were primarily due to lower overhead costs.
Loss before income taxes, minority interests, extraordinary item
and cumulative effect of changes in accounting principles
The loss before income taxes, minority interests, extraordinary
item and cumulative effect of changes in accounting principles includes
operating losses, investment, interest and other income (expense) and
interest expense, including amortization of deferred financing costs, that
are not allocated to the Company's industry segments. The loss for the
second quarter of 1994 was $6.9 million, an increase of $1.2 million from
the second quarter of 1993. The loss for the six months ended June 30,
1994 was $11.3 million, an increase of $.3 million from the six months
ended June 30, 1993. These increases were primarily due to the equity in
losses of affiliates, partially offset by lower interest expense and the
decreased operating losses discussed above. The equity in losses of
affiliates is attributable to the Company's 29.7% equity interest in Sam
Houston Race Park (see "--Financial Condition and Investing and Financing
Activities -- Parent
Company"). The decreases in interest expense resulted primarily from the
redemption of $20.0 million aggregate principal amount of the Reset Notes
in August 1993.
Minority interests
Minority interests represent the minority stockholders' interest
in the Company's aluminum operations.
Extraordinary item
The refinancing activities of Kaiser during the first quarter of
1994, as described in Note 4 to the Condensed Notes to Consolidated
Financial Statements, resulted in an extraordinary loss of $5.4 million,
net of benefits for income taxes of $2.9 million. The extraordinary loss
consists primarily of the write-off of unamortized deferred financing costs
on the 1989 Credit Agreement. The extraordinary loss for the six months
ended June 30, 1993 resulted from the refinancing activities of KACC and
Pacific Lumber.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
The Company's consolidated indebtedness increased $16.3 million
to $1,622.5 million at June 30, 1994 from $1,606.2 million at December 31,
1993. The increase was primarily attributable to Kaiser's issuance of the
KACC Senior Notes, offset by the repayment of outstanding borrowings under
the 1989 Credit Agreement.
PARENT COMPANY
Certain of the Company's subsidiaries, principally Kaiser and
MGI, are restricted by their various debt agreements as to the amount of
funds that can be paid in the form of dividends or loaned to the Company.
KACC's 1994 Credit Agreement and the indentures governing the KACC Senior
Notes and the KACC Notes contain covenants which, among other things, limit
Kaiser's ability to pay cash dividends and restrict transactions between
Kaiser and its affiliates. Under the most restrictive of these covenants,
Kaiser is not currently permitted to pay dividends on its common stock.
The indenture governing the MGI Notes contains various covenants which,
among other things, limit the payment of dividends and restrict
transactions between MGI and its affiliates. At June 30, 1994, under the
most restrictive of these covenants, no dividends may be paid by MGI.
Under the most restrictive covenants governing debt of the Company's real
estate subsidiaries, approximately $26.2 million could be paid as of June
30, 1994.
As of June 30, 1994, the Company (excluding its aluminum, forest
products and real estate subsidiary companies) had cash and marketable
securities of approximately $41.7 million. The Company believes that its
existing cash and marketable securities (excluding its aluminum, forest
products and real estate subsidiaries), together with the funds available
to it, will be sufficient to fund its working capital requirements for the
foreseeable future.
Sam Houston Race Park, a Class 1 horse racing track located in
Houston, began operations on April 29, 1994. The track has thoroughbred
and quarter horse races scheduled through the end of 1994. Through various
subsidiaries, the Company is the general partner of, and holds an equity
interest of approximately 29.7% in, Sam Houston Race Park, Ltd. ("SHRP"),
which owns the facility. SHRP's initial working capital, together with
cash flows from operations, has not been sufficient to enable SHRP to meet
its obligations as they become due. As of June 30, 1994, SHRP had a
working capital deficiency of approximately $2.7 million and a capital
deficit of approximately $8.1 million. SHRP has been able to
continue its operations principally by deferring payments to certain of its
vendors. There can be no assurance that such vendors will continue to
permit SHRP to defer full payment of amounts due.
SHRP's ability to recover its investment in Sam Houston Race Park
is dependent upon its ability to raise additional capital from its partners
and, ultimately, to achieve a level of cash flow from operations sufficient
to enable it to meet its operating and financing obligations as they become
due. In this regard, the Company has undertaken a number of steps designed
to improve SHRP's current operations. These efforts include increasing its
marketing and advertising programs, strengthening on-site management,
renegotiating contracts for purse payments and reducing other general and
administrative costs. In addition to its efforts to strengthen SHRP's
current operations, the Company has determined that a cash call to the
partners will be necessary. The amount, timing and terms of the cash call
are to be discussed at a meeting of the partners scheduled for August 17,
1994. The Company's portion of the cash call is not expected to be
significant to the Company. There can be no assurance that the operating
changes referred to above, together with the cash raised from the partners,
will be sufficient to enable SHRP to achieve a level of cash flow from
operations sufficient to enable it to meet its future operating and
financing obligations as they become due. There is a high probability
that, absent significant improvements in SHRP's operating performance,
additional cash calls to the partners will be required in the future.
ALUMINUM OPERATIONS
The offering of the PRIDES, the issuance of the KACC Senior Notes
and the replacement of the 1989 Credit Agreement during the first quarter
of 1994 (as described in Notes 4 and 5 to the Condensed Notes to
Consolidated Financial Statements) were the final steps of a comprehensive
refinancing plan which Kaiser began in January 1993 which extended the
maturities of Kaiser's outstanding indebtedness, enhanced its liquidity and
raised new equity capital. Kaiser expects that cash flows from operations
and borrowings under the 1994 Credit Agreement will be sufficient to
satisfy its working capital and capital expenditure requirements for the
foreseeable future.
The 1994 Credit Agreement was amended as of July 21, 1994, by
First Amendment to Credit Agreement (the "First Amendment"). The First
Amendment provided, among other things, for an increase in the revolving
line of credit from $250.0 million to $275.0 million, and for an increase
in the inventory sub-limit of the borrowing base from $175.0 million to
$200.0 million, under the 1994 Credit Agreement.
FOREST PRODUCTS OPERATIONS
MGI anticipates that cash flows from operations, together with
existing cash, marketable securities and available sources of financing,
will be sufficient to fund the working capital and capital expenditures
requirements of MGI and its respective subsidiaries for the foreseeable
future; however, due to its highly leveraged condition, MGI is more
sensitive than less leveraged companies to factors affecting its
operations, including governmental regulation affecting its timber
harvesting practices, increased competition from other lumber producers or
alternative building products and general economic conditions.
REAL ESTATE OPERATIONS
As of June 30, 1994, the Company's real estate subsidiaries had
approximately $28.6 million available for use under various credit
agreements. Substantially all of the availability was attributable to the
credit
availability pursuant to the loan agreement secured by real properties, and
certain loans secured by income-producing real property, purchased from the
RTC.
SENSITIVITY TO PRICES AND HEDGING PROGRAMS
ALUMINUM OPERATIONS
To mitigate its exposure to declines in the market prices of
alumina and primary aluminum, while retaining the ability to participate in
favorable pricing environments that may materialize, Kaiser has developed
strategies which include forward sales of primary aluminum at fixed prices
and the purchase or sale of options for primary aluminum. Under the
principal components of Kaiser's price risk management strategy, which can
be modified at any time, (i) varying quantities of Kaiser's anticipated
production are sold forward at fixed prices, (ii) call options are
purchased to allow Kaiser to participate in certain higher market prices,
should they materialize, for a portion of Kaiser's excess primary aluminum
and alumina sold forward, (iii) option contracts are entered into to
establish a price range Kaiser will receive for a portion of its excess
primary aluminum and alumina and (iv) put options are purchased to
establish minimum prices Kaiser will receive for a portion of its excess
primary aluminum and alumina.
Since June 30, 1994, in addition to the positions which have
expired pursuant to their terms, Kaiser has adjusted certain of its hedge
positions. In respect of its remaining 1994 anticipated primary aluminum
and alumina production, as of the date of this Report, Kaiser had sold
forward 59,200 metric tons of primary aluminum at fixed prices and had
purchased call options in respect of 25,000 metric tons of primary
aluminum. Further, in respect of its 1995 anticipated primary aluminum
production, as of the date of this Report, Kaiser had sold forward 42,200
metric tons of primary aluminum at fixed prices, had purchased call options
in respect of 30,000 metric tons of primary aluminum, had entered into
option contracts that established a price range for 90,000 metric tons of
primary aluminum and had purchased put options to establish a minimum price
for 181,500 metric tons of primary aluminum. In addition, since several
alumina sales contracts have pricing provisions which link the selling
price of alumina to the spot price of primary aluminum, Kaiser has hedged a
portion of its 1995 alumina sales on the primary aluminum forward market.
As of the date of this Report, Kaiser had sold 34,000 metric tons of
primary aluminum forward at fixed prices.
TRENDS
ALUMINUM OPERATIONS
In response to a power reduction imposed by the Bonneville Power
Administration ("BPA") in the Pacific Northwest, Kaiser in January 1993
removed three reduction potlines from production in Washington (two at its
Mead smelter and one at its Tacoma smelter). Kaiser has operated these
smelters at such reduced operating rate since that time. Although full BPA
power was restored as of April 1, 1994, a 25% power reduction was imposed
again by the BPA as of August 1, 1994, which reduction is expected to
continue through at least November 30, 1994. Kaiser cannot predict whether
full power will be provided by the BPA after November 30, 1994, or whether
power will otherwise become available at a price acceptable to Kaiser.
Kaiser currently anticipates that it will operate its Mead and Tacoma
smelters during the remainder of 1994 at a rate which does not exceed the
current operating rate of 75% of full capacity for such smelters.
Furthermore, after continued assessment of current market conditions, on
May 15, 1994, Kaiser curtailed about 40,000 metric tons of primary
aluminum-making capacity at its 90%-owned Volta
Aluminium Company Limited ("VALCO") smelter in Ghana, West Africa. The
tonnage accounts for about 20% of VALCO's annual capacity and about 9.3% of
Kaiser's current annual production. With this cutback and those taken at
Kaiser's Pacific Northwest smelters in January 1993, Kaiser is operating at
an annual production rate of approximately 390,000 metric tons of primary
aluminum, or 77% of its total annual rated capacity of 508,000 metric tons.
During the six months ended June 30, 1994, Kaiser's average
realized prices from sales of alumina, primary aluminum and fabricated
aluminum products declined from their 1993 levels. 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. If Kaiser's average realized
sales prices in 1994 for substantial quantities of its primary aluminum and
alumina were based on the current market price of primary aluminum, Kaiser
would continue to sustain net losses in 1994, which would be expected to
exceed the loss for 1993 before extraordinary losses and cumulative effect
of changes in accounting principles, the charges related to the
restructuring of the Trentwood plant and certain other facilities, certain
other charges principally related to a reduction in the carrying value of
Kaiser's inventories and the establishment of additional litigation and
environmental reserves.
MAXXAM INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Form 10-K and Part II, Item 1
of the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1994 (the "Form 10-Q") for information concerning material
legal proceedings with respect to the Company. The following material
developments have occurred with respect to such legal proceedings. Any
capitalized or italicized terms used but not defined in this Item have the
same meaning given to them in the Form 10-K and the Form 10-Q.
KAISER ENVIRONMENTAL LITIGATION
Aberdeen Pesticides Dumps Site Matter
As indicated in the Form 10-K, by letters dated December 30,
1993, the EPA notified KACC of its potential liability for, and requested
that KACC, along with a number of other companies, undertake or agree to
finance, groundwater remediation at certain of the Sites. On June 22,
1994, the EPA issued two Unilateral Administrative Orders under Section
106(a) of CERCLA under U.S. EPA Docket No. 94-28-C and U.S. EPA Docket No.
94-27-C, respectively, ordering a number of respondents, including KACC, to
design and implement the groundwater remediation remedy for two of the
Sites. KACC has reached an agreement in principle with certain of the
respondents to participate jointly in responding to both of the Unilateral
Administrative Orders, to share costs incurred on an interim basis, and to
seek to reach a final allocation of costs through agreement or to allow
such final allocation and determination of liability to be made by the U.S.
District Court. A definitive agreement is under negotiation by the
participating respondents. The participating respondents are also in the
process of notifying the EPA of their intent to comply with the Unilateral
Administrative Orders to the extent consistent with applicable law.
PACIFIC LUMBER MERGER LITIGATION
With respect to the In re Ivan F. Boesky multidistrict securities
litigation matter, on May 17, 1994, the Company and Pacific Lumber
announced that an agreement in principle had been reached to settle class
and related individual claims brought by former stockholders of Pacific
Lumber against the Company, MGI, Pacific Lumber, former directors of
Pacific Lumber and others concerning MGI's acquisition of Pacific Lumber.
The settlement would resolve the Fries State, Omicini, Thompson State,
Russ, Fries Federal, Thompson Federal, Boesky and American Red Cross
actions described in the Form 10-K. Of the pending approximately $52.0
million settlement, approximately $33.0 million was paid by insurance
carriers of the Company and Pacific Lumber, approximately $14.8 million was
paid by Pacific Lumber, and the balance was paid by other defendants and
through the assignment of certain claims. The settlement is subject to
certain contingencies, including a fairness hearing which will be held at a
yet unspecified time in the United States District Court, Southern District
of New York (notice of which hearing will be furnished to claimants). The
above-described cash payments are being held in the registry of the court
pending satisfaction of these contingencies.
Management believes the settlement of these claims is in the best
interest of the Company. See also Note 6 to the Condensed Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations -
- - Forest Products Operations -- Loss before income taxes, minority
interests, extraordinary item and cumulative effect of changes in
accounting principles" in Part I of this Report.
With respect to the Russ case, the Court has scheduled a status
conference for January 6, 1995, but has directed the parties to file
dismissal papers with the Court in the event that the above-described
Boesky settlement is approved and finalized prior to the next scheduled
status conference.
RANCHO MIRAGE LITIGATION
With respect to the consolidated In re MAXXAM Inc./Federated
Development Shareholders Litigation action, on July 6, 1994, the defendants
and consolidated plaintiffs entered into a settlement agreement. Under the
terms of the proposed settlement, the Company would receive $3 million,
$1.5 million to be paid by defendant Federated Development Company (over 22
months) and the other $1.5 million to be paid on behalf of the individual
defendants by their insurance carriers. All shareholders of record have
been sent notice and information concerning the proposed settlement. A
fairness hearing with respect to the proposed settlement has been scheduled
for September 21, 1994. NL Industries, Inc., which filed separate actions
in Delaware and Texas concerning the Mirada transactions (described in the
Form 10-K) has indicated that it intends to oppose the proposed settlement.
ITEM 5. OTHER INFORMATION
In Part I, Item 1, "Business--Forest Products Operations--
Regulatory and Environmental Factors" of the Form 10-K, a bill is described
which relates to approximately 54,000 acres of Pacific Lumber's
timberlands. A similar bill has been introduced in the U.S. Senate by
Senator Barbara Boxer (D-CA). Since these bills are subject to amendment,
it is premature to assess the ultimate content of these bills, the
likelihood of any of the bills passing, or the impact of either of these
bills on the financial position or results of operations of the Company.
MCO Properties Inc., a subsidiary of the Company, and the local
sanitation district, an unaffiliated company, have received notification of
non-compliance with certain Arizona statutes and regulations concerning the
discharge and disposal of effluent and wastewater. MCOP and the
unaffiliated company are working with the Arizona Department of
Environmental Quality to correct this matter. This matter could delay the
processing and approval of subdivision plats within the Fountain Hills
development.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
4.1 Certificate of Designations of Class A $.05 Non-Cumulative
Participating Convertible Preferred Stock of the Company, dated
July 6, 1994 (incorporated herein by reference to Exhibit 4(c) to
the Registration Statement of the Company on Form S-8,
Registration No. 33-54479)
*4.2 Second Amendment, dated as of May 26, 1994, to Pacific Lumber's
Revolving Credit Agreement
*4.3 Fourth Modification Agreement, dated as of March 31, 1994, by and
among General Electric Capital Corporation ("GECC"), MXM Mortgage
Corp. and MXM Mortgage L.P.
*4.4 Fifth Amendment to Loan Agreement, dated as of March 31, 1994, by
and among GECC, MXM Mortgage Corp. and MXM Mortgage L.P.
4.5 First Amendment to Kaiser's 1994 Credit Agreement (incorporated
herein by reference to Exhibit 4.1 to the Quarterly Report on
Form 10-Q of Kaiser Aluminum Corporation for the quarter ended
June 30, 1994; File No. 1-9447)
10.1 MAXXAM 1994 Omnibus Employee Incentive Plan (incorporated herein
by reference to the Company's Proxy Statement dated April 29,
1994; File No. 1-3924; the "1994 Proxy Statement")
10.2 MAXXAM 1994 Non-Employee Director Plan (incorporated herein by
reference to the 1994 Proxy Statement)
10.3 MAXXAM 1994 Executive Bonus Plan (incorporated herein by
reference to the 1994 Proxy Statement)
*11 Computation of Net Loss Per Common and Common Equivalent Share
- --------------------
* Included with this filing.
B. REPORTS ON FORM 8-K:
On June 2, 1994, the Company filed a Current Report on
Form 8-K, dated June 2, 1994, describing under Item 5
the settlement of the Pacific Lumber merger litigation
(see "-- Pacific Lumber Merger Litigation" under Part
II, Item 1 of this Report for a description of such
settlement).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized, who has signed this report on
behalf of the Registrant and as the chief financial officer of the
Registrant.
MAXXAM INC.
Date: August 15, 1994 By: JOHN T. LA DUC
John T. La Duc
Senior Vice President and Chief
Financial Officer