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, 1996
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 1, 1996: 8,707,847
MAXXAM INC.
INDEX
PART I. - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet at June 30, 1996 and
December 31, 1995 3
Consolidated Statement of Operations for the three
and six months ended June 30, 1996 and 1995 4
Consolidated Statement of Cash Flows for the six months
ended June 30, 1996 and 1995 5
Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures S-1
CONSOLIDATED BALANCE SHEET
June 30, December 31,
1996 1995
------------- -------------
(Unaudited)
(IN MILLIONS OF DOLLARS)
ASSETS
Current assets:
Cash and cash equivalents $ 118.9 $ 104.2
Marketable securities 40.8 45.9
Receivables:
Trade, net of allowance for doubtful
accounts of $5.8 and $5.5 at June
30, 1996 and December 31, 1995,
respectively 227.3 246.2
Other 80.7 98.9
Inventories 631.5 606.8
Prepaid expenses and other current assets 151.3 129.7
------------- -------------
Total current assets 1,250.5 1,231.7
Property, plant and equipment, net of accumulated
depreciation of $725.0 and $678.1 at June
30, 1996 and December 31, 1995, respectively 1,235.4 1,231.9
Timber and timberlands, net of depletion of
$146.4 and $139.6 at June 30, 1996 and
December 31, 1995, respectively 307.4 313.0
Investments in and advances to unconsolidated
affiliates 189.5 189.1
Deferred income taxes 426.1 414.0
Long-term receivables and other assets 468.4 452.6
------------- -------------
$ 3,877.3 $ 3,832.3
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 174.9 $ 196.7
Accrued interest 57.9 58.0
Accrued compensation and related benefits 151.2 166.5
Other accrued liabilities 153.4 148.4
Payable to affiliates 92.6 90.2
Long-term debt, current maturities 24.4 25.1
------------- -------------
Total current liabilities 654.4 684.9
Long-term debt, less current maturities 1,648.5 1,585.1
Accrued postretirement benefits 738.6 742.6
Other noncurrent liabilities 679.6 680.3
------------- -------------
Total liabilities 3,721.1 3,692.9
------------- -------------
Commitments and contingencies
Minority interests 216.9 223.2
Stockholders' deficit:
Preferred stock, $.50 par value; 12,500,000
shares authorized; Class A $.05 Non-
Cumulative Participating Convertible
Preferred Stock; shares issued: 669,701 .3 .3
Common stock, $.50 par value; 28,000,000
shares authorized; shares issued:
10,063,359 5.0 5.0
Additional capital 155.4 155.0
Accumulated deficit (185.8) (208.5)
Pension liability adjustment (16.1) (16.1)
Treasury stock, at cost (shares held:
preferred - 845; common: 1,355,512) (19.5) (19.5)
------------- -------------
Total stockholders' deficit (60.7) (83.8)
------------- -------------
$ 3,877.3 $ 3,832.3
============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
(In millions of dollars, except share amounts)
Net sales:
Aluminum operations $ 567.6 $ 583.4 $ 1,098.7 $ 1,096.4
Forest products operations 71.3 65.6 131.1 117.6
Real estate operations 28.8 24.3 50.1 40.6
------------- ------------- ------------- -------------
667.7 673.3 1,279.9 1,254.6
------------- ------------- ------------- -------------
Costs and expenses:
Costs of sales and operations
(exclusive of depreciation
and depletion):
Aluminum operations 476.1 463.8 909.8 890.5
Forest products operations 41.4 33.0 74.5 62.5
Real estate operations 23.4 16.3 40.3 28.4
Selling, general and
administrative expenses 49.5 47.2 94.2 89.8
Depreciation and depletion 31.3 31.1 61.9 60.9
------------- ------------- ------------- -------------
621.7 591.4 1,180.7 1,132.1
------------- ------------- ------------- -------------
Operating income 46.0 81.9 99.2 122.5
Other income (expense):
Investment, interest and other
income 10.2 5.5 15.5 9.1
Interest expense (45.6) (45.4) (90.7) (90.8)
------------- ------------- ------------- -------------
Income before income taxes and
minority interests 10.6 42.0 24.0 40.8
Credit (provision) for income taxes 9.1 (10.0) 4.1 (2.8)
Minority interests (2.8) (6.6) (5.4) (13.6)
------------- ------------- ------------- -------------
Net income $ 16.9 $ 25.4 $ 22.7 $ 24.4
============= ============= ============= =============
Net income per common and common
equivalent share $ 1.78 $ 2.69 $ 2.40 $ 2.58
============= ============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
----------------------------
1996 1995
------------- -------------
(In millions of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22.7 $ 24.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and depletion 61.9 60.9
Net sales (purchases) of marketable
securities 8.6 (1.7)
Minority interests 5.4 13.6
Amortization of deferred financing costs
and discounts on long-term debt 10.6 9.5
Equity in income of unconsolidated
affiliates (7.9) (7.1)
Decrease (increase) in receivables 39.5 (43.2)
Decrease in payable to affiliates and
other liabilities (34.1) (12.1)
Increase in inventories (26.7) (45.3)
Increase (decrease) in accrued interest (.2) .2
Decrease (increase) in prepaid expenses
and other assets (21.4) 64.6
Decrease in accounts payable (21.8) (14.6)
Increase in accrued and deferred income
taxes (13.3) (6.3)
Other .4 .2
------------- -------------
Net cash provided by operating
activities 23.7 43.1
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposition of property
and investments 8.2 11.0
Capital expenditures (63.8) (33.8)
Other (2.9) (.3)
------------- -------------
Net cash used for investing
activities (58.5) (23.1)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit
agreements 66.5 41.1
Proceeds from issuance of long-term debt 4.3 2.6
Principal payments on long-term debt (15.4) (20.8)
Dividends paid to Kaiser's minority
preferred stockholders (4.2) (15.6)
Redemption of preference stock (5.1) (8.7)
Other 3.4 2.0
------------- -------------
Net cash provided by financing
activities 49.5 .6
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 14.7 20.6
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 104.2 84.6
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 118.9 $ 105.2
============= =============
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Net repayments of margin borrowings for
marketable securities $ - $ 6.9
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 80.2 $ 81.0
Income taxes paid 18.3 17.1
<FN>
The accompanying notes are an integral part of these financial statements.
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, 1995 (the "Form 10-K"). All references to the "Company"
include MAXXAM Inc. and its subsidiary companies unless otherwise indicated
or the context indicates otherwise. Any capitalized term used but not
defined in the following Condensed Notes to the Consolidated Financial
Statements have the same meaning given to them as in the Form 10-K.
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, 1996, the
consolidated results of operations for the three and six months ended June
30, 1996 and 1995 and consolidated cash flows for the six months ended June
30, 1996 and 1995. Certain reclassifications of prior period information
have been made to conform to the current presentation.
2. RESTRICTED CASH
Long-term receivables and other assets, as reflected on the
accompanying consolidated balance sheet, includes restricted cash in the
amount of $31.1 and $31.4 at June 30, 1996 and December 31, 1995,
respectively. Such restricted cash represents the amount deposited into an
account held by the Trustee under the indenture governing the Timber Notes
of the Company's indirect wholly owned subsidiary, Scotia Pacific Holding
Company ("Scotia Pacific").
At June 30, 1996 and December 31, 1995, cash and cash equivalents
also includes $11.3 and $19.7, respectively, which is restricted for debt
service payments on the succeeding note payment date for the Timber Notes.
3. INVENTORIES
Inventories consist of the following:
June 30, December 31,
1996 1995
-------------- --------------
Aluminum Operations:
Finished fabricated products $ 107.4 $ 91.5
Primary aluminum and work in process 197.1 195.9
Bauxite and alumina 131.2 119.6
Operating supplies and repair and
maintenance parts 123.0 118.7
-------------- --------------
558.7 525.7
-------------- --------------
Forest Products Operations:
Lumber 60.0 65.5
Logs 12.8 15.6
-------------- --------------
72.8 81.1
-------------- --------------
$ 631.5 $ 606.8
============== ==============
4. LONG-TERM DEBT
Long-term debt consists of the following:
June 30, December 31,
1996 1995
------------- -------------
Corporate:
14% MAXXAM Senior Subordinated Reset
Notes due May 20, 2000 $ 25.0 $ 25.0
12-1/2% MAXXAM Subordinated Debentures
due December 15, 1999, net of
discount 16.6 16.5
Other - .1
Aluminum Operations:
1994 KACC Credit Agreement 80.4 13.1
9-7/8% KACC Senior Notes due February
15, 2002, net of discount 223.9 223.8
Alpart CARIFA Loan 60.0 60.0
12-3/4% KACC Senior Subordinated Notes
due February 1, 2003 400.0 400.0
Other 55.6 61.2
Forest Products Operations:
7.95% Scotia Pacific Timber
Collateralized Notes due July 20,
2015 341.7 350.2
11-1/4% MGI Senior Secured Notes due
August 1, 2003 100.0 100.0
12-1/4% MGI Senior Secured Discount
Notes due August 1, 2003, net of
discount 98.2 92.5
10-1/2% Pacific Lumber Senior Notes due
March 1, 2003 235.0 235.0
Other .7 .8
Real Estate and Other Operations:
11% SHRP, Ltd. Senior Secured Extendible
Notes due September 1, 2001, net of
discount 14.8 13.3
RTC Portfolio secured notes due December
31, 1999, interest at prime plus 3% 11.7 8.0
Other notes and contracts, secured by
receivables, buildings, real estate
and equipment 9.3 10.7
------------- -------------
1,672.9 1,610.2
Less: current maturities (24.4) (25.1)
------------- -------------
$ 1,648.5 $ 1,585.1
============= =============
On April 24, 1996, the Securities and Exchange Commission ("SEC")
declared effective a shelf registration statement which the Company had
filed with respect to up to $200.0 aggregate principal amount of debt
securities. The Company has not determined the amount, interest rates,
maturity, collateral (if any) or other terms of such debt securities or the
timing of any offering of such debt securities. The debt securities could
be secured by, or convertible into, shares of common stock of Kaiser
Aluminum Corporation ("Kaiser," a majority-owned subsidiary of the Company)
owned by the Company. In that regard, Kaiser also filed a shelf
registration statement with the SEC, which was also declared effective on
April 24, 1996, covering 10 million shares of its common stock owned by the
Company. The Company would use the net proceeds (or portions thereof) from
the sale of such debt securities to retire outstanding debt, for working
capital and general corporate purposes.
5. 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.
6. CREDIT (PROVISION) FOR INCOME TAXES
The Company's credit (provision) for income taxes differs from
the federal statutory rate due principally to (i) the revision of prior
years' tax estimates and other changes in valuation allowances, (ii)
percentage depletion, and (iii) foreign, state and local taxes, net of
related federal tax benefits. Revision of prior years' tax estimates
includes amounts for the reversal of reserves which the Company no longer
believes are necessary. Generally, the reversal of reserves relate to the
expiration of the relevant statute of limitations with respect to certain
income tax returns, or the resolution of specific income tax matters with
the relevant tax authorities. The credit for income taxes for the second
quarter of 1996 includes a benefit of $13.4 million relating to the
reversal of reserves the Company no longer believes are necessary. The
Company's provision for income taxes for the second quarter and six months
ended June 30, 1995, reflects a benefit of $4.9 million and $12.8 million,
respectively, relating to the reversal of reserves the Company no longer
believes are necessary.
7. CONTINGENCIES
Environmental Contingencies
Kaiser and its principal operating subsidiary, Kaiser Aluminum &
Chemical Corporation ("KACC"), are subject to a number of environmental
laws and regulations, to fines or penalties assessed for alleged breaches
of the environmental laws, and to claims and litigation based on 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 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, 1996, the balance of such accruals, which is
primarily included in other noncurrent liabilities, was $34.6. These
environmental accruals represent Kaiser's estimate of costs reasonably
expected to be incurred based on presently enacted laws and regulations,
currently available facts, existing technology, and Kaiser's assessment of
the likely remediation action to be taken. Kaiser expects that these
remediation actions will be taken over the next several years and estimates
that annual expenditures to be charged to these environmental accruals will
be approximately $3.0 to $10.0 for the years 1996 through 2000 and an
aggregate of approximately $8.0 thereafter.
As additional facts are developed and definitive remediation
plans and necessary regulatory approvals for implementation of remediation
are established or alternative technologies are developed, changes in these
and other factors may result in actual costs exceeding the current
environmental accruals. Kaiser believes that it is reasonably possible
that costs associated with these environmental matters may exceed current
accruals by amounts that could range, in the aggregate, up to an estimated
$22.0 and that the factors upon which a substantial portion of this
estimate is based are expected to be resolved in early 1997. 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 substantial number of lawsuits, some of
which involve claims of multiple persons, in which the plaintiffs allege
that certain of their injuries were caused by, among other things, exposure
to asbestos during, and as a result of, their employment or association
with KACC or exposure to products containing asbestos produced or sold by
KACC. The lawsuits generally relate to products KACC has not manufactured
for at least 15 years. At June 30, 1996, the number of such lawsuits
pending was approximately 71,900, as compared to 59,700 at December 31,
1995. In 1995, approximately 41,700 of such claims were received and
approximately 7,200 were settled or dismissed and, during the first six
months of 1996, approximately 15,400 of such claims were received and
approximately 3,200 were settled or dismissed.
Based on past experience and reasonably anticipated future
activity, Kaiser has established an accrual for estimated asbestos-related
costs for claims filed and estimated to be filed and settled through 2008.
There are inherent uncertainties involved in estimating asbestos-related
costs, and Kaiser's actual costs could exceed these estimates. Kaiser's
accrual was calculated based on the current and anticipated number of
asbestos-related claims, the prior timing and amounts of asbestos-related
payments, and the advice of Wharton Levin Ehrmantraut Klein & Nash, P.A.
with respect to the current state of the law related to asbestos claims.
Accordingly, an asbestos-related cost accrual of $159.9, before
consideration of insurance recoveries, is included primarily in other
noncurrent liabilities at June 30, 1996. Kaiser estimates that annual
future cash payments in connection with such litigation will be
approximately $13.0 to $20.0 for each of the years 1996 through 2000, and
an aggregate of approximately $78.0 thereafter through 2008. While Kaiser
does not believe there is a reasonable basis for estimating such costs
beyond 2008, and, accordingly, did not accrue such costs, there is a
reasonable possibility that such costs may continue beyond 2008, and that
such costs may be substantial.
A substantial portion of the asbestos-related claims that were
filed and served on KACC during 1995 and the first half of 1996 were filed
in Texas. KACC has been advised by its regional counsel that, although
there can be no assurance, the increase in pending claims may have been
attributable in part to tort reform legislation in Texas. Although
asbestos-related claims are currently excluded from certain aspects of the
Texas tort reform legislation, management has been advised that efforts to
remove the asbestos-related exemption in the tort reform legislation, as
well as other developments in the legislative and legal environment in
Texas, may be responsible for the accelerated pace of new claims
experienced in late 1995 and its continuance through the first half of
1996, albeit at a somewhat reduced rate.
Kaiser believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs. Claims for
recovery from some of KACC's insurance carriers are currently subject to
pending litigation and other carriers have raised certain defenses, which
have resulted in delays in recovering costs from the insurance carriers.
The timing and amount of ultimate recoveries from these insurance carriers
are dependent upon the resolution of these disputes. KACC believes, based
on prior insurance-related recoveries with respect to asbestos-related
claims, existing insurance policies, and the advice of Thelen, Marrin,
Johnson & Bridges with respect to applicable insurance coverage law
relating to the terms and conditions of those policies, that substantial
recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $140.8, determined on the same
basis as the asbestos-related cost accrual, is recorded primarily in long-
term receivables and other assets at June 30, 1996.
Management continues to monitor claims activity, the state of the
lawsuits (including settlement initiatives), legislative progress, and
costs incurred in order to ascertain whether an adjustment to the existing
accruals should be made to the extent that historical experience may differ
significantly from Kaiser's underlying assumptions. While uncertainties
are inherent in the final outcome of these asbestos matters and it is
impossible to determine the actual costs that ultimately may be incurred
and the insurance recoveries that will be received, management currently
believes that, based on the factors discussed in the preceding paragraphs,
the resolution of the asbestos-related uncertainties and the incurrence of
asbestos-related costs net of related insurance recoveries should not have
a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
OTS Contingency and Related Matters
On December 26, 1995, the United States Department of Treasury's
Office of Thrift Supervision ("OTS") initiated formal administrative
proceedings against the Company and others by filing a Notice of Charges
(the "Notice"). The Notice alleges misconduct by the Company, Federated
Development Company ("Federated," a New York business trust wholly owned by
Mr. Charles E. Hurwitz, members of his immediate family and trusts for the
benefit thereof), Mr. Hurwitz and others (the "respondents") with respect
to the failure of United Savings Association of Texas ("USAT"), a wholly
owned subsidiary of United Financial Group Inc. ("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 $138.0 from the Company, civil money
penalties and a removal from, and prohibition against the Company and the
other respondents engaging in, the banking industry. The Company has
concluded that it is unable to determine a reasonable estimate of the loss
(or range of loss), if any, that could result from this contingency.
Accordingly, it is impossible to assess the ultimate impact, if any, of the
outcome this matter may have on the Company's consolidated financial
position, results of operations or liquidity.
On August 2, 1995, the Federal Deposit Insurance Corporation
("FDIC") filed a civil action entitled Federal Deposit Insurance
Corporation, as manager of the FSLIC Resolution Fund v. Charles E. Hurwitz
(No. H-95-3936) (the "FDIC action") in the U.S. District Court for the
Southern District of Texas (the "Court"). The FDIC action did not name the
Company as a defendant. The suit against Mr. Hurwitz seeks damages in
excess of $250.0 based on the allegation that Mr. Hurwitz was a controlling
shareholder, de facto senior officer and director of USAT, and was involved
in certain decisions which contributed to the insolvency of USAT. The FDIC
further alleges, among other things, that Mr. Hurwitz was obligated to
ensure that UFG, Federated and the Company maintained the net worth of
USAT. On November 14, 1995, Mr. Hurwitz filed a motion to join the OTS to
this action. On December 8, 1995, the Company filed a motion to intervene
in this action and conditioned it on the Court joining the OTS to this
action. The Company also filed a proposed complaint which alleges that the
OTS violated the Administrative Procedures Act by rejecting the Company's
bid for USAT. The Company's bylaws provide for indemnification of its
officers and directors to the fullest extent permitted by Delaware law.
The Company is obligated to advance defense costs to its officers and
directors, subject to the individual's obligation to repay such amount if
it is ultimately determined that the individual was not entitled to
indemnification. In addition, the Company's indemnity obligation can,
under certain circumstances, include amounts other than defense costs,
including judgments and settlements. The Company has concluded that it is
unable to determine a reasonable estimate of the loss (or range of loss),
if any, that could result from this contingency. It is impossible to
assess the ultimate outcome of the foregoing matter or its potential impact
on the Company's consolidated financial position, results of operations or
liquidity.
Other Contingencies
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
impossible to determine the actual costs that ultimately may be incurred,
management currently 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
KACC enters into primary aluminum hedging transactions in the
normal course of business. The prices realized by KACC under certain sales
contracts for alumina, primary aluminum and fabricated aluminum products as
well as the costs incurred by KACC on certain items, such as aluminum
scrap, rolling ingot, power and bauxite, fluctuate with the market price of
primary aluminum, together resulting in a "net exposure" of earnings. The
primary aluminum hedging transactions are designed to mitigate the net
exposure of earnings to declines in the market price of primary aluminum,
while retaining the ability to participate in favorable environments that
may materialize. KACC has employed strategies which include forward sales
and purchases of primary aluminum at fixed prices and the purchase or sale
of options for primary aluminum. With respect to its 1996, 1997 and 1998
anticipated net exposure, at June 30, 1996, KACC had sold forward 166,500
tons (all references to tons in this report refer to metric tons of 2,204.6
pounds) of primary aluminum at fixed prices, had purchased 28,900 tons of
primary aluminum under forward purchase contracts at fixed prices, and had
purchased put options to establish a minimum price for 157,000 tons of
primary aluminum.
In addition, at June 30, 1996, KACC had sold approximately 97%,
62% and 77% of the alumina available to it in excess of its projected
internal smelting requirements for 1996, 1997 and 1998, respectively.
Approximately 42% of such alumina sold for 1996 and all of such alumina
sold for 1997 and 1998 have been sold at prices linked to the future prices
of primary aluminum as a percentage of the price of primary aluminum
("Variable Price Contracts"), and approximately 58% of such alumina sold
for 1996 has been sold at fixed prices ("Fixed Price Contracts"). The
average realized prices of alumina sold under Variable Price Contracts will
depend on future prices of primary aluminum, and the average realized
prices of alumina sold under Fixed Price Contracts will substantially
exceed Kaiser's manufacturing cost of alumina.
From time to time, KACC also enters into forward purchase and
option transactions to limit its exposure to increases in fuel costs. At
June 30, 1996, KACC had entered into a series of transactions to limit its
costs for 40,000 MM Btu of natural gas per day through October 1996.
During July 1996, KACC entered into additional transactions for 40,000 MM
Btu per day to reduce its exposure to increases in natural gas prices
through March 1997.
KACC also enters into hedging transactions in the normal course
of business that are designed to reduce its exposure to fluctuations in
foreign exchange rates. At June 30, 1996, KACC had net forward foreign
exchange contracts totaling approximately $92.2 for the purchase of 127.0
Australian dollars from July 1996 through May 1998, in respect of its
commitments for 1996, 1997 and 1998 expenditures denominated in Australian
dollars.
At June 30, 1996, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price of
$1,588 per ton ($.72 per pound) of primary aluminum, natural gas forward
purchase and option contracts, and forward foreign exchange contracts was
$21.0.
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 principal industries: aluminum,
through its majority owned subsidiary Kaiser, a fully integrated aluminum
producer; forest products, through MAXXAM Group Inc. ("MGI") and its wholly
owned subsidiaries, principally The Pacific Lumber Company ("Pacific
Lumber") and Britt Lumber Co., Inc.; real estate investment and
development, managed through MAXXAM Property Company; and other commercial
operations through various other wholly owned subsidiaries.
ALUMINUM OPERATIONS
Aluminum operations account for a substantial portion of the
Company's revenues and operating results. Kaiser's operating results are
sensitive to changes in prices of alumina, primary aluminum and fabricated
aluminum products, and also depend to a significant degree upon the volume
and mix of all products sold and on hedging strategies. Kaiser, through
its principal subsidiary KACC, operates in two business segments: bauxite
and alumina, and aluminum processing. The following table presents
selected operational and financial information for the three and six months
ended June 30, 1996 and 1995. 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,
---------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
Shipments: (1)
Alumina 431.9 576.6 908.1 1,023.1
Aluminum products:
Primary aluminum 100.0 63.8 174.8 111.5
Fabricated aluminum
products 85.1 99.4 162.3 193.9
------------- ------------- ------------- -------------
Total aluminum
products 185.1 163.2 337.1 305.4
============= ============= ============= =============
Average realized sales price:
Alumina (per ton) $ 207 $ 206 $ 208 $ 202
Primary aluminum (per pound) .69 .83 .71 .82
Net sales:
Bauxite and alumina:
Alumina $ 89.5 $ 118.7 $ 188.5 $ 206.6
Other (2) (3) 27.0 23.9 51.4 43.0
------------- ------------- ------------- -------------
Total bauxite and
alumina 116.5 142.6 239.9 249.6
------------- ------------- ------------- -------------
Aluminum processing:
Primary aluminum 153.1 116.6 272.2 201.6
Fabricated aluminum
products 294.1 319.8 579.0 636.0
Other (3) 3.9 4.4 7.6 9.2
------------- ------------- ------------- -------------
Total aluminum
processing 451.1 440.8 858.8 846.8
------------- ------------- ------------- -------------
Total net sales $ 567.6 $ 583.4 $ 1,098.7 $ 1,096.4
============= ============= ============= =============
Operating income $ 38.1 $ 65.0 $ 79.9 $ 99.1
============= ============= ============= =============
Income before income taxes and
minority interests $ 16.3 $ 40.1 $ 35.1 $ 49.9
============= ============= ============= =============
Capital expenditures $ 31.9 $ 13.4 $ 51.7 $ 27.1
============= ============= ============= =============
<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. Net sales to third parties for the
bauxite and alumina segment decreased 18% in the second quarter of 1996
from the second quarter of 1995, and decreased 4% in the six months ended
June 30, 1996 from the six months ended June 30, 1995. Net sales from
alumina decreased 25% in the second quarter of 1996 from the second quarter
of 1995 due to lower shipments as a result of routine fluctuations in the
timing of cargo vessel departures, compounded by below-average production
at the Company's 65%-owned Alpart alumina refinery in Jamaica ("Alpart")
due to an earlier power outage and at the Gramercy, Louisiana, facility due
to a temporary material quality problem. Net sales from alumina decreased
9% in the six months ended June 30, 1996 from the six months ended June 30,
1995, due to lower shipments partially offset by higher average realized
prices.
Aluminum processing. Net sales to third parties for the
aluminum processing segment increased 2% in the second quarter of 1996 from
the second quarter of 1995, and were approximately the same for the six
months ended June 30, 1996 and 1995. Net sales from primary aluminum
increased 31% in the second quarter of 1996 from the second quarter of
1995, and increased 35% in the six months ended June 30, 1996 from the six
months ended June 30, 1995, due primarily to higher shipments, partially
offset by lower average realized prices. Net sales for the first half of
1995 were adversely affected by decreased shipments caused by the strike by
the United Steelworkers of America ("USWA") discussed below. Shipments of
primary aluminum to third parties were approximately 54% and 52% of total
aluminum products shipments in the second quarter of 1996 and six months
ended June 30, 1996, respectively, compared with approximately 39% and 37%
in the second quarter of 1995 and six months ended June 30, 1995,
respectively. Net sales from fabricated aluminum products decreased 8% in
the second quarter of 1996 from the second quarter of 1995, and decreased
9% in the six months ended June 30, 1996 from the six months ended June 30,
1995, due to lower shipments for most of these products, partially offset
by higher average realized prices for most of these products.
Operating income (loss)
Kaiser's corporate general and administrative expenses of $14.7
million and $19.3 million for the second quarter of 1996 and 1995,
respectively, and $32.7 million and $37.4 million for the six months ended
June 30, 1996 and 1995, respectively, were allocated by the Company to the
bauxite and alumina and aluminum processing segments based on those
segments' ratio of sales to unaffiliated customers.
Operating results for the six months ended June 30, 1995 were
negatively impacted by (i) an eight-day strike at five major domestic
locations by the USWA, (ii) a six-day strike by the National Workers Union
at Alpart, and (iii) a four-day disruption of alumina production at Alpart
caused by a boiler failure. The combined impact of these events on the
results for the six months ended June 30, 1995 was approximately $17.0
million in the aggregate (on a pre-tax basis) principally from lower
production volume and other related costs.
Bauxite and alumina. Operating loss for the bauxite and alumina
segment for the second quarter of 1996 was $1.4 million, compared with an
operating income of $16.0 million for the second quarter of 1995,
principally due to lower revenue. Operating income for the six months
ended June 30, 1996 was $4.8 million, compared to $14.2 million for the six
months ended June 30, 1995, principally due to lower revenue. Operating
results for the first half of 1995 were negatively impacted by the effect
of the strikes and boiler failure.
Aluminum processing. Operating income for the aluminum
processing segment for the second quarter of 1996 was $39.4 million,
compared to $49.0 million for the second quarter of 1995, principally due
to lower revenue. Operating income for the six months ended June 30, 1996
was $75.0 million, compared to $84.9 million for the six months ended June
30, 1995, principally due to lower revenue. Operating results for the
first half of 1995 were negatively impacted by the effect of the strike by
the USWA.
Income (loss) before income taxes and minority interests
Income before income taxes and minority interests for the three
and six months ended June 30, 1996 decreased from the three and six months
ended June 30, 1995, principally due to the declines in operating income as
discussed above.
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, 1996 and 1995.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
(In millions of dollars, except shipments and prices)
Shipments:
Lumber: (1)
Redwood upper grades 12.9 12.8 23.3 23.5
Redwood common grades 60.8 64.8 118.1 115.9
Douglas-fir upper grades 2.8 1.4 5.0 3.2
Douglas-fir common grades 18.6 11.1 37.9 24.5
Other 8.4 4.0 10.3 7.0
-------------- -------------- -------------- --------------
Total lumber 103.5 94.1 194.6 174.1
============== ============== ============== ==============
Logs (2) 5.7 1.6 11.6 2.1
============== ============== ============== ==============
Wood chips (3) 52.4 52.8 101.4 99.7
============== ============== ============== ==============
Average sales price:
Lumber: (4)
Redwood upper grades $ 1,392 $ 1,478 $ 1,389 $ 1,508
Redwood common grades 525 498 504 467
Douglas-fir upper grades 1,158 1,290 1,156 1,333
Douglas-fir common grades 438 378 407 378
Logs (4) 544 559 505 482
Wood chips (5) 67 99 77 94
Net sales:
Lumber, net of discount $ 63.5 $ 58.8 $ 115.4 $ 105.7
Logs 3.0 .9 5.8 1.0
Wood chips 3.5 5.2 7.8 9.4
Cogeneration power .9 .4 1.3 .8
Other .4 .3 .8 .7
-------------- -------------- -------------- --------------
Total net sales $ 71.3 $ 65.6 $ 131.1 $ 117.6
============== ============== ============== ==============
Operating income $ 19.3 $ 22.0 $ 35.9 $ 34.6
============== ============== ============== ==============
Operating cash flow (6) $ 26.3 $ 29.1 $ 49.4 $ 47.5
============== ============== ============== ==============
Income before income taxes and
minority interests $ 2.7 $ 5.1 $ 3.3 $ -
============== ============== ============== ==============
Capital expenditures $ 3.1 $ 2.6 $ 5.9 $ 4.5
============== ============== ============== ==============
<FN>
(1) Lumber shipments are expressed in millions of board feet.
(2) Log shipments are expressed in millions of feet, net Scribner scale.
(3) Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds.
(4) Dollars per thousand board feet.
(5) Dollars per bone dry unit.
(6) Operating income before depletion and depreciation, also referred to as "EBITDA."
Shipments
Lumber shipments to third parties for the second quarter of 1996
increased from the second quarter of 1995. Increased shipments of common
Douglas-fir lumber were partially offset by decreased shipments of redwood
common lumber. Log shipments for the second quarter of 1996 were 5.7
million feet (net Scribner scale), an increase of 4.1 million feet from the
second quarter of 1995.
Lumber shipments to third parties for the six months ended June
30, 1996 increased from the six months ended June 30, 1995 due primarily to
increased shipments of Douglas-fir and redwood common lumber. Log
shipments for the six months ended June 30, 1996 were 11.6 million feet, an
increase of 9.5 million feet from the six months ended June 30, 1995.
Net sales
Net sales for the second quarter of 1996 increased from the
second quarter of 1995. This increase was principally due to higher
shipments and average realized prices of common Douglas-fir lumber,
increased shipments of logs and upper grade Douglas-fir lumber and higher
average realized prices for redwood common lumber, partially offset by
decreased shipments of redwood common lumber and lower average realized
prices for upper grade redwood lumber and wood chips.
Net sales for the six months ended June 30, 1996 increased from
the six months ended June 30, 1995. This increase was principally due to
higher shipments of common and upper grade Douglas-fir lumber, logs and
higher average realized prices for Douglas-fir and redwood common lumber,
partially offset by lower average realized prices for upper grade redwood
lumber and wood chips. Shipments of fencing and other value-added common
lumber products from the Company's new remanufacturing facility were a
contributing factor in the improved redwood common lumber realizations.
Operating income
Operating income for the second quarter of 1996 decreased from
the second quarter of 1995 and increased for the six months ended June 30,
1996 from the six months ended June 30, 1995. Cost of goods sold increased
during the quarter and six month period ended June 30, 1996 compared to the
same periods in 1995 primarily due to the increased costs associated with
the higher shipments of common grade lumber. Additionally, cost of goods
sold for the second quarter of 1995 was reduced by $1.5 million of business
interruption proceeds for the settlement of claims related to the April
1992 earthquake.
Income before income taxes and minority interests
Income before income taxes for the second quarter of 1996
decreased from the second quarter of 1995 principally due to the decrease
in operating income discussed above. Income before income taxes for the
six months ended June 30, 1996 increased from the same period in 1995,
primarily as a result of the increase in operating income as discussed
above.
REAL ESTATE AND OTHER OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
(In millions of dollars)
Net sales $ 28.8 $ 24.3 $ 50.1 $ 40.6
Operating loss (1.0) (.3) (2.7) (3.6)
Income (loss) before income taxes and
minority interests 2.0 1.2 1.2 (1.5)
Net sales
Net sales for the second quarter of 1996 and the six months ended
June 30, 1996 increased from the same periods in 1995, principally due to
$5.7 million and $10.3 million, respectively, of revenues attributable to
Sam Houston Race Park, Ltd. ("SHRP, Ltd."). Operating results with respect
to SHRP, Ltd. were not consolidated prior to October 6, 1995.
Operating loss
The operating loss decreased for the second quarter of 1996 and
for the six months ended June 30, 1996 from the same periods in 1995,
principally due to higher sales of real property in the Palmas del Mar
development in Puerto Rico. The operating loss for the second quarter and
the six months ended June 30, 1996 included losses of $.3 million and $1.0
million, respectively, due to the operations of SHRP Ltd.
Income (loss) before income taxes and minority interests
Income before income taxes and minority interests for the second
quarter of 1996 and for the six months ended June 30, 1996 increased
compared to the loss for the same periods in 1995. Investment, interest
and other income for the second quarter of 1996 includes a pre-tax gain of
$3.1 million from the sale of a multi-family property from the RTC
Portfolio for $6.3 million. Additionally, investment income for the
quarter and the six months ended June 30, 1996 include income derived from
lot sales at SunRidge Canyon, the Company's 50%-owned joint venture in
Arizona. Interest expense for the second quarter of 1996 and for the six
months ended June 30, 1996 includes interest on SHRP Ltd.'s Senior Secured
Extendible Notes (see Note 4 of the Condensed Notes to Consolidated
Financial Statements).
OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
(In millions of dollars)
Operating loss $ (10.4) $ (4.8) $ (13.9) $ (7.6)
Loss before income taxes and minority
interests (10.4) (4.4) (15.6) (7.6)
Operating loss
The operating losses represent corporate general and
administrative expenses that are not attributable to the Company's industry
segments. The operating losses for the second quarter of 1996 and the six
months ended June 30, 1996 increased from the same periods in 1995
principally due to a $7.0 million accrual for certain legal contingencies.
Loss before income taxes and minority interests
The loss before income taxes and minority interests includes
operating losses, investment, interest and other income (expense) and
interest expense, including amortization of deferred financing costs, that
are not attributable to the Company's industry segments. The losses for
the second quarter of 1996 and the six months ended June 30, 1996 increased
from the same periods in 1995 principally due to increased operating losses
discussed above.
Credit (Provision) for Income Taxes
The Company's credit for income taxes for the second quarter of
1996 and the provision for income taxes for the second quarter and six
months ended June 30, 1995 include the reversal of reserves the Company no
longer believes are necessary (see Note 6 of the Condensed Notes to
Consolidated Financial Statements).
Minority interests
Minority interests represent the minority stockholders' interest
in the Company's aluminum operations and, with respect to periods after
October 6, 1995, the minority partners' interest in SHRP, Ltd.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
THE 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.
The 1994 KACC Credit Agreement and the indentures governing the KACC Senior
Notes and the KACC Senior Subordinated Notes contain covenants which, among
other things, limit Kaiser's ability to pay cash dividends and restrict
transactions between Kaiser and its affiliates. Pursuant to the terms of
the 1994 KACC Credit Agreement, Kaiser is precluded from paying any
dividends with respect to its common stock. The indenture governing the
MGI Senior Notes and the MGI Discount Notes contains various covenants
which, among other things, limit the payment of dividends and restrict
transactions between MGI and its affiliates. In January 1996, MGI paid
dividends of $1.6 million. As of June 30, 1996, an additional $2.3 million
of dividends could be paid by MGI. The covenants governing debt of the
Company's real estate and other subsidiaries would permit payment to the
Company of approximately $10.7 million as of June 30, 1996.
As of June 30, 1996, the Company (excluding its subsidiaries) had
cash and marketable securities of approximately $41.9 million and available
borrowings under its Custodial Trust Agreement (defined below) of $25.0
million. The Company believes that its existing cash, cash equivalents and
marketable securities (excluding such items owned by its subsidiaries),
together with available sources of financing, will be sufficient to fund
its working capital requirements for the next year. With respect to its
long-term liquidity, the Company believes that its existing cash and cash
resources, together with the cash proceeds from the sale of assets,
distributions from its subsidiaries, and the proceeds from the sale of debt
securities should be sufficient to meet its working capital requirements.
See Note 7 of the Condensed Notes to Consolidated Financial Statements for
a discussion of the Company's material contingencies.
On June 28, 1996, the Company entered into a loan and pledge
agreement (the "Custodial Trust Agreement") with Custodial Trust Company
providing for up to $25.0 million in borrowings. Any amounts borrowed
would be secured by Kaiser common stock owned by the Company (or such other
marketable securities acceptable to the lender) with an initial market
value (as defined therein) of approximately three times the amount
borrowed. Borrowings under the Custodial Trust Agreement would bear
interest at the prime rate plus 1/2% per annum. The Custodial Trust
Agreement provides for a revolving credit arrangement during the first year
of the agreement. Any borrowings outstanding on the first anniversary date
of the agreement convert into a term loan maturing on the second
anniversary date of the agreement. No borrowings were outstanding as of
June 30, 1996.
On April 24, 1996, the SEC declared effective a shelf
registration statement which the Company had filed with respect to up to
$200.0 million aggregate principal amount of debt securities. The Company
has not determined the amount, interest rates, maturity, collateral (if
any) or other terms of such debt securities or the timing of any offering
of such debt securities. The debt securities could be secured by, or
convertible into, shares of common stock of Kaiser owned by the Company.
In that regard, Kaiser also filed a shelf registration statement with the
SEC, which was also declared effective on April 24, 1996, covering 10
million shares of its common stock owned by the Company. The Company would
use the net proceeds (or portions thereof) from the sale of such debt
securities to retire outstanding debt, for working capital and general
corporate purposes.
ALUMINUM OPERATIONS
Kaiser's Board of Directors has approved a proposed
recapitalization (the "Proposed Recapitalization"). The Proposed
Recapitalization would, among other things: (i) provide for two classes of
common stock: Class A Common Shares, $.01 par value, with one vote per
share ("Class A Common Shares") and a new, lesser-voting class designated
as Common Stock, $.01 par value, with 1/10 vote per share ("New Common
Stock"), (ii) redesignate as Class A Common Shares the 100 million
currently authorized shares of Kaiser's existing common stock and authorize
an additional 250 million shares of New Common Stock, and (iii) reclassify
each issued share of Kaiser's existing common stock into (a) .33 of a Class
A Common Share and (b) .67 of a share of New Common Stock. Kaiser would
pay cash in lieu of fractional shares. Kaiser anticipates that both the
Class A Common Shares and the New Common Stock would be approved for
trading on the New York Stock Exchange.
On March 19, 1996, a lawsuit was filed in the Delaware Court of
Chancery which, among other things, sought to enjoin the Proposed
Recapitalization. On April 8, 1996, the Delaware Court of Chancery issued
a ruling which preliminarily enjoined Kaiser from implementing the Proposed
Recapitalization. On April 19, 1996, the Delaware Supreme Court granted
defendants' motion to consider, on an expedited basis, defendants' appeal
of the preliminary injunction. On May 1, 1996, Kaiser's stockholders
approved the Proposed Recapitalization; however, it will not be implemented
pending the outcome of defendants' appeal. The Delaware Supreme Court
heard oral arguments on May 21, 1996, but has not yet issued its decision
in this matter.
At a recent meeting of the directors of Yellow River Aluminum
Industry Company Limited (the "Joint Venture"), a Sino-foreign joint equity
enterprise organized under the law of the People's Republic of China
between Kaiser Yellow River Investment Limited ("KYRIL"), a subsidiary of
KACC, and Lanzhou Aluminum Smelters ("LAS") of the China National
Nonferrous Metal Industry Corporation, KYRIL, LAS and the Joint Venture
reached an agreement (i) that extended until early 1997, the time for KYRIL
to make a second capital contribution to the Joint Venture, and (ii) that
KYRIL would continue to explore various methods of financing any future
capital contributions to the Joint Venture, including financing that could
be obtained from third-party investors.
Loans under the 1994 KACC Credit Agreement bear interest at a
rate per annum, at KACC's election, equal to a Reference Rate (as defined)
plus 1-1/2% or LIBO Rate (Reserve Adjusted) (as defined) plus 3-1/4%.
After June 30, 1995, the interest rate margins applicable to borrowings
under the 1994 KACC Credit Agreement may be reduced by up to 1-1/2% (non-
cumulatively), based on a financial test, determined quarterly. The
quarterly financial test permitted a 1-1/2% reduction in margins during the
first and second quarters of 1996. As of June 30, 1996, the financial
test permitted a reduction of 1% per annum in margins effective July 1,
1996. At June 30, 1996, $192.1 million (of which $72.5 million could have
been used for letters of credit) was available to KACC under the 1994 KACC
Credit Agreement.
Kaiser believes that its existing cash resources, together with
cash flow from operations and borrowings under KACC's credit agreement
dated as of February 15, 1994, as amended (the "1994 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 its 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, 1996, $45.1 million of borrowings was available
under Pacific Lumber's Revolving Credit Agreement, of which $5.1 million
was available for letters of credit and $30.0 million for timberland
acquisitions. No borrowings were outstanding as of June 30, 1996, and
letters of credit outstanding amounted to $9.9 million.
MGI and its subsidiaries anticipate that cash flow from
operations, together with existing cash, cash equivalents, marketable
securities and available sources of financing, will be sufficient to fund
their working capital and capital expenditure requirements for the next
year. With respect to their long-term liquidity, MGI and its subsidiaries
believe that their existing cash and cash equivalents, together with their
ability to generate sufficient cash flow from operations and obtain both
short and long-term financing, should provide sufficient funds to meet
their working capital and capital expenditure requirements. However, due
to their highly leveraged condition, MGI and its subsidiaries are more
sensitive than less-leveraged companies to factors affecting their
operations, including litigation and governmental regulation affecting
their timber harvesting practices, increased competition from other lumber
producers or alternative building products and general economic conditions.
REAL ESTATE AND OTHER OPERATIONS
As of June 30, 1996, the Company's real estate and other
subsidiaries had approximately $9.0 million available for use under the
MCOP Credit Agreement. The Company believes that the existing cash and
credit facilities of its real estate and other subsidiaries are sufficient
to fund the working capital and capital expenditure requirements of such
subsidiaries for the next year. With respect to the long-term liquidity of
such subsidiaries, the Company believes that their ability to generate cash
from the sale of their existing real estate, together with their ability to
obtain financing should provide sufficient funds to meet their working
capital and capital expenditure requirements.
TRENDS
FOREST PRODUCTS OPERATIONS
The Company's forest products operations are primarily conducted
by Pacific Lumber and are subject to a variety of California and federal
laws and regulations dealing with timber harvesting, endangered species and
critical habitat, and air and water quality. While the Company does not
expect that Pacific Lumber's compliance with such existing laws and
regulations will have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity,
Pacific Lumber is subject to certain pending matters, including the
resolution of issues relating to the final designation of critical habitat
for the marbled murrelet (described below), which could have a material
adverse effect on Pacific Lumber's consolidated financial position, results
of operations or liquidity. Moreover, the laws and regulations relating to
Pacific Lumber's forest products operations are modified from time to time
and are subject to judicial and administrative interpretation. There can
be no assurance that certain pending or future governmental regulations,
legislation or judicial or administrative decisions would not materially
and adversely affect Pacific Lumber or its ability to sell lumber, logs or
timber.
In May 1996, the U.S. Fish and Wildlife Service (the "USFWS")
published its final designation of critical habitat for the marbled
murrelet ("Final Designation"), designating over four million acres as
critical habitat for the marbled murrelet. Although nearly all of the
designated habitat is public land, approximately 33,000 acres of the
Company's (privately owned) timberlands are included in the Final
Designation, the substantial portion of such 33,000 acres being young
growth timber. Pacific Lumber's wildlife surveys to date (based upon
current survey protocols) have indicated that Pacific Lumber has
approximately 6,600 acres of occupied marbled murrelet habitat. A
substantial portion of this land contains virgin and residual old growth
timber and the bulk of it falls within the area covered by the Final
Designation. In order to mitigate the impact of the Final Designation,
particularly with respect to timberlands occupied by the marbled murrelet,
Pacific Lumber has attempted over the last few years to develop a habitat
conservation plan for the marbled murrelet (the "Murrelet HCP"). The USFWS
has given unfavorable responses to Pacific Lumber's Murrelet HCP efforts.
For this reason and a variety of others, Pacific Lumber and its
subsidiaries have filed two actions alleging that certain portions of its
timberlands have been "taken" and seeking just compensation (see Part II,
Item 1, "Legal Proceedings--Pacific Lumber Litigation").
It is impossible to determine the potential adverse effect of the
Final Designation on Pacific Lumber's consolidated financial position,
results of operations or liquidity until such time as the related
regulatory and legal issues are fully resolved. However, if Pacific Lumber
is unable to harvest, or is severely limited in harvesting, on timberlands
designated as marbled murrelet critical habitat, such effect could be
material. If Pacific Lumber is unable to harvest or is severely limited in
harvesting, it intends to seek just compensation from the appropriate
governmental agencies on the grounds that such restrictions constitute a
governmental taking.
Judicial or regulatory actions adverse to Pacific Lumber,
increased regulatory delays and inclement weather in northern California,
independently or collectively, could impair Pacific Lumber's ability to
maintain adequate log inventories and force Pacific Lumber to temporarily
idle or curtail operations at certain of its lumber mills from time to
time.
See also Part II, Item 1. "Legal Proceedings--Pacific Lumber
Litigation" for further information, including government takings actions
recently filed and additional takings claims which could be filed by
Pacific Lumber and its subsidiaries.
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, 1996 (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.
USAT MATTERS
In connection with the OTS action, the date for the hearing on
the merits has been rescheduled from January 21, 1997 to May 28, 1997.
In connection with U.S., ex rel., Martel v. Hurwitz, et al., on
June 11, 1996, defendants filed their motion to dismiss this case. On
August 6, 1996, the Court transferred this case to the judge handling the
FDIC action.
In connection with the FDIC action, on August 6, 1996, the court
entered an order denying the FDIC's motion to stay this case pending the
outcome of the OTS action.
RANCHO MIRAGE LITIGATION
In connection with the In Re: MAXXAM Inc./Federated Development
Shareholder's Litigation, the Court has rescheduled oral argument on the
merits of the case from July 24, 1996 to August 13, 1996.
KAISER LITIGATION
In connection with the Hammons action, on July 1, 1996, the
United States District Court for the Central District of California granted
summary judgment in favor of Kaiser and other defendants and dismissed the
complaint as to all defendants with prejudice. On July 16, 1996, the Court
ruled on Plaintiff's Motion for Reconsideration and confirmed its ruling
and order granting summary judgment in favor of defendants.
In connection with Matheson, et al. v. Kaiser Aluminum
Corporation, et al., the Delaware Supreme Court heard oral argument on
defendants' appeal of the preliminary injunction on May 21, 1996, but has
not yet issued its decision.
PACIFIC LUMBER LITIGATION
In connection with the Kayes/Miller action and the DOL civil
action, the settlement agreement in these cases was approved by the Court
at the July 12, 1996 final hearing. The settlement called for payment to
the class plaintiffs and their counsel of $7.0 million in cash by Pacific
Lumber in exchange for full releases by the plaintiffs of defendants and
dismissal of the Kayes/Miller and DOL civil actions.
In connection with the Marbled Murrelet action, on May 7, 1996,
the U. S. Ninth Circuit Court of Appeals reversed the preliminary
injunction order concerning harvesting pursuant to exemptions for forest
health. In addition to appealing the preliminary injunction issued on
April 3, 1996 preventing harvesting on eight THPs to the extent each
relies on the Owl Plan, Pacific Lumber has obtained reapproval of two of
the THPs without reliance on the Owl Plan and has received confirmation
from the Court that these two THPs are not subject to the preliminary
injunction. Pacific Lumber continues to review and seek reapproval of the
other THPs covered by the April 3, 1996 preliminary injunction.
In connection with The Pacific Lumber Company, et al. v. The
United States of America, the Court has granted the parties' agreed motion
to stay this action until September 15, 1996 in order to negotiate a
possible settlement involving approximately 4,500 acres of Pacific Lumber's
timberlands, including a 3,000 acre stand of virgin old growth timber often
referred to as the "Headwaters Forest." Settlement discussions have
commenced. On July 23, 1996, EPIC and the Sierra Club filed a motion to
intervene in this lawsuit.
In connection with Salmon Creek Corporation v. California State
Board of Forestry, et al., in July 1996 the parties submitted an agreed
motion to stay this action until September 15, 1996 in order to negotiate a
possible settlement involving the Headwaters Forest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on May
22, 1996, at which meeting the stockholders voted to elect management's
slate of nominees as directors of the Company. The nominees for election
are listed below, together with voting information for each nominee.
Messrs. Charles E. Hurwitz and Ezra G. Levin continued as directors of the
Company.
NOMINEES FOR ELECTION BY HOLDERS OF COMMON STOCK
Stanley D. Rosenberg - 6,718,287 votes for, -0- votes against,
37,422 votes withheld, -0- votes abstaining and -0- broker non-votes.
Robert J. Cruikshank - 6,720,264 votes for, -0- votes against,
35,445 votes withheld, -0- votes abstaining and -0- broker non-votes.
NOMINEES FOR ELECTION BY HOLDERS OF COMMON STOCK AND CLASS A
PREFERRED STOCK
No person was nominated to stand for election by the holders of
Common Stock and Preferred Stock, voting together as a separate class to
hold office until the 1999 Annual Meeting of Stockholders and a vacancy
will exist with respect to such
position unless the Board of Directors
appoints someone to fill such vacancy.
ITEM 5. OTHER INFORMATION
See Part II, Item 1. "Legal Proceedings - Pacific Lumber
Litigation" for information regarding settlement discussions involving the
Headwaters Forest.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
4 Loan and Pledge Agreement, dated June 28, 1996, between
Custodial Trust Company and MAXXAM Inc.
11 Computation of Net Income Per Common and Common Equivalent
Share
27 Financial Data Schedule
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
B. REPORTS ON FORM 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized, who has signed this report on
behalf of the Registrant and as the principal accounting officer of the
Registrant.
MAXXAM INC.
Date: August 13, 1996 By: TERRY L. FREEMAN
Terry L. Freeman
Assistant Controller