UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
---------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-3924
MAXXAM INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 95-2078752
(State or other (I.R.S. Employer
jurisdiction Identification Number)
of incorporation or
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
---------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each
Title of each class exchange
--------------------------- on which registered
--------------------
Common Stock, $.50 par value American, Pacific,
Philadelphia
Number of shares of common stock outstanding at March 1, 1997: 8,655,773
Securities registered pursuant to Section 12(g) of the Act: None.
---------------
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. /X/
Based upon the February 28, 1997 American Stock Exchange closing price
of $48.125 per share, the aggregate market value of the Registrant's
outstanding voting stock held by non-affiliates was approximately $288.0
million.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of Registrant's annual report to stockholders for the
fiscal year ended December 31, 1996 are incorporated by reference under
Part II. Certain portions of Registrant's definitive proxy statement, to be
filed with the Securities and Exchange Commission pursuant to Regulation
14A not later than 120 days after the close of the Registrant's fiscal
year, are incorporated by reference under Part III.
PART I
ITEM 1. BUSINESS
GENERAL
MAXXAM Inc. and its majority and wholly owned subsidiaries are
collectively referred to herein as the "Company" or "MAXXAM" unless
otherwise indicated or the context indicates otherwise. The Company,
through Kaiser Aluminum Corporation ("Kaiser") and Kaiser's principal
operating subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), is a
fully integrated aluminum company. The Company's voting interest in Kaiser
is approximately 62% on a fully diluted basis. See "--Aluminum
Operations." In addition, the Company is engaged in forest products
operations through its wholly owned subsidiary, MAXXAM Group Inc. ("MGI")
and MGI's wholly owned subsidiaries, The Pacific Lumber Company and its
wholly owned subsidiaries (collectively referred to herein as "Pacific
Lumber," unless the context indicates otherwise), and Britt Lumber Co.,
Inc. ("Britt"). See "--Forest Products Operations." MGI is a wholly owned
subsidiary of MAXXAM Group Holdings Inc. ("MGHI"), which is in turn a
wholly owned subsidiary of the Company. The Company is also engaged in (a)
real estate investment and development, managed through MAXXAM Property
Company, and (b) other commercial operations through subsidiaries,
including a Class 1 thoroughbred and quarter horse racing facility located
in the greater Houston metropolitan area. See "--Real Estate and Other
Operations." See Note 11 to the Consolidated Financial Statements
(contained in the Company's Annual Report to Stockholders--see Item 8) for
certain financial information by industry segment and geographic area.
This Annual Report on Form 10-K contains statements which
constitute"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a
number of places in this section (see Item 1. "Business--Aluminum
Operations" and "--Forest Products Operations--Regulatory and Environmental
Factors" and Item 3. "Legal Proceedings"). Such statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "estimates,""will," "should," "plans" or "anticipates" or
the negative thereof or other variations thereon or comparable terminology,
or by discussions of strategy. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and
involve significant risks and uncertainties, and that actual results may
vary materially from those in the forward-looking statements as a result of
various factors. These factors include the effectiveness of management's
strategies and decisions, general economic and business conditions,
developments in technology, new or modified statutory or regulatory
requirements and changing prices and market conditions. This report and
the financial portion of the Company's 1996 Annual Report to Shareholders
(see Items 6 to 8 of this report) identify other factors that could cause
such differences. No assurance can be given that these are all of the
factors that could cause actual results to vary materially from the
forward-looking statements.
ALUMINUM OPERATIONS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See above for cautionary information with respect to
such forward-looking statements.
INDUSTRY OVERVIEW
Primary aluminum is produced by the refining of bauxite into alumina
and the reduction of alumina into primary aluminum. Approximately two pounds
of bauxite are required to produce one pound of alumina, and approximately two
pounds of alumina are required to produce one pound of primary aluminum.
Aluminum's valuable physical properties include its light weight, corrosion
resistance, thermal and electrical conductivity and high tensile strength.
Demand
The packaging, transportation and construction industries are the
principal consumers of aluminum in the United States, Japan Germany, France,
Italy and the United Kingdom. In the packaging industry, which accounted for an
estimated 21% of 1996 aluminum consumption in these countries, aluminum's
recyclability and weight advantages have enabled it to gain market share from
steel and glass, primarily in the beverage container area. Nearly all beer cans
and soft drink cans manufactured for the United States market are made of
aluminum. Kaiser believes that growth in the packaging area is likely to
continue through the 1990s due to general population increase and to further
penetration of the beverage container market in emerging markets. Kaiser
believes that growth in demand for can sheet in the United States will follow
the growth in population, offset, in part, by the effects of the use of
lighter gauge aluminum for can sheet and of plastic container production.
In the transportation industry, which accounted for an estimated 30%
of aluminum consumption in the United States, Japan, Germany, France, Italy
and the United Kingdom during 1996, automotive manufacturers use aluminum
instead of steel, ductile iron or copper for an increasing number of
components, including radiators, wheels, suspension components, and engines,
in order to meet more stringent environmental, safety, and fuel efficiency
standards. Kaiser believes that sales of aluminum to the transportation
industry have considerable growth potential due to projected increases in
the use of aluminum in automobiles. In addition, Kaiser believes that
consumption of aluminum in the construction industry will follow the cyclical
growth pattern of that industry, and will benefit from higher growth in Asian
and Latin American economies.
Supply
As of year-end 1996, world aluminum capacity from 179 smelting
facilities was approximately 22.9 million tons per year (all references to
tons in this report refer to metric tons of 2,204.6 pounds). World
production of primary aluminum for 1996 increased approximately 4.5%
compared to 1995. Net exports of aluminum from the former Sino Soviet bloc
increased approximately 200% from 1990 levels to an estimated 1.9 million
tons as of year-end 1996. In addition, one smelter continued to increase
production following its start-up in 1995, and a number of producers
restarted idled capacity in late 1995 and early 1996. These exports, as
well as new and restarted capacity, contributed to an increase in London
Metal Exchange ("LME") stocks of primary aluminum which peaked in October
1996 at 970,000 tons. At the end of 1996, LME stocks of primary aluminum had
declined to 951,275 tons. See "--Industry Trends."
Based upon information currently available, Kaiser believes that
moderate additions will be made during 1997-1999 to world alumina and primary
aluminum production capacity. The increases in alumina capacity are
expected to come from one new refinery which began operations in 1996 and
incremental expansions of existing refineries. In addition, Kaiser believes
that there is an estimated 1.6 million tons of unutilized world smelting
capacity. The increases in primary aluminum capacity during 1997-1999 are
expected to come from two new smelters which may begin operations in 1997,
two relocated smelters that are expected to resume operations in 1998, and
the remainder principally from incremental expansions of existing smelters.
INDUSTRY TRENDS
Primary aluminum prices have historically been subject to significant
cyclical price fluctuations. During the first half of 1996, the average
Midwest United States transaction price ("AMT Price") for primary aluminum
remained relatively stable in the $.75 per pound range. However, during the
second half of the year the AMT Price fell, reaching a low of $.65 per pound
for October 1996, before recovering late in the year. During 1996, the AMT
Price for primary aluminum was approximately $.72 per pound, compared to
$.86, $.72 and $.54 per pound in 1995, 1994 and 1993, respectively. The AMT
Price for primary aluminum for the week ended March 14, 1997, was
approximately $.81 per pound.
The significant improvement in prices during 1994 and 1995 resulted
from strong growth in Western world consumption of aluminum and the
curtailment of production in response to lower prices in prior periods by
many producers worldwide. In 1995, production of primary aluminum increased
and consumption of aluminum continued to grow, but at a much lower rate than
in 1994. In general, the overall aluminum market was strongest in the first
half of 1995. By the second half of 1995, orders and shipments for certain
products had softened and the rate of decline in LME inventories had leveled
off. By the end of 1995, some small increases in LME inventories occurred,
and prices of aluminum weakened from first-half levels. This trend continued
throughout most of 1996. Net reported primary aluminum inventories increased
by approximately 62,000 tons in 1996 based upon reports of the LME and the
International Primary Aluminium Institute ("IPAI"), following substantial
declines of 764,000 and 1,153,000 tons in 1994 and 1995, respectively.
However, since year-end 1996, LME stocks of primary aluminum have continued
to decline from their October 1996 peak level.
Increased production of primary aluminum due to restarts of certain
previously idled capacity, the continued increase in production by a smelter
in South Africa following its start-up in 1995, and the continued high level of
exports from the Commonwealth of Independent States ("CIS") contributed to
increased supplies of primary aluminum to the Western world in 1996. While
the economies of the major aluminum consuming regions - the United States,
Japan, Western Europe, and Asia - are, in the aggregate, performing
relatively well, the Company believes that the reduction of aluminum
inventories by customers, as prices have continued to decline, has mitigated
the growth in primary aluminum demand that normally accompanies growth in
economic and industrial activity.
Western world demand for alumina and the price of alumina declined
in 1994 in response to the curtailment of Western world smelter production of
primary aluminum, partially offset by increased usage of Western world
alumina by smelters in the CIS and in the People's Republic of China ("PRC").
Increased Western world production of primary aluminum, as well as continued
imports of Western world alumina by the CIS and the PRC, during 1995 resulted
in higher demand for Western world alumina and significantly stronger alumina
pricing. In 1996, however, the alumina market softened, primarily as a result
of increased alumina production and decreased alumina exports to the CIS and
the PRC, resulting in lower alumina prices. However, increases in primary
aluminum production as well as reductions in alumina production during the
second half of 1996 resulted in stronger alumina pricing in late 1996.
United States shipments of domestic fabricated aluminum products in
1995 were near 1994 levels, although in 1995 demand for can sheet in the
United States softened relative to 1994. United States shipments of
domestic fabricated aluminum products in 1996 are believed to have been at
approximately 1995 levels, although in 1996 demand for can sheet in the
United States softened relative to 1995.
KAISER OPERATIONS
General
Kaiser, through KACC, operates in all principal aspects of the
aluminum industry--the mining of bauxite, the refining of bauxite into
alumina, the production of primary aluminum from alumina, and the
manufacture of fabricated (including semi-fabricated) aluminum products. In
addition to the production utilized by Kaiser in its operations, Kaiser sells
significant amounts of alumina and primary aluminum in domestic and
international markets. In 1996, Kaiser produced approximately 2,838,000
tons of alumina, of which approximately 73% was sold to third parties, and
produced approximately 473,200 tons of primary aluminum, of which
approximately 75% was sold to third parties. Kaiser is also a major
domestic supplier of fabricated aluminum products. In 1996, Kaiser shipped
approximately 327,100 tons of fabricated aluminum products to third parties,
which accounted for approximately 5% of the total tonnage of United States
domestic shipments. A majority of Kaiser's fabricated products are
sold to distributors or used by customers as components in the manufacture
and assembly of finished end-use products.
The following table sets forth total shipments and intracompany
transfers of Kaiser's alumina, primary aluminum, and fabricated aluminum
operations:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
(In thousands of tons)
<S> <C> <C> <C>
ALUMINA:
Shipments to Third Parties 2,073.7 2,040.1 2,086.7
Intracompany Transfers 912.4 800.6 820.9
PRIMARY ALUMINUM:
Shipments to Third Parties 355.6 271.7 224.0
Intracompany Transfers 128.3 217.4 225.1
FABRICATED ALUMINUM PRODUCTS:
Shipments to Third Parties 327.1 368.2 399.0
</TABLE>
Sensitivity to Prices and Hedging Programs
Kaiser's operating results are sensitive to changes in the prices
of alumina, primary aluminum and fabricated aluminum products, and also
depend to a significant degree upon the volume and mix of all products sold
and on Kaiser's hedging strategies. Primary aluminum prices have
historically been subject to significant cyclical price fluctuations.
Alumina prices, as well as fabricated aluminum product prices (which vary
considerably among products), are significantly influenced by changes in
the price of primary aluminum and generally lag behind primary aluminum
prices for periods of up to three months. From time to time in the
ordinary course of business, Kaiser enters into hedging transactions to
provide price risk management in respect of its net exposure resulting from
(i) anticipated sales of alumina, primary aluminum and fabricated aluminum
products, less (ii) expected purchases of certain items, such as aluminum
scrap, rolling ingot and bauxite, whose prices fluctuate with the price of
primary aluminum. Forward sales contracts are used by Kaiser to
effectively lock-in or fix the price that Kaiser will receive for its
shipments. Kaiser also uses option contracts (i) to establish a minimum
price for its product shipments, (ii) to establish a "collar" or range of
price for its anticipated sales, and/or (iii) to permit Kaiser to realize
possible upside price movements. See Notes 1 and 10 to the Company's
Consolidated Financial Statements.
Profit Enhancement and Cost Reduction Initiative
In October 1996, Kaiser established a goal of achieving
significant cost reductions and profit improvements by the end of 1997,
with the full effect planned to be realized in 1998 and beyond, measured
against 1996 results. To achieve this goal, Kaiser plans reductions in
production costs, decreases in corporate general and administrative
expenses, and enhancements to product mix and volume throughput. There can
be no assurance that the initiative will result in the desired cost
reductions and other profit improvements.
Production Operations--General
Kaiser's operations are conducted through KACC's decentralized
business units which compete throughout the aluminum industry.
- - The alumina business unit, which mines bauxite and obtains additional
bauxite tonnage under long-term contracts, produced approximately 7%
of world alumina produced in 1996, as reported by the IPAI. During
1996, Kaiser's shipments of bauxite to third parties represented
approximately 25% of the bauxite mined by Kaiser. In addition,
Kaiser's third party shipments of alumina represented approximately
73% of the alumina produced by Kaiser. Kaiser's share of world
alumina capacity, as reported by the IPAI, was approximately 6% in
1996.
- - The primary aluminum products business unit operates two wholly owned
domestic smelters and two foreign smelters in which Kaiser holds
significant ownership interests. During 1996, Kaiser's shipments of
primary aluminum to third parties represented approximately 75% of its
primary aluminum production. Kaiser's share of world primary aluminum
capacity, as reported by the IPAI, was approximately 2% in 1996.
- - Fabricated aluminum products are manufactured by two business units--
lat-rolled products and engineered products. The products include
heat-treated products, body, lid, and tab stock for beverage
containers, sheet and plate products, screw machine stock, redraw rod,
forging stock, truck wheels and hubs, air bag canisters, engine
manifolds, and other castings, forgings and extruded products, which
are manufactured at plants located in principal marketing areas of the
United States and Canada. The aluminum utilized in Kaiser's
fabricated products operations is comprised of primary aluminum,
obtained both internally and from third parties, and scrap metal
purchased from third parties.
Production Operations--Bauxite and Alumina
The following table lists Kaiser's bauxite mining and alumina
refining facilities as of December 31, 1996:
<TABLE>
<CAPTION>
Annual
Production Total
Capacity Annual
Company Available to Production
Activity Facility Location Ownership the Company Capacity
- ----------------------- ------------- ------------- ------------- ------------- -------------
(tons) (tons)
<S> <C> <C> <C> <C> <C>
Bauxite Mining KJBC(1) Jamaica 49% 4,500,000 4,500,000
Alpart(2) Jamaica 65% 2,275,000 3,500,000
------------- -------------
6,775,000 8,000,000
============= =============
Alumina Refining Gramercy Louisiana 100% 1,050,000 1,050,000
Alpart(2) Jamaica 65% 942,500 1,450,000
QAL(3) Australia 28.3% 973,500 3,440,000
------------- -------------
2,966,000 5,940,000
============= =============
<FN>
- ---------------
(1) Although Kaiser owns 49% of Kaiser Jamaica Bauxite Company ("KJBC"), it has the right to receive all of such entity's output.
(2) Alumina Partners of Jamaica ("Alpart") bauxite is refined into alumina at the Alpart alumina refinery.
(3) Queensland Alumina Limited ("QAL").
</TABLE>
Bauxite mined in Jamaica by KJBC is refined into alumina at
Kaiser's plant at Gramercy, Louisiana, or is sold to third parties. In
1979, the Government of Jamaica granted Kaiser a mining lease for the
mining of bauxite sufficient to supply Kaiser's then-existing Louisiana
alumina refineries at their annual capacities of 1,656,000 tons per year
until January 31, 2020. Alumina from the Gramercy plant is sold to third
parties.
Alpart holds bauxite reserves and owns a 1,450,000 tons per year
alumina plant located in Jamaica. Kaiser owns a 65% interest in Alpart,
and Hydro Aluminium a.s ("Hydro") owns the remaining 35% interest. Kaiser
has management responsibility for the facility on a fee basis. Kaiser and
Hydro have agreed to be responsible for their proportionate shares of
Alpart's costs and expenses. The Government of Jamaica has granted Alpart
a mining lease and has entered into other agreements with Alpart designed
to assure that sufficient reserves of bauxite will be available to Alpart
to operate its refinery as it may be expanded to a capacity of 2,000,000
tons per year through the year 2024.
Kaiser owns a 28.3% interest in QAL, which owns the largest and
one of the most efficient alumina refineries in the world, located in
Queensland, Australia. QAL refines bauxite into alumina, essentially on a
cost basis, for the account of its stockholders under long-term tolling
contracts. The stockholders, including Kaiser, purchase bauxite from
another QAL stockholder under long-term supply contracts. Kaiser has
contracted with QAL to take approximately 792,000 tons per year of capacity
or pay standby charges. Kaiser is unconditionally obligated to pay amounts
calculated to service its share ($94.4 million at December 31, 1996) of
certain debt of QAL, as well as other QAL costs and expenses, including
bauxite shipping costs.
Kaiser's principal customers for bauxite and alumina consist of
other aluminum producers that purchase bauxite and reduction-grade alumina,
trading intermediaries who resell raw materials to end-users, and users of
chemical-grade alumina. All of Kaiser's third-party sales of bauxite in
1996 were made to two customers, the largest of which accounted for
approximately 79% of such sales. Kaiser also sold alumina to fifteen
customers, the largest and top five of which accounted for approximately
21% and 79% of such sales, respectively. See "--Competition." Kaiser
believes that among alumina producers it is the world's second largest
seller of alumina to third parties. Kaiser's strategy is to sell a
substantial portion of the bauxite and alumina available to it in excess of
its internal refining and smelting requirements under multi-year sales
contracts. See also "--Sensitivity to Prices and Hedging Programs."
Production Operations--Primary Aluminum Products
The following table lists Kaiser's primary aluminum smelting
facilities as of December 31, 1996:
<TABLE>
<CAPTION>
Annual
Rated Total
Capacity Annual 1996
Company Available to Rated Operating
Location Facility Ownership the Company Capacity Rate
------------------- ------------- ------------- ------------- ------------- -------------
(tons) (tons)
<S> <C> <C> <C> <C> <C>
Domestic
Washington Mead 100% 200,000 200,000 106%
Washington Tacoma 100% 73,000 73,000 100%
------------- -------------
273,000 273,000
------------- -------------
International
Ghana Valco(1) 90% 180,000 200,000 68%
Wales, United
Kingdom Anglesey(2) 49% 55,000 112,000 118%
------------- -------------
235,000 312,000
------------- -------------
Total 508,000 585,000
============= =============
<FN>
- ------------------------------
(1) Valco Aluminium Company Limited ("Valco")
(2) Anglesey Aluminium Limited ("Anglesey")
</TABLE>
Kaiser owns two smelters located at Mead and Tacoma, Washington,
where alumina is processed into primary aluminum. The Mead facility uses
pre-bake technology and produces primary aluminum. Approximately 53% of
Mead's 1996 production was used at Kaiser's Trentwood fabricating facility
and the balance was sold to third parties. The Tacoma plant uses Soderberg
technology and produces primary aluminum and high-grade, continuous-cast,
redraw rod, which currently commands a premium price in excess of the price
of primary aluminum. Both smelters have achieved significant production
efficiencies through retrofit technology and a variety of cost controls,
leading to increases in production volume and enhancing their ability to
compete with newer smelters. Kaiser has also commenced the modernization
and expansion of the carbon baking furnace at its Mead smelter at an
estimated cost of approximately $52.0 million. This project is expected to
lower costs, enhance safety and improve the environmental performance of
the facility and is expected to be completed in late 1998.
Electric power represents an important production cost for Kaiser
at its aluminum smelters. In 1995, Kaiser successfully restructured
electric power purchase agreements for its facilities in the Pacific
Northwest, which resulted in significantly lower electric power costs in
1996 for the Mead and Tacoma, Washington, smelters compared to 1995
electric power costs. Kaiser expects to continue to benefit from these
savings in electric power costs at these facilities in 1997. However, a
number of lawsuits challenging the restructuring have been filed and the
effect, if any, of such lawsuits on Kaiser's power purchase and
transmission arrangements is not known at this time.
Kaiser manages, and owns a 90% interest in, the Valco aluminum
smelter in Ghana. The Valco smelter uses pre-bake technology and processes
alumina supplied by Kaiser and the other participant into primary aluminum
under long-term tolling contracts which provide for proportionate payments
by the participants. Kaiser's share of the primary aluminum is sold to
third parties. Power for the Valco smelter is supplied under an agreement
which expires in 2017. The agreement indexes two-thirds of the price of
the contract quantity of power to the market price of primary aluminum.
The agreement also provides for a review and adjustment of the base power
rate and the price index every five years. The most recent review was
completed in April 1994 for the 1994-1998 period. The Volta River
Authority has allocated to Valco sufficient electric power to operate at
80% of its annual rated capacity through December 31, 1997.
Kaiser owns a 49% interest in the Anglesey aluminum smelter and
port facility at Holyhead, Wales. The Anglesey smelter uses pre-bake
technology. Kaiser supplies 49% of Anglesey's alumina requirements and
purchases 49% of Anglesey's aluminum output. Kaiser sells its share of
Anglesey's output to third parties. Power for the Anglesey aluminum
smelter is supplied under an agreement which expires in 2001.
Kaiser has developed and installed proprietary retrofit and
control technology in all of its smelters, as well as at third party
locations. This technology--which includes the redesign of the cathodes
and anodes that conduct electricity through reduction cells, improved
"feed" systems that add alumina to the cells, and a computerized system
that controls energy flow in the cells--has significantly contributed to
increased and more efficient production of primary aluminum and enhances
Kaiser's ability to compete with the industry's newer smelters. Kaiser is
actively engaged in efforts to license this technology and sell technical
and managerial assistance to other producers worldwide, and may participate
in joint ventures or similar business partnerships which employ Kaiser's
technical and managerial knowledge. See "--Research and Development."
Kaiser's principal primary aluminum customers consist of large
trading intermediaries and metal brokers, who resell primary aluminum to
fabricated product manufacturers, and large and small international
aluminum fabricators. In 1996, Kaiser sold its primary aluminum production
not utilized for internal purposes to approximately 45 customers, the
largest and top five of which accounted for approximately 16% and 54% of
such sales, respectively. See "--Competition." Marketing and sales efforts
are conducted by a small staff located at the business unit's headquarters
in Pleasanton, California, and by senior executives of Kaiser who
participate in the structuring of major sales transactions. A majority of
the business unit's sales are based upon long-term relationships with metal
merchants and end-users.
Production Operations--Fabricated Aluminum Products
Kaiser manufactures and markets fabricated aluminum products for
the transportation, packaging, construction, and consumer durables markets
in the United States and abroad. Sales in these markets are made directly
and through distributors to a large number of customers. Kaiser's
fabricated products compete with those of numerous domestic and foreign
producers and with products made of steel, copper, glass, plastic and other
materials. Product quality, price and availability are the principal
competitive factors in the market for fabricated aluminum products. Kaiser
has focused its fabricated products operations on selected products in
which Kaiser has production expertise, high-quality capability and
geographic and other competitive advantages.
Flat-Rolled Products. The flat-rolled products business unit,
the largest of Kaiser's fabricated products businesses, operates the
Trentwood sheet and plate mill at Spokane, Washington. In addition, Kaiser
broke ground on its first commercial Micromill(TM) facility, near Reno,
Nevada. The Micromill(TM) process is a proprietary, compact, high-speed
process for continuous casting and rolling of a thin-strip aluminum sheet
from molten metal. Kaiser expects the Nevada facility to be in a start-up
mode in the first half of 1997, and anticipates beginning limited customer
shipments by the second half of 1997. See "-- Research and Development."
The Trentwood facility is Kaiser's largest fabricating plant and
accounted for approximately 63% of Kaiser's 1996 fabricated aluminum
products shipments. The business unit supplies the aerospace and general
engineering markets (producing heat-treat products), the beverage container
market (producing body, lid and tab stock) and the specialty coil markets
(producing automotive brazing sheet, wheel, and tread products), both
directly and through distributors.
Kaiser continues to implement changes to the process and product
mix of its Trentwood rolling mill in an effort to maximize its
profitability and maintain full utilization of the facility. Kaiser has
approved an expansion of its heat-treat capacity to approximately 60,000
tons from approximately 45,000 tons, which will enable Kaiser to increase
the range of its heat-treat products, including wide heat-treated sheet for
the aerospace market, enhance the quality of its heat-treated products, and
improve Trentwood's operating efficiency. The project is estimated to cost
approximately $45.0 million and to take approximately two years to
complete. Global sales of Kaiser's heat-treat products have increased
significantly over the last several years and are made primarily to the
aerospace and general engineering markets, which are experiencing growth in
demand.
Kaiser's flat-rolled products are also sold to beverage container
manufacturers located in the western United States and in the Asian Pacific
Rim countries where the Trentwood plant's location provides Kaiser with a
transportation advantage. Quality of products for the beverage container
industry and timeliness of delivery are the primary bases on which Kaiser
competes. Kaiser has made significant capital expenditures at Trentwood
during the past several years in rolling technology and process control to
improve the metal integrity, shape and gauge control of its products.
Kaiser believes that such improvements have enhanced the quality of its
products for the beverage container industry and the capacity and
efficiency of its manufacturing operations. Kaiser believes that it is one
of the highest quality producers of aluminum beverage can stock in the
world.
In 1996, the business unit shipped products to approximately 150
customers in the aerospace, transportation and industrial ("ATI") markets,
most of whom were distributors who sell to a variety of industrial
end-users. The top five customers in the ATI markets for flat-rolled
products accounted for approximately 15% of the business unit's revenue.
In 1996, the flat-rolled products business unit had approximately 40
domestic and foreign can stock customers. The largest and top five of such
customers accounted for approximately 18% and 35%, respectively, of the
business unit's revenue. See "--Competition." The marketing staff for the
flat-rolled products business unit is located at the Trentwood facility and
in Pleasanton, California. Sales are made directly to end-use customers
from eight sales offices located throughout the United States.
International customers are served by sales offices in England and Japan
and by independent sales agents in Asia and Latin America.
Engineered Products. The engineered products business unit is
headquartered in Detroit, Michigan, and operates soft-alloy extrusion
facilities in Los Angeles, California; Santa Fe Springs, California;
Sherman, Texas; and London, Ontario, Canada; a cathodic protection business
located in Tulsa, Oklahoma, that also extrudes both aluminum and magnesium;
rod and bar facilities in Newark, Ohio, and Jackson, Tennessee, which
produce screw machine stock, redraw rod, forging stock, and billet; and a
facility in Richland, Washington, which produces seamless tubing in both
hard and soft alloys for the automotive, other transportation, export,
recreation, agriculture, and other industrial markets. Each of the
soft-alloy extrusion facilities has fabricating capabilities and provides
finishing services. Major markets for extruded products are in the
transportation industry, to which the business unit provides extruded
shapes for automobiles, trucks, trailers, cabs and shipping containers, and
in the distribution, durable goods, defense, building and construction,
ordnance and electrical markets. The sales and engineering office in
Detroit, Michigan, works with car makers and other customers, the Center
for Technology (see "- Research and Development") and plant personnel to
create new automotive component designs and improve existing products.
The engineered products business unit also operates forging
facilities at Erie, Pennsylvania; Oxnard, California; and Greenwood, South
Carolina; a machine shop at Greenwood, South Carolina; and a casting
facility in Canton, Ohio, and is one of the largest producers of aluminum
forgings in the United States and is a major supplier of high-quality
forged parts to customers in the automotive, commercial vehicle and
ordnance markets. The high strength-to-weight properties of forged and
cast aluminum make it particularly well-suited for automotive applications.
The business unit's casting facility manufactures aluminum engine manifolds
for the automobile, truck and marine markets.
In 1996, the engineered products business unit had approximately
990 customers, the largest and top five of which accounted for
approximately 13% and 31%, respectively, of the business unit's revenue.
Sales are made directly from plants, as well as marketing locations across
the United States. See "-- Competition."
In September 1996, Kaiser entered into a letter of intent with
Accuride Corporation ("Accuride"), a business unit of Phelps Dodge
Corporation, to form a joint-venture to design, manufacture and market
aluminum wheels for the commercial ground transportation industry. The
formation of the joint venture, subject to various conditions including
third-party consents, is expected to occur in the second quarter of 1997.
COMPETITION
Aluminum competes in many markets with steel, copper, glass,
plastic and other materials. In recent years, plastic containers have
increased and glass containers have decreased their respective shares of
the soft drink sector of the beverage container market. In the United
States, beverage container materials, including aluminum, face increased
competition from plastics as increased polyethylene terephthalate container
capacity is brought on line by plastics manufacturers. Within the aluminum
business, Kaiser competes with both domestic and foreign producers of
bauxite, alumina and primary aluminum, and with domestic and foreign
fabricators. Many of Kaiser's competitors have greater financial resources
than Kaiser. Kaiser's principal competitors in the sale of alumina include
Alcoa Alumina and Chemicals L.L.C., Billiton Marketing and Trading BV, and
Alcan Aluminium Limited. Kaiser competes with most aluminum producers in
the sale of primary aluminum.
Primary aluminum and, to some degree, alumina are commodities
with generally standard qualities, and competition in the sale of these
commodities is based primarily upon price, quality and availability.
Kaiser also competes with a wide range of domestic and international
fabricators in the sale of fabricated aluminum products. Competition in
the sale of fabricated products is based upon quality, availability, price
and service, including delivery performance. Kaiser concentrates its
fabricating operations on selected products in which it has production
expertise, high-quality capability, and geographic and other competitive
advantages. Kaiser believes that, assuming the current relationship between
worldwide supply and demand for alumina and primary aluminum does not change
materially, the loss of any one of its customers, including intermediaries,
would not have a material adverse effect on its financial condition,
results of operations or liquidity.
RESEARCH AND DEVELOPMENT
Kaiser conducts research and development activities principally
at two facilities - the Center for Technology ("CFT") in Pleasanton,
California, and the Primary Aluminum Products Division Technology Center
("DTC") adjacent to the Mead smelter in Washington. Net expenditures for
company-sponsored research and development activities were $20.5 million in
1996, $18.5 million in 1995, and $16.7 million in 1994. Kaiser's research
staff totaled 156 at December 31, 1996. Kaiser estimates that research and
development net expenditures will be approximately $22 million in 1997.
CFT performs research and development across a range of aluminum
process and product technologies to support Kaiser's business units and new
business opportunities. It also selectively offers technical services to
third parties. Significant efforts are directed at product and process
technology for the aircraft, automotive and can sheet markets, and aluminum
reduction cell models which are applied to improving cell designs and
operating conditions. DTC maintains specialized laboratories and a
miniature carbon plant where experiments with new anode and cathode
technology are performed. DTC supports Kaiser's primary aluminum smelters,
and concentrates on the development of cost-effective technical innovations
such as equipment and process improvements.
The largest and most notable single project being developed at
CFT and the Reno, Nevada, facility is a unique Micromill(TM) casting facility
for the production of can sheet from molten metal using a continuous cast
process. The capital and conversion costs of Kaiser's Micromill(TM)
facilities are expected to be significantly lower than conventional rolling
mills. The use of a Micromill(TM) facility is also expected to result in
lower transportation costs due to the ability to strategically locate a
Micromill(TM) facility in close proximity to a manufacturing facility.
Micromill(TM) facilities are expected to be particularly well suited to take
advantage of the rapid growth in demand for can sheet expected in emerging
markets in Asia and Latin America where there is limited indigenous supply.
Kaiser believes that Micromill(TM) facilities should also be capable of
manufacturing other sheet products at relatively low capital and operating
costs. The Micromill(TM) technology is based on a proprietary thin-strip,
high-speed, continuous-belt casting technique linked directly to hot and
cold rolling mills. The major advantage of the process is that the sheet
is continuously manufactured from molten metal, unlike the conventional
process in which the metal is first cast into large, solid ingots and
subsequently rolled into sheet through a series of highly capital-intensive
steps. The first Micromill(TM) facility, which was constructed in Nevada
during 1996 as a demonstration and production facility, achieved
operational start-up in the fourth quarter of 1996. Kaiser expects that
the Nevada Micromill(TM) will be in a start-up mode for the first half of 1997
and will be able to commence limited shipments to customers in the second
half of 1997. If Kaiser is successful in proving and commercializing its
Micromill(TM) technology, Micromill(TM) facilities could represent an important
source of future growth. There can be no assurance that Kaiser will be
able to successfully develop and commercialize the technology for use at
full-scale facilities. Kaiser is currently financing the capital cost of
the construction of the Nevada Micromill(TM), estimated to be approximately
$70 million, from available general corporate resources.
Kaiser licenses its technology and sells technical and managerial
assistance to other producers worldwide. Kaiser's technology has been
installed in alumina refineries, aluminum smelters and rolling mills
located in the United States, Jamaica, Sweden, Germany, Russia, India,
Australia, Korea, New Zealand, Ghana, United Arab Emirates and the United
Kingdom. Kaiser has technical services contracts with smelters in Wales,
Africa, Europe, the Middle East and India. Kaiser's revenue from
technology sales and technical assistance to third parties was $3.6 million
in 1996, $5.7 million in 1995 and $10.0 million in 1994.
BUSINESS DEVELOPMENT
Kaiser is actively pursuing opportunities to grow in targeted
areas of its portfolio, by internal investment and by acquisition, both
domestically and internationally. Kaiser is pursuing opportunities to
increase its participation in emerging markets by using its technical
expertise and capital to form joint ventures or acquire equity in
aluminum-related facilities in foreign countries where it can apply its
proprietary technology. Kaiser has created Kaiser Aluminum International
to identify growth opportunities in targeted emerging markets and develop
the needed country competence to complement Kaiser's product and process
competence in capitalizing on such opportunities. Kaiser has focused its
efforts on countries that are expected to be important suppliers of
aluminum and/or large customers for aluminum and alumina, including
Venezuela--where Kaiser is the Qualified Operator in one of five consortia
seeking to participate in the privatization of Venezuela's aluminum
industry--the PRC, Russia and other members of the CIS, and India.
Kaiser's proprietary retrofit technology has been installed by Kaiser at
various third party locations throughout the world and is an integral part
of Kaiser's initiatives for participating in new and existing smelting
facilities. See "--Research and Development."
In 1995, Kaiser Yellow River Investment Limited ("KYRIL"), a
subsidiary of Kaiser, entered into a Joint Venture Agreement and related
agreements (the "Joint Venture Agreements") with the Lanzhou Aluminum
Smelters ("LAS") of the China National Nonferrous Metals Industry
Corporation relating to the formation and operation of Yellow River
Aluminum Industry Company Limited, a Sino-foreign joint equity enterprise
organized under PRC law (the "Joint Venture"). KYRIL contributed $9.0
million to the capital of the Joint Venture in July 1995. The parties to
the Joint Venture are currently engaged in discussions concerning the
future of the Joint Venture. Governmental approval in the PRC will be
necessary in order to implement any arrangements agreed to by the parties,
and there can be no assurance such approvals will be obtained. At a
meeting of the Board of Directors of the Joint Venture held on January 16,
1997, LAS reported that negotiations had begun with an investor which might
be interested in buying KYRIL's interest in the Joint Venture. In light of
such report, the directors adopted a resolution that, among other things,
(i) contained an agreement to continue until June 30, 1997, discussions
concerning the future of the Joint Venture, (ii) provided that KYRIL
granted to LAS the right to seek a buyer to purchase KYRIL's equity
interest in the Joint Venture, and (iii) provided that if a buyer to
purchase KYRIL's equity interest in the Joint Venture was not found by June
30, 1997, the Joint Venture would be terminated and dissolved.
Kaiser, through its engineered products business unit, has
entered into contracts to form two small joint venture companies in the
PRC. Kaiser indirectly acquired equity interests of approximately 45% and
49%, respectively, in these two companies which will manufacture aluminum
extrusions, in exchange for the contribution to those companies of certain
used equipment, technology, services and cash. The majority equity
interests in the two companies are owned by affiliates of Guizhou Guang Da
Construction Company.
EMPLOYEES
During 1996, Kaiser employed an average of approximately 9,600
persons, compared with an average of approximately 9,500 employees in 1995,
and 9,700 employees in 1994. At December 31, 1996, Kaiser's work force was
approximately 9,500, including a domestic work force of approximately
5,900, of whom approximately 4,000 were paid at an hourly rate. Most
hourly paid domestic employees are covered by collective bargaining
agreements with various labor unions. Approximately 75% of such employees
are covered by a master agreement (the "Labor Contract") with the United
Steelworkers of America ("USWA") which expires September 30, 1998. The
Labor Contract covers Kaiser's plants in Spokane (Trentwood and Mead) and
Tacoma, Washington; Gramercy, Louisiana; and Newark, Ohio.
The Labor Contract provides for base wages at all covered plants.
In addition, workers covered by the Labor Contract may receive quarterly or
more frequent bonus payments based on various indices of profitability,
productivity, efficiency, and other aspects of specific plant or
departmental performance, as well as, in certain cases, the price of
alumina or primary aluminum. Pursuant to the Labor Contract, base wage
rates were raised effective January 2, 1995, were raised again effective
November 6, 1995, and will be raised an additional amount effective
November 3, 1997, and an amount in respect of the cost of living adjustment
under the previous master agreement will be phased into base wages during
the term of the Labor Contract. In the second quarter of 1995, Kaiser
acquired up to $2,000 of preference stock held in a stock plan for the
benefit of certain employees covered by the Labor Contract and in the first
half of 1998 will acquire up to an additional $4,000 of such preference
stock held in such plan for the benefit of substantially the same
employees. In addition, a profitability test was satisfied and, therefore,
Kaiser acquired during 1996 up to an additional $1,000 of such preference
stock held in such plan for the benefit of substantially the same
employees. Kaiser made comparable acquisitions of preference stock held
for the benefit of certain salaried employees.
The contract covering Alpart's employees expired in April 1996,
and contract negotiations are ongoing. Management considers Kaiser's
employee relations to be satisfactory.
ENVIRONMENTAL MATTERS
Kaiser is subject to a wide variety of international, federal,
state and local environmental laws and regulations (the "Environmental
Laws"). The Environmental Laws regulate, among other things, air and water
emissions and discharges; the generation, storage, treatment,
transportation and disposal of solid and hazardous waste; the release of
hazardous or toxic substances, pollutants and contaminants into the
environment; and, in certain instances, the environmental condition of
industrial property prior to transfer or sale. In addition, Kaiser is
subject to various federal, state and local workplace health and safety
laws and regulations ("Health Laws").
From time to time, Kaiser is subject, with respect to its current
and former operations, to fines or penalties assessed for alleged breaches
of the Environmental and Health Laws and to claims and litigation brought
by federal, state or local agencies and by private parties seeking remedial
or other enforcement action under the Environmental and Health Laws or
damages related to alleged injuries to health or to the environment,
including claims with respect to certain waste disposal sites and the
remediation of sites presently or formerly operated by Kaiser. See "Legal
Proceedings--Kaiser Litigation--Environmental Litigation." Kaiser
currently is subject to a number of lawsuits under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA").
Kaiser, along with certain other entities, has been named as a Potentially
Responsible Party ("PRP") for remedial costs at certain third-party sites
listed on the National Priorities List under CERCLA and, in certain
instances, may be exposed to joint and several liability for those costs or
damages to natural resources. Kaiser's Mead, Washington, facility has been
listed on the National Priorities List under CERCLA. By letter dated June
18, 1996, the Washington State Department of Ecology advised Kaiser that
there are several options for remediation at the Mead facility that would
be acceptable to the Department. Kaiser expects that one of these remedial
options will be agreed upon and incorporated into a consent decree in 1997.
In addition, in connection with certain of its asset sales, Kaiser has
agreed to indemnify the purchasers with respect to certain liabilities (and
associated expenses) resulting from acts or omissions arising prior to such
dispositions, including environmental liabilities.
See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and Investing and
Financing Activities--Aluminum Operations" and Note 9 to the Consolidated
Financial Statements, each under the heading "Environmental Contingencies"
for further information.
PROPERTIES
The locations and general character of the principal plants,
mines, and other materially important physical properties relating to
Kaiser's operations are described in "--Production Operations." Kaiser
owns or leases all the real estate and facilities used in connection with
its business. Plants and equipment and other facilities are generally in
good condition and suitable for their intended uses, subject to changing
environmental requirements. Although Kaiser's domestic aluminum smelters
and alumina facility were initially designed early in Kaiser's history,
they have been modified frequently over the years to incorporate
technological advances in order to improve efficiency, increase capacity,
and achieve energy savings. Kaiser believes that its domestic plants are
cost competitive on an international basis.
Kaiser's obligations under its credit agreement are secured by,
among other things, mortgages on its major domestic plants (other than the
Gramercy alumina refinery and Nevada Micromill ).
LEGAL PROCEEDINGS
See "Legal Proceedings--Kaiser Litigation" for a description of
certain legal proceedings in which Kaiser is involved.
FOREST PRODUCTS OPERATIONS
GENERAL
The Company engages in forest products operations through MGI and
its wholly owned subsidiaries, Pacific Lumber and Britt, and Pacific
Lumber's subsidiaries, Scotia Pacific and Salmon Creek. Pacific Lumber,
which has been in continuous operation for over 125 years, engages in
several principal aspects of the lumber industry--the growing and
harvesting of redwood and Douglas-fir timber, the milling of logs into
lumber products and the manufacturing of lumber into a variety of
value-added finished products. Britt manufactures redwood and cedar fencing
and decking products from small diameter logs, a substantial portion of
which Britt acquires from Pacific Lumber (as Pacific Lumber cannot
efficiently process them in its own mills).
PACIFIC LUMBER OPERATIONS
TIMBERLANDS
Pacific Lumber owns and manages approximately 193,000 acres of
virtually contiguous commercial timberlands located in Humboldt County
along the northern California coast, which has very favorable soil and
climate conditions. These timberlands contain approximately three-quarters
redwood and one-quarter Douglas-fir timber, are located in close proximity
to Pacific Lumber's four sawmills and contain an extensive network of
roads. Approximately 179,000 acres of Pacific Lumber's timberlands are
owned by Scotia Pacific (the "Scotia Pacific Timberlands"). Pacific Lumber
has the exclusive right to harvest (the "Pacific Lumber Harvest Rights")
approximately 8,000 non-contiguous acres of the Scotia Pacific Timberlands
consisting substantially of virgin old growth redwood and virgin old growth
Douglas-fir timber located on numerous small parcels throughout the Scotia
Pacific Timberlands. Substantially all of Scotia Pacific's assets,
including the Scotia Pacific Timberlands and the GIS (defined below), are
pledged as security for Scotia Pacific's 7.95% Timber Collateralized Notes
due 2015 (the "Timber Notes"). Pacific Lumber harvests and purchases from
Scotia Pacific all of the logs harvested from the Scotia Pacific
Timberlands. See "--Relationships With Scotia Pacific and Britt" for a
description of this and other relationships among Pacific Lumber, Scotia
Pacific and Britt. Approximately 6,000 acres of Pacific Lumber's
timberlands are owned by Salmon Creek.
The forest products industry grades lumber in various
classifications according to quality. The two broad categories within
which all grades fall, based on the absence or presence of knots, are
called "upper" and "common" grades, respectively. "Old growth" trees,
often defined as trees which have been growing for approximately 200 years
or longer, have a higher percentage of upper grade lumber than "young
growth" trees (those which have been growing for less than 200 years).
"Virgin" old growth trees are located in timber stands that have not
previously been harvested. "Residual" old growth trees are located in
timber stands which have been partially harvested in the past.
Pacific Lumber engages in extensive efforts to supplement the
natural regeneration of timber and increase the amount of timber on its
timberlands. Pacific Lumber is required to comply with California forestry
regulations regarding reforestation, which generally require that an area
be reforested to specified standards within an established period of time.
Pacific Lumber also actively engages in efforts to establish timberlands
from open areas such as pasture land. Regeneration of redwood timber
generally is accomplished through the natural growth of new redwood sprouts
from the stump remaining after a redwood tree is harvested. Such new
redwood sprouts grow quickly, thriving on existing mature root systems. In
addition, Pacific Lumber supplements natural redwood regeneration by
planting redwood seedlings. Douglas-fir timber grown on Pacific Lumber's
timberlands is regenerated almost entirely by planting seedlings. During
1996, Pacific Lumber planted an estimated 529,000 redwood and Douglas-fir
seedlings.
HARVESTING PRACTICES
The ability of Pacific Lumber to sell logs or lumber products
will depend, in part, upon its ability to obtain regulatory approval of
timber harvesting plans ("THPs"). THPs are required to be developed by
registered professional foresters and must be filed with, and approved by,
the California Department of Forestry ("CDF") prior to the harvesting of
timber. Each THP is designed to comply with applicable laws and
regulations. The CDF's evaluation of proposed THPs incorporates review and
analysis of such THPs by several California and federal agencies and public
comments received with respect to such THPs. An approved THP is applicable
to specific acreage and specifies the harvesting method and other
conditions relating to the harvesting of the timber covered by such THP.
See "--Regulatory and Environmental Factors" for information regarding a
critical habitat designation, sustained yield regulations and similar
matters concerning Pacific Lumber and its operations. Pacific Lumber
maintains a detailed geographical information system covering its
timberlands (the "GIS"). The GIS covers numerous aspects of Pacific
Lumber's properties, including timber type, tree class, wildlife data,
roads, rivers and streams. By carefully monitoring and updating this data
base and conducting field studies, Pacific Lumber's foresters are better
able to develop detailed THPs addressing the various regulatory
requirements. Pacific Lumber also utilizes a Global Positioning System
("GPS") which allows precise location of geographic features through
satellite positioning.
Pacific Lumber employs a variety of well-accepted methods of
selecting trees for harvest. These methods, which are designed to achieve
optimal regeneration, are referred to as "silvicultural systems" in the
forestry profession. Silvicultural systems range from very light thinnings
aimed at enhancing the growth rate of retained trees to clear cutting which
results in the harvest of all trees in an area and replacement with a new
forest stand. In between are a number of varying levels of partial
harvests which can be employed. Pacific Lumber's foresters select the
appropriate silvicultural system for any given site based upon the specific
conditions of that site. The systems chosen are those which will most
closely emulate those natural processes that result in the cycling of
natural forest stands. Due to the magnitude of its timberlands and
conservative application of silvicultural systems, Pacific Lumber has
historically conducted harvesting operations on approximately 5% of its
timberlands in any given year.
PRODUCTION FACILITIES
Pacific Lumber owns four highly mechanized sawmills and related
facilities located in Scotia, Fortuna and Carlotta, California. The
sawmills historically have been supplied almost entirely from timber
harvested from Pacific Lumber's timberlands. Since 1986, Pacific Lumber
has implemented numerous technological advances that have increased the
operating efficiency of its production facilities and the recovery of
finished products from its timber. Over the past three years, Pacific
Lumber's annual lumber production has averaged approximately 289 million
board feet, with approximately 291, 290 and 286 million board feet produced
in 1996, 1995 and 1994, respectively. The Fortuna sawmill produces
primarily common grade lumber. During 1996, the Fortuna mill produced
approximately 99 million board feet of lumber. The Carlotta sawmill
produces both common and upper grade redwood lumber. During 1996, the
Carlotta mill produced approximately 63 million board feet of lumber.
Sawmills "A" and "B" are both located in Scotia. Sawmill "A" processes
Douglas-fir logs and Sawmill "B" primarily processes large diameter redwood
logs. During 1996, Sawmills "A" and "B" produced 88 million and 41 million
board feet of lumber, respectively.
Pacific Lumber operates a finishing plant which processes rough
lumber into a variety of finished products such as trim, fascia, siding and
paneling. These finished products include the redwood lumber industry's
largest variety of customized trim and fascia patterns. Pacific Lumber
also enhances the value of some grades of common grade lumber by assembling
knot-free pieces of common lumber into wider or longer pieces in its
state-of-the-art end and edge glue plants. The result is a standard sized
upper grade product which can be sold at a significant premium over common
grade products. Pacific Lumber has installed a lumber remanufacturing
facility at its mill in Fortuna which processes low grade redwood common
lumber into value-added, higher grade redwood fence and related products.
Pacific Lumber dries the majority of its upper grade lumber
before it is sold. Upper grades of redwood lumber are generally air-dried
for three to twelve months and then kiln-dried for seven to twenty-four
days to produce a dimensionally stable and high quality product which
generally commands higher prices than "green" lumber (which is lumber sold
before it has been dried). Upper grade Douglas-fir lumber is generally
kiln-dried immediately after it is cut. Pacific Lumber owns and operates
34 kilns, having an annual capacity of approximately 95 million board feet,
to dry its upper grades of lumber efficiently in order to produce a
quality, premium product. Pacific Lumber also maintains several large
enclosed storage sheds which hold approximately 27 million board feet of
lumber.
In addition, Pacific Lumber owns and operates a modern
25-megawatt cogeneration power plant which is fueled almost entirely by the
wood residue from Pacific Lumber's milling and finishing operations. This
power plant generates substantially all of the energy requirements of
Scotia, California, the town adjacent to Pacific Lumber's timberlands where
several of its manufacturing facilities are located. Pacific Lumber sells
surplus power to Pacific Gas and Electric Company. In 1996, the sale of
surplus power accounted for approximately 1% of Pacific Lumber's total
revenues.
PRODUCTS
The following table sets forth the distribution of Pacific
Lumber's lumber production (on a net board foot basis) and revenues by
product line:
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1995
----------------------------------------- -----------------------------------------
% of Total % of Total
Lumber % of Total Lumber % of Total
Production Lumber % of Total Production Lumber % of Total
Product Volume Revenues Revenues Volume Revenues Revenues
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Upper grade redwood
lumber 13% 33% 28% 17% 38% 31%
Common grade redwood
lumber 53% 42% 35% 54% 40% 32%
------------- ------------- ------------- ------------- ------------- -------------
Total redwood
lumber 66% 75% 63% 71% 78% 63%
------------- ------------- ------------- ------------- ------------- -------------
Upper grade Douglas-
fir lumber 3% 6% 5% 3% 5% 4%
Common grade Douglas-
fir lumber 27% 16% 13% 23% 14% 11%
------------- ------------- ------------- ------------- ------------- -------------
Total Douglas-
fir lumber 30% 22% 18% 26% 19% 15%
------------- ------------- ------------- ------------- ------------- -------------
Other grades of
lumber 4% 3% 2% 3% 3% 4%
------------- ------------- ------------- ------------- ------------- -------------
Total lumber 100% 100% 83% 100% 100% 82%
============= ============= ============= ============= ============= =============
Logs 9% 7%
============= =============
Hardwood chips 2% 4%
Softwood chips 4% 5%
------------- -------------
Total wood chips 6% 9%
============= =============
</TABLE>
Lumber. Pacific Lumber primarily produces and markets lumber.
In 1996, Pacific Lumber sold approximately 307 million board feet of
lumber, which accounted for approximately 83% of Pacific Lumber's total
revenues. Lumber products vary greatly by the species and quality of the
timber from which it is produced. Lumber is sold not only by grade (such
as "upper" grade versus "common" grade), but also by board size and the
drying process associated with the lumber.
Redwood lumber is Pacific Lumber's largest product category.
Redwood is commercially grown only along the northern coast of California
and possesses certain unique characteristics that permit it to be sold at a
premium to many other wood products. Such characteristics include its
natural beauty, superior ability to retain paint and other finishes,
dimensional stability and innate resistance to decay, insects and
chemicals. Typical applications include exterior siding, trim and fascia
for both residential and commercial construction, outdoor furniture, decks,
planters, retaining walls and other specialty applications. Redwood also
has a variety of industrial applications because of its chemical resistance
and because it does not impart any taste or odor to liquids or solids.
Upper grade redwood lumber, which is derived primarily from large
diameter logs and is characterized by an absence of knots and other
defects, is used primarily in distinctive interior and exterior
applications. The overall supply of upper grade lumber has been
diminishing due to increasing environmental and regulatory restrictions and
other factors, and Pacific Lumber's supply of upper grade lumber has
decreased in some premium product categories. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations--Forest Products Operations." Common grade redwood
lumber, Pacific Lumber's largest volume product, has many of the same
aesthetic and structural qualities of redwood uppers, but has some knots,
sapwood and a coarser grain. Such lumber is commonly used for construction
purposes, including outdoor structures such as decks, hot tubs and fencing.
Douglas-fir lumber is used primarily for new construction and
some decorative purposes and is widely recognized for its strength, hard
surface and attractive appearance. Douglas-fir is grown commercially along
the west coast of North America and in Chile and New Zealand. Upper grade
Douglas-fir lumber is derived primarily from old growth Douglas-fir timber
and is used principally in finished carpentry applications. Common grade
Douglas-fir lumber is used for a variety of general construction purposes
and is largely interchangeable with common grades of other whitewood
lumber.
Logs. Pacific Lumber currently sells certain logs that, due to
their size or quality, cannot be efficiently processed by its mills into
lumber. The majority of these logs are purchased by Britt. The balance
are purchased by surrounding mills which do not own sufficient timberlands
to support their mill operations. See "--Relationships With Scotia Pacific
and Britt" below. Except for the agreement with Britt described below,
Pacific Lumber does not have any significant contractual relationships with
third parties relating to the purchase of logs. Pacific Lumber has
historically not purchased significant quantities of logs from third
parties; however, Pacific Lumber may from time to time purchase logs from
third parties for processing in its mills or for resale to third parties
if, in the opinion of management, economic factors are advantageous to
Pacific Lumber.
Wood Chips. Pacific Lumber uses a whole-log chipper to produce
wood chips from hardwood trees which would otherwise be left as waste.
These chips are sold to third parties primarily for the production of
facsimile and other specialty papers. Pacific Lumber also produces
softwood chips from the wood residue and waste from its milling and
finishing operations. These chips are sold to third parties for the
production of wood pulp and paper products.
BACKLOG AND SEASONALITY
Pacific Lumber's backlog of sales orders at December 31, 1996 and
1995 was approximately $21.3 million and approximately $11.5 million,
respectively, the substantial portion of which was delivered in the first
quarter of the next fiscal year. Pacific Lumber has historically
experienced lower first quarter sales due largely to the general decline in
construction-related activity during the winter months. As a result,
Pacific Lumber's results in any one quarter are not necessarily indicative
of results to be expected for the full year.
MARKETING
The housing, construction and remodeling markets are the primary
markets for Pacific Lumber's lumber products. Pacific Lumber's policy is to
maintain a wide distribution of its products both geographically and in
terms of the number of customers. Pacific Lumber sells its lumber products
throughout the country to a variety of accounts, the large majority of
which are wholesalers, followed by retailers, industrial users, exporters
and manufacturers. Upper grades of redwood and Douglas-fir lumber are sold
throughout the entire United States, as well as to export markets. Common
grades of redwood lumber are sold principally west of the Mississippi
River, with California accounting for approximately 66% of these sales in
1996. Common grades of Douglas-fir lumber are sold primarily in
California. In 1996, the largest and top five of Pacific Lumber's
customers accounted for approximately 9% and 24%, respectively, of total
revenues. Exports of lumber accounted for approximately 5% of Pacific
Lumber's total revenues in 1996. Pacific Lumber markets its products
through its own sales staff which focuses primarily on domestic sales.
Pacific Lumber actively follows trends in the housing,
construction and remodeling markets in order to maintain an appropriate
level of inventory and assortment of products. Due to its high quality
products, large inventory, competitive prices and long history, Pacific
Lumber believes it has a strong degree of customer loyalty.
COMPETITION
Pacific Lumber's lumber is sold in highly competitive markets.
Competition is generally based upon a combination of price, service,
product availability and product quality. Pacific Lumber's products compete
not only with other wood products but with metals, masonry, plastic and
other construction materials made from non-renewable resources. The level
of demand for Pacific Lumber's products is dependent on such broad factors
as overall economic conditions, interest rates and demographic trends. In
addition, competitive considerations, such as total industry production and
competitors' pricing, as well as the price of other construction products,
affect the sales prices for Pacific Lumber's lumber products. Pacific
Lumber currently enjoys a competitive advantage in the upper grade redwood
lumber market due to the quality of its timber holdings and relatively low
cost production operations. Competition in the common grade redwood and
Douglas-fir lumber market is more intense, and Pacific Lumber competes with
numerous large and small lumber producers.
EMPLOYEES
As of March 1, 1997, Pacific Lumber had approximately 1,600
employees, none of whom are covered by a collective bargaining agreement.
RELATIONSHIPS WITH SCOTIA PACIFIC AND BRITT
In March 1993, Pacific Lumber consummated its offering of $235
million of 10-1/2% Senior Notes due 2003 (the "Pacific Lumber Senior
Notes") and Scotia Pacific consummated its offering of $385 million of
Timber Notes. Upon the closing of such offerings, Pacific Lumber, Scotia
Pacific and Britt entered into a variety of agreements. Pacific Lumber and
Scotia Pacific entered into a Services Agreement (the "Services Agreement")
and an Additional Services Agreement (the "Additional Services Agreement").
Pursuant to the Services Agreement, Pacific Lumber provides operational,
management and related services with respect to the Scotia Pacific
Timberlands containing timber of Scotia Pacific ("Scotia Pacific Timber")
not performed by Scotia Pacific's own employees. Such services include,
but are not limited to, the furnishing of all equipment, personnel and
expertise not within Scotia Pacific's possession and reasonably necessary
for the operation and maintenance of the Scotia Pacific Timberlands
containing Scotia Pacific Timber. In particular, Pacific Lumber is
required to regenerate Scotia Pacific Timber, prevent and control loss of
Scotia Pacific Timber by fires, maintain a system of roads throughout the
Scotia Pacific Timberlands, take measures to control the spread of disease
and insect infestation affecting Scotia Pacific Timber and comply with
environmental laws and regulations. Pacific Lumber is also required (to
the extent necessary) to assist Scotia Pacific personnel in updating the
GIS and to prepare and file, on Scotia Pacific's behalf, all pleadings and
motions and otherwise diligently pursue appeals of any denial of any THP
and related matters. As compensation for these and the other services to
be provided by Pacific Lumber, Scotia Pacific pays a fee which is adjusted
on January 1 of each year based on a specified government index relating to
wood products. The fee was approximately $112,000 per month in 1996 and is
expected to be approximately $115,200 per month in 1997. Pursuant to the
Additional Services Agreement, Scotia Pacific provides Pacific Lumber with
a variety of services, including (a) assisting Pacific Lumber to operate,
maintain and harvest its own timber properties, (b) updating and providing
access to the GIS with respect to information concerning Pacific Lumber's
own timber properties, and (c) assisting Pacific Lumber with its statutory
and regulatory compliance. Pacific Lumber pays Scotia Pacific a fee for
such services equal to the actual cost of providing such services, as
determined in accordance with generally accepted accounting principles.
Pacific Lumber and Scotia Pacific also entered into a Master
Purchase Agreement (the "Master Purchase Agreement"). The Master Purchase
Agreement governs all purchases of logs by Pacific Lumber from Scotia
Pacific. Each purchase of logs by Pacific Lumber from Scotia Pacific is
made pursuant to a separate log purchase agreement (which incorporates the
terms of the Master Purchase Agreement) for the Scotia Pacific Timber
covered by an approved THP. Each log purchase agreement generally
constitutes an exclusive agreement with respect to the timber covered
thereby, subject to certain limited exceptions. The purchase price must be
at least equal to the SBE Price (as defined below). The Master Purchase
Agreement provides that if the purchase price equals or exceeds (i) the
price for such species and category thereof set forth on the structuring
schedule applicable to the Timber Notes and (ii) the SBE Price, then such
price shall be deemed to be the fair market value of such logs. The Master
Purchase Agreement defines the "SBE Price," for any species and category of
timber, as the stumpage price for such species and category as set forth in
the most recent "Harvest Value Schedule" published by the California State
Board of Equalization ("SBE") applicable to the timber sold during the
period covered by such Harvest Value Schedule. Such Harvest Value
Schedules are published for the purpose of computing yield taxes and
generally are released every six months. As Pacific Lumber purchases logs
from Scotia Pacific pursuant to the Master Purchase Agreement, Pacific
Lumber is responsible, at its own expense, for harvesting and removing the
standing Scotia Pacific Timber covered by approved THPs, and the purchase
price is therefore based upon "stumpage prices." Title to the harvested
logs does not pass to Pacific Lumber until the logs are transported to
Pacific Lumber's log decks and measured. Substantially all of Scotia
Pacific's revenues are derived from the sale of logs to Pacific Lumber
under the Master Purchase Agreement.
Pacific Lumber, Scotia Pacific and Salmon Creek also entered into
a Reciprocal Rights Agreement granting to each other certain reciprocal
rights of egress and ingress through their respective properties in
connection with the operation and maintenance of such properties and their
respective businesses. In addition, Pacific Lumber entered into an
Environmental Indemnification Agreement with Scotia Pacific pursuant to
which Pacific Lumber agreed to indemnify Scotia Pacific from and against
certain present and future liabilities arising with respect to hazardous
materials, hazardous materials contamination or disposal sites, or under
environmental laws with respect to the Scotia Pacific Timberlands.
Pacific Lumber entered into an agreement with Britt (the "Britt
Agreement") which governs the sale of logs by Pacific Lumber and Britt to
each other, the sale of hog fuel (wood residue) by Britt to Pacific Lumber
for use in Pacific Lumber's cogeneration plant, the sale of lumber by
Pacific Lumber and Britt to each other, and the provision by Pacific Lumber
of certain administrative services to Britt (including accounting,
purchasing, data processing, safety and human resources services). The
logs which Pacific Lumber sells to Britt and which are used in Britt's
manufacturing operations are sold at approximately 75% of applicable SBE
prices (to reflect the lower quality of these logs). Logs which either
Pacific Lumber or Britt purchases from third parties and which are then
sold to each other are transferred at the actual cost of such logs. Hog
fuel is sold at applicable market prices, and administrative services are
provided by Pacific Lumber based on Pacific Lumber's actual costs and an
allocable share of Pacific Lumber's overhead expenses consistent with past
practice.
BRITT LUMBER OPERATIONS
BUSINESS
Britt is located in Arcata, California, approximately 45 miles
north of Pacific Lumber's headquarters. Britt's primary business is the
processing of small diameter redwood logs into wood fencing products for
sale to retail and wholesale customers. Britt was incorporated in 1965 and
operated as an independent manufacturer of fence products until July 1990,
when it was purchased by a subsidiary of the Company. Britt purchases small
diameter (6 to 11 inch) and short length (6 to 12 feet) redwood logs from
Pacific Lumber and a variety of different diameter and different length
logs from various timberland owners. Britt processes logs at its mill into
a variety of different fencing products, including "dog-eared" 1" x 6"
fence stock in six and eight foot lengths, 4" x 4" fence posts in 6 through
12 foot lengths, and other fencing products in 6 through 12 foot lengths.
Britt's purchases of logs from third parties are generally consummated
pursuant to short-term contracts of twelve months or less. See "--Pacific
Lumber Operations--Relationships With Scotia Pacific and Britt" for a
description of Britt's log purchases from Pacific Lumber.
MARKETING
In 1996, Britt sold approximately 79 million board feet of lumber
products to approximately 75 different customers. Over one-half of Britt's
1996 lumber sales were in northern California. The remainder of its 1996
sales were in southern California and ten other western states. The largest
and top five of such customers accounted for approximately 27% and 68%,
respectively, of such 1996 sales. Britt markets its products through its
own salesmen to a variety of customers, including distribution centers,
industrial remanufacturers, wholesalers and retailers.
Britt's backlog of sales orders at December 31, 1996 and 1995 was
approximately $4.2 million and $3.2 million, respectively, the substantial
portion of which was delivered in the first quarter of the next fiscal
year.
FACILITIES AND EMPLOYEES
Britt's manufacturing operations are conducted on 12 acres of
land, 10 acres of which are leased on a long-term fixed-price basis from an
unrelated third party. Fence production is conducted in a 46,000 square
foot mill. An 18 acre log sorting and storage yard is located one quarter
of a mile away. The mill was constructed in 1980, and capital expenditures
to enhance its output and efficiency are made periodically. Britt's (single
shift) mill capacity, assuming 40 production hours per week, is estimated
at 37.4 million board feet of fencing products per year. As of March 1,
1997, Britt employed approximately 120 people, none of whom are covered by
a collective bargaining agreement.
COMPETITION
Management estimates that Britt accounted for approximately
one-third of the redwood fence market in 1996. Britt competes primarily
with the northern California mills of Louisiana Pacific, Georgia Pacific
and Eel River.
REGULATORY AND ENVIRONMENTAL FACTORS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.
Regulatory and environmental issues play a significant role in
Pacific Lumber's forest products operations. Pacific Lumber's forest
products operations 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. Moreover, these laws and
regulations are modified from time to time and are subject to judicial and
administrative interpretation. These laws include the California Forest
Practice Act (the "Forest Practice Act"), which requires that timber
harvesting operations be conducted in accordance with detailed requirements
set forth in the Forest Practice Act and in the regulations promulgated
thereunder by the California Board of Forestry (the "BOF"). The federal
Endangered Species Act (the "ESA") and California Endangered Species Act
(the "CESA") provide in general for the protection and conservation of
specifically listed fish, wildlife and plants which have been declared to
be endangered or threatened. The California Environmental Quality Act
("CEQA") provides, in general, for protection of the environment of the
state, including protection of air and water quality and of fish and
wildlife. In addition, the California Water Quality Act and Federal Clean
Water Act require, in part, that Pacific Lumber's operations be conducted
so as to reasonably protect the water quality of nearby rivers and streams.
Pacific Lumber is subject to certain pending matters described below which
could have a material adverse effect on the consolidated financial
position, results of operations or liquidity of Pacific Lumber, and in turn
MGI and MGHI. There can be no assurance that certain pending or future
legislation, governmental regulations or judicial or administrative
decisions will not have a material adverse effect on Pacific Lumber.
In March 1992, the marbled murrelet was approved for listing as
endangered under the CESA. In October 1992, the United States Fish and
Wildlife Service ("USFWS") issued its final rule listing the marbled
murrelet as a threatened species under the ESA in the tri-state area of
Washington, Oregon and California. Pacific Lumber has incorporated, and
will continue to incorporate as required, mitigation measures into its THPs
to protect and maintain habitat for the marbled murrelet on its
timberlands. The BOF requires Pacific Lumber to conduct pre-harvest
marbled murrelet surveys to provide certain site specific mitigations in
connection with THPs covering virgin old growth timber and unusually dense
stands of residual old growth timber. Such surveys can only be conducted
during a portion of the murrelet's nesting and breeding season, which
extends from April through mid-September. Accordingly, such surveys are
expected to delay the review and approval process with respect to certain
of the THPs filed by Pacific Lumber. The results of such surveys to date
(based upon current survey protocols) have indicated that Pacific Lumber
has approximately 6,600 acres (all containing virgin or residual old growth
timber) which are occupied marbled murrelet habitat. Pacific Lumber is
unable to predict when or if it will be able to harvest this acreage.
In May 1996, the USFWS published its final designation of
critical habitat for the marbled murrelet (the "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 Pacific Lumber's timberlands are included in
the Final Designation, the substantial portion of such acreage being young
growth timber. The bulk of Pacific Lumber's 6,600 acres of occupied
marbled murrelet habitat falls within the 33,000 acres of Pacific Lumber's
timberlands included in 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 over the last few years
has attempted to develop a habitat conservation plan for the marbled
murrelet (the "Murrelet HCP"). Due to, among other things, the unfavorable
response of the USFWS to Pacific Lumber's initial Murrelet HCP efforts,
Pacific Lumber and its subsidiaries filed two actions (the "Takings
Litigation") alleging that certain portions of their timberlands have been
"taken" and seeking just compensation. See Item 3. "Legal Proceedings--
Pacific Lumber Litigation" for a description of the Takings Litigation.
Pursuant to an agreement entered into by the Company, MAXXAM, the United
States and the State of California on September 28, 1996 (the "Headwaters
Agreement") and described below under "--Headwaters Agreement," the Takings
Litigation has been stayed at the request of the parties.
It is impossible for the Company 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
various regulatory and legal issues are resolved; however, if Pacific
Lumber is unable to harvest, or is severely limited in harvesting, on
timberlands designated as critical habitat for the marbled murrelet, such
effect could be materially adverse to Pacific Lumber (and in turn MGI and
MGHI). 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. There continue to be other regulatory actions and
lawsuits seeking to have other species listed as threatened or endangered
under the ESA and/or the CESA and to designate critical habitat for such
species. For example, the National Marine Fisheries Service has announced
that by April 25, 1997 it will make a final determination whether to list
the coho salmon under the ESA in northern California, including,
potentially, lands owned by Pacific Lumber. It is uncertain what impact,
if any, such listings and/or designations of critical habitat would have on
the consolidated financial position, results of operations or liquidity of
Pacific Lumber, and in turn MGI and MGHI.
In 1994, the BOF adopted certain regulations regarding compliance
with long-term sustained yield ("LTSY") objectives. These regulations
require that timber companies project timber growth and harvest on their
timberlands over a 100-year planning period and establish a LTSY harvest
level that takes into account environmental and economic considerations.
The sustained yield plan ("SYP") must demonstrate that the average annual
harvest over any rolling ten-year period will not exceed the LTSY harvest
level and that Pacific Lumber's projected timber inventory is capable of
sustaining the LTSY harvest level in the last decade of the 100-year
planning period. On December 17, 1996, Pacific Lumber submitted a proposed
SYP to the CDF. The proposed SYP sets forth an LTSY harvest level
substantially the same as Pacific Lumber's average annual timber harvest
over the last six years. The proposed SYP also indicates that Pacific
Lumber's average annual timber harvest during the first decade of the SYP
would approximate the LTSY harvest level. During the second decade of the
proposed SYP, Pacific Lumber's average annual timber harvest would be
approximately 8% less than that proposed for the first decade. The SYP,
when approved, will be valid for ten years. Thereafter, revised SYPs will
be prepared every decade that will address the LTSY harvest level based
upon reassessment of changes in the resource base and protection of public
resources.
The proposed SYP assumes that the transactions contemplated by
the Headwaters Agreement will be consummated and that the Multi-Species HCP
(as defined below under "--Headwaters Agreement") will permit Pacific
Lumber to harvest its timberlands (including over the next two decades a
substantial portion of its old growth timberlands not transferred pursuant
to the Headwaters Agreement) to achieve maximum sustained yield. The SYP
is subject to review and approval by the CDF, and there can be no assurance
that the SYP will be approved in its proposed form. Until the SYP is
reviewed and approved, Pacific Lumber is unable to predict the impact that
these regulations will have on Pacific Lumber's future timber harvesting
practices. It is possible that the results of the review and approval
process could require Pacific Lumber to reduce its timber harvest in future
years from the harvest levels set forth in the proposed SYP. Pacific Lumber
believes it would be able to mitigate the effect of any required reduction
in harvest level by acquisitions of additional timberlands (and making
corresponding amendments to the SYP); however, there can be no assurance
that Pacific Lumber would be able to do so and the amount of such
acquisitions would be limited by Pacific Lumber's available financial
resources. The Company is unable to predict the ultimate impact the
sustained yield regulations will have on Pacific Lumber's future financial
position, results of operations or liquidity.
Various groups and individuals have filed objections with the CDF
and the BOF regarding the CDF's and the BOF's actions and rulings with
respect to certain of Pacific Lumber's THPs and other timber harvesting
operations, and Pacific Lumber expects that such groups and individuals
will continue to file such objections. In addition, lawsuits are pending or
threatened which seek to prevent Pacific Lumber from implementing certain
of its approved THPs or which challenge other operations by Pacific Lumber.
These challenges have severely restricted Pacific Lumber's ability to
harvest old growth timber on its property. To date, challenges with
respect to Pacific Lumber's THPs relating to young growth timber and to its
other operations have been limited; however, no assurance can be given as
to the extent of such challenges in the future. The Company believes that
environmentally focused challenges to its timber harvesting and other
operations are likely to occur in the future, particularly with respect to
virgin and residual old growth timber. Although such challenges have
delayed or prevented Pacific Lumber from conducting a portion of its
operations, they have not had a material adverse effect on Pacific Lumber's
consolidated financial position, results of operations or liquidity.
Nevertheless, it is impossible to predict the future nature or degree of
such challenges or their ultimate impact on the consolidated financial
position, results of operations or liquidity of Pacific Lumber, and in turn
MGI and MGHI.
In early 1997, the Environmental Protection Agency ("EPA")
entered into a consent decree agreeing to establish limits on
sedimentation, temperature and other factors (i.e. non-point source total
maximum daily loadings, "TMDL") under the Federal Clean Water Act for
seventeen northern California rivers and certain of their tributaries,
including rivers within Pacific Lumber's timberlands. The TMDL scheme will
be primarily aimed at protecting fish habitat. It is impossible to predict
the ultimate impact this consent decree will have on Pacific Lumber's
consolidated financial position, results of operations or liquidity.
In June 1990, the USFWS designated the northern spotted owl as
threatened under the ESA. The owl's range includes all of Pacific Lumber's
timberlands. The ESA and its implementing regulations (and related
California regulations) generally prohibit harvesting operations in which
individual owls might be killed, displaced or injured or which result in
significant habitat modification that could impair the survival of
individual owls or the species as a whole. Since 1988, biologists have
conducted inventory and habitat utilization studies of northern spotted
owls on Pacific Lumber's timberlands. Pacific Lumber has developed and the
USFWS has given its full concurrence to a northern spotted owl management
plan (the "Federal Owl Plan"). The Federal Owl Plan, as amended from time
to time, is currently applicable through 1999 and the USFWS expressed its
agreement that operations consistent with the Federal Owl Plan would not
result in the taking of any owls. Pacific Lumber has also developed a
Spotted Owl Resource Plan (the "State Owl Plan"), and the California
Department of Fish and Game has expressed its agreement that operations
consistent with the State Owl Plan would not result in the taking of any
owls. By incorporating the Federal Owl Plan or State Owl Plan into each
THP filed with the CDF, Pacific Lumber is able to expedite the approval
time with respect to its THPs. The plaintiffs in the Marbled Murrelet
action have requested and received injunctive relief with respect to
certain THPs involving the Federal Owl Plan. See Item 3."Legal Proceedings-
- -Pacific Lumber Litigation." Both federal and state agencies continue to
review and consider possible additional regulations regarding the northern
spotted owl. It is uncertain if such additional regulations will become
effective or their ultimate content or impact on Pacific Lumber.
Laws, regulations and related judicial and administrative
interpretations dealing with Pacific Lumber's operations are subject to
change and new laws and regulations are frequently introduced concerning
the California timber industry. From time to time, bills are introduced in
the California legislature and the U.S. Congress which relate to the
business of Pacific Lumber, including the protection and acquisition of old
growth and other timberlands, endangered species, environmental protection,
air and water quality, and the restriction, regulation and administration
of timber harvesting practices. It is impossible to predict the content of
any such bills, the likelihood of any of the bills passing or the impact of
any of these bills on the future liquidity, consolidated financial position
or operating results of Pacific Lumber. Furthermore, any bills which are
passed are subject to executive veto and court challenge. In addition to
existing and possible new or modified statutory enactments, regulatory
requirements and administrative and legal actions, the California timber
industry remains subject to potential California or local ballot
initiatives and evolving federal and California case law which could affect
timber harvesting practices. It is impossible, however, to assess the
effect of such matters on Pacific Lumber's consolidated financial position,
operating results or liquidity.
HEADWATERS AGREEMENT
On September 28, 1996, Pacific Lumber (on behalf of itself, its
subsidiaries and affiliates) and MAXXAM (collectively, "the Pacific Lumber
Parties") entered into the Headwaters Agreement with the United States and
California. The Headwaters Agreement provides the framework for the
acquisition by the United States and California of certain timberlands of
Pacific Lumber.
The Headwaters Agreement requires the parties to use their
respective best, good faith efforts to achieve certain items (the
"Specified Items"). The Specified Items include the transfer to the United
States and California of approximately 5,600 acres of Pacific Lumber's
timberlands commonly referred to as the Headwaters Forest and the Elk Head
Springs Forest and related buffer zones (respectively, the "Headwaters
Forest" and the "Elk Head Forest" and, collectively, the "Headwaters
Timberlands"). A substantial portion of the Headwaters Timberlands
consists of virgin old growth timberlands. Approximately 4,900 of these
acres are owned by Salmon Creek. The remaining acreage is owned by Scotia
Pacific (Pacific Lumber having harvesting rights on a portion of the
acreage).
The Headwaters Timberlands would be transferred in exchange for
(a) property and other consideration (possibly including cash) from both
the United States and California having an aggregate fair market value of
$300 million and (b) 7,755 acres of adjacent timberlands to be acquired by
the United States and California from a third party (the "Elk River
Timberlands"). The United States and California would also acquire and
retain an additional 1,900 acres of timberlands from such third party. An
additional Specified Item is the expedited development and submission by
Pacific Lumber and processing by the United States of an incidental take
permit ("Permit") to be based upon a habitat conservation plan for multiple
species ("Multi-Species HCP") covering (a) the timberlands and timber
harvesting rights which Pacific Lumber will own after consummation of the
Headwaters Agreement (the "Resulting Pacific Lumber Timber Property") and
(b) the Headwaters Timberlands and the 1,900 acres of Elk River Timberlands
retained by the United States and California (both as conserved habitat).
The agreement also requires expedited processing by California of an SYP
covering the Resulting Pacific Lumber Timber Property. The Headwaters
Agreement contains various provisions regarding the processing of the
Multi-Species HCP, the Permit and the SYP. The Specified Items also
require, among other things, dismissal with prejudice at closing of the
Takings Litigation pending against the United States and California. See
Item 3. "Legal Proceedings--Pacific Lumber Litigation." Pursuant to the
Headwaters Agreement, the parties have stayed the Takings Litigation,
subject to certain rights of the parties to terminate the stay.
The Headwaters Agreement also requires the United States and/or
California to provide to Pacific Lumber a list of property interests owned
or controlled by the United States and/or California meeting certain
conditions, including that they have a good faith estimated fair market
value equal to or in excess of $300 million. On December 5, 1996, the
United States and California each furnished a list of properties for
Pacific Lumber's review and approval. Neither list was accompanied by the
requisite background information, although both lists did indicate that
additional information would be made available. The list of United States
properties consisted of oil and gas interests in Kern County, California,
approximately 3,000 acres of young growth timberlands in Humboldt,
Mendocino and Trinity Counties in California, and surplus acreage next to a
federal office building in Laguna Niguel, California. In February 1997,
after full and careful consideration, Pacific Lumber notified California
that its Presented Properties were not acceptable due to, among other
things, various physical problems and encumbrances on the properties,
certain properties having been withdrawn by the state and public opposition
to the transfer of some of the properties. Pacific Lumber also advised
California that it should proceed with the steps necessary to assure that
California can provide cash for its portion of the consideration to be paid
to Pacific Lumber. There have been ongoing discussions between the Pacific
Lumber Parties and the United States regarding the properties or other
consideration to be furnished by the United States.
As part of the Headwaters Agreement, the Pacific Lumber Parties
agreed to not enter the Headwaters Forest or the Elk Head Forest to conduct
logging operations, including salvage logging (the "Moratorium"). The
Moratorium was to terminate if by July 28, 1997 the parties had not
achieved the Specified Items to their respective satisfaction. On March
11, 1997, the Pacific Lumber Parties agreed to amend the Headwaters
Agreement to extend the period of time during which these closing
conditions must be met to February 17, 1998. The extension is, however,
subject to the achievement of certain milestones toward completion of the
Headwaters Agreement. The parties have agreed to execute an amendment to
the Headwaters Agreement evidencing these modifications.
Closing of the Headwaters Agreement is subject to various
conditions, including (a) completion of the Specified Items, (b) approval
of a Multi-Species HCP and SYP and issuance of the Permit, each in form and
substance satisfactory to Pacific Lumber, (c) the issuance by the Internal
Revenue Service and the California Franchise Tax Board of closing
agreements in form and substance sought by and satisfactory to the Pacific
Lumber Parties, (d) the absence of a judicial decision in any litigation
brought by third parties that any party reasonably believes will
significantly delay or impair the transactions described in the Headwaters
Agreement, and (e) approval by the boards of directors of the applicable
Pacific Lumber Parties. The Headwaters Agreement also provides that the
parties will cooperate and act in good faith to preserve diligently the
Headwaters Agreement, the Multi-Species HCP, the Permit and the SYP against
third party challenge. The parties to the Headwaters Agreement are working
to satisfy these conditions; however, there can be no assurance that the
Headwaters Agreement will be consummated.
LEGAL PROCEEDINGS
See "Legal Proceedings--Pacific Lumber Litigation" for a
description of certain legal proceedings in which Pacific Lumber is
involved and "Legal Proceedings--USAT Matters" for a description of the
Martel action in which MGI is involved.
REAL ESTATE AND OTHER OPERATIONS
REAL ESTATE AND RESORT OPERATIONS
General
The Company, principally through its wholly owned subsidiaries,
is also engaged in the business of residential and commercial real estate
investment and development, primarily in Arizona, California, Texas and
Puerto Rico. At December 31, 1996, the Company had approximately $18.2
million of outstanding receivables derived from the financing of real
estate sales in its land developments and may continue to finance real
estate sales in the future. As of December 31, 1996, these receivables had
a weighted average interest rate of approximately 9.6%, a weighted average
maturity of less than three years and average borrower equity of
approximately 54%. As of December 31, 1996, the Company also held $1.4
million of other receivables as a portion of the RTC Portfolio (as defined
below).
Principal Properties
Palmas del Mar. Palmas del Mar, a resort located on the
southeastern coast of Puerto Rico near Humacao ("Palmas"), was acquired
by a subsidiary of the Company in 1984. Palmas consists of approximately
1,900 acres of undeveloped land, 104 condominiums utilized in its
time-sharing program (comprising 5,300 time-share intervals, of which
approximately 1,258 remain to be sold), a 102-room hotel and adjacent
executive convention center known as the Candelero Hotel, a 23-room luxury
hotel known as the Palmas Inn, a casino, a Gary Player-designed 18-hole
golf course, 20 tennis courts, golf and tennis pro shops, restaurants,
beach and pool facilities, an equestrian center and a marina. The
Candelero Hotel, approximately 1,300 private residences, a marina and
certain other facilities are owned by third parties, and certain of these
facilities are operated by third parties. Since 1985, subsidiaries of
MAXXAM have been actively engaged in the development and sale of
condominiums, estate lots and villas.
During 1996, Palmas del Mar Properties, Inc. ("PDMPI"), the
subsidiary through which the Company conducts its Palmas operations, sold
20 condominiums, 219 time-share intervals, one residential lot and 727
time-share conversions for an aggregate of $9.6 million. In addition, on
December 20, 1996, PDMPI completed the sale of the Candelero Hotel and
certain other assets of Palmas for a purchase price of $7.6 million to
BlueWater Palmas Ltd. ("BlueWater"), an affiliate of the Talon Group, Inc.
The Candelero Hotel and certain other current or former assets of Palmas
are being managed for BlueWater and PDMPI by an affiliate of Wyndham hotels.
PDMPI will continue to receive royalty payments from BlueWater, for a period
of 49 years, equal to 3% of the gross revenues from the Candelero Hotel and
a percentage of gross revenues from certain other assets. During 1995,
PDMPI sold 31 condominium units and 65 time-share intervals. Additionally,
PDMPI completed a sale and leaseback transaction on July 14, 1995 of 33
furnished condominium units for approximately $8.4 million.
Palmas Country Club, Inc. ("PCCI"), a subsidiary of PDMPI, owns
the Palmas Country Club which consists of the golf course at Palmas, a
clubhouse, tennis courts and other facilities. PCCI has entered into a
$12.5 million loan agreement, the proceeds of which will be used to construct
an additional golf course, a new clubhouse and related facilities. An
additional $2.5 million can be borrowed if certain financial tests are met.
The loan is currently secured by the existing facilities and the land on
which the additional golf course is being built. The new golf course,
clubhouse and other facilities will also serve as security for the loan,
provided that at the time the new facilities are completed, certain of the
existing facilities will be released as security for the loan.
Fountain Hills. In 1968, a subsidiary of MAXXAM purchased and
began developing approximately 12,100 acres of real property at Fountain
Hills, Arizona, which is located near Phoenix and adjacent to Scottsdale,
Arizona. As of December 31, 1996, Fountain Hills had approximately 3,660
acres of undeveloped residential land, 81 developed commercial and
industrial lots, 81 acres of undeveloped commercial and industrial land and
165 developed residential lots available for sale. The population of
Fountain Hills is approximately 15,000. The Company is planning the
development of certain of the remaining acreage at Fountain Hills. Future
sales are expected to consist mainly of undeveloped acreage, semi-developed
parcels and fully-developed lots, although Company subsidiaries may engage
in limited construction and direct sale of residential units. During 1996,
67 residential lots, 20 commercial parcels and 2 acres were sold for an
aggregate of $7.5 million. During 1995, 115 residential lots, 22
commercial parcels and 103 acres were sold for an aggregate of $14.5
million. These sales figures do not include those arising from the
SunRidge Canyon development described in the following paragraph.
In 1994 a subsidiary of the Company entered into a joint venture
to develop 950 acres in Fountain Hills in an area known as SunRidge Canyon.
The development is a residential golf-oriented, upscale master-planned
community. The project includes 950 acres, of which 185 have been
developed into a championship-quality, public golf course which opened for
play in November 1995. The remaining 765 acres are being developed into
approximately 860 single family lots. Sales of the individual lots began
in November 1995. The project consists of both custom lots, marketed on an
individual basis, and production lots, marketed to home builders. There
are currently five homebuilders actively involved in the construction and
sale of new homes within SunRidge Canyon. During 1996, 39 custom lots and
70 production lots were sold for an aggregate of $8.9 million. Nine custom
lots and three production lots were sold during 1995 for an aggregate of
$1.4 million. The development is being done by SunRidge Canyon L.L.C., an
Arizona limited liability company organized by a subsidiary of the Company
and SunCor Development Company. A subsidiary of the Company holds a 50%
equity interest in the joint venture.
The Company intends to continue development of its remaining
acreage at Fountain Hills in a manner that will allow it to maintain recent
sales levels, although there can be no assurance that it will be able to do
so.
Texas. In June 1991, a wholly owned subsidiary of MAXXAM
purchased from the Resolution Trust Corporation at an auction, for
approximately $122.3 million, a portfolio of 27 parcels of income producing
real property and 28 loans secured by real property (the "RTC Portfolio").
Substantially all of the real property was located in Texas, with the
largest concentration in the vicinities of San Antonio, Houston, Austin and
Dallas. From 1992 to December 31, 1996, an aggregate of approximately
$41.7 million in loans (which represented thirteen loans) were sold or paid
off and thirty-six properties (including fourteen acquired via foreclosure)
were sold for aggregate consideration of approximately $182.4 million.
These transactions resulted in aggregate gains of $97.3 million. As of
December 31, 1996, two loans resulting from property sales and six
properties (including one acquired via foreclosure) were held, which had an
aggregate net book value of $15.7 million. One property within this
portfolio has subsequently been sold for $4.5 million, resulting in a gain
of $2.5 million and net cash proceeds of $4.3 million. All of the
remaining assets are being marketed for sale.
Lake Havasu City. In 1963, a subsidiary of the Company purchased
and began developing approximately 16,700 acres of real property at Lake
Havasu City, Arizona, which were offered for sale in the form of subdivided
single and multiple family residential, commercial and industrial sites.
The Company has sold substantially all of its lot inventory in Lake Havasu
City and is currently planning the marketing of the remaining 137 acres.
Rancho Mirage. In 1991, a subsidiary of the Company acquired
Mirada, a 195-acre luxury resort-residential project located in Rancho
Mirage, California. Mirada is a master planned community built into the
Santa Rosa Mountains, 650 feet above the Coachella Valley floor. Two of
the five parcels have been developed, one of which is a custom lot
subdivision of 46 estate lots with home prices ranging from $1.5 million to
$3.0 million. The Ritz-Carlton Rancho Mirage Hotel is located in the
development. The three remaining parcels encompass approximately 130 acres
with entitlements allowing a variety of residential options. The Company is
currently marketing the project's 23 fully-developed lots.
Other. The Company through its subsidiaries, owns a number of
other properties in Arizona, New Mexico, Texas and Colorado. Efforts are
underway to sell most of these properties. Most notably, in April 1996,
the Company sold the 1,600-acre Vail Valley Ranch project and Del Lago
Water Company near Tucson, Arizona, for an aggregate of $6.0 million.
Marketing
The Company is engaged in marketing and sales programs of varying
magnitudes at its real estate developments. In recent years, the Company
has constructed residential units and sold time-share intervals at certain
of its real estate developments. The Company intends to continue selling
land to builders and developers and lots to individuals and expects to
continue to construct and sell completed residential units at certain of
its developments. It also expects to sell certain of its commercial real
estate assets. All sales are made directly to purchasers through the
Company's marketing personnel, independent contractors or through
independent real estate brokers who are compensated through the payment of
customary real estate brokerage commissions.
Competition and Regulation and Other Industry Factors
There is intense competition among companies in the real estate
investment and development business. Sales and payments on real estate
sales obligations depend, in part, on available financing and disposable
income and, therefore, are affected by changes in general economic
conditions and other factors. The real estate development business and
commercial real estate business are subject to other risks such as shifts
in population, fluctuations in the real estate market, and unpredictable
changes in the desirability of residential, commercial and industrial
areas. The resort and time-sharing business of Palmas competes with
similar businesses in the Caribbean, Florida and other locations.
The Company's real estate operations are subject to comprehensive
federal, state and local regulation. Applicable statutes and regulations
may require disclosure of certain information concerning real estate
developments and credit policies of the Company and its subsidiaries.
Periodic approval is required from various agencies in connection with the
design of developments, the nature and extent of improvements, construction
activity, land use, zoning, and numerous other matters. Failure to obtain
such approval, or periodic renewal thereof, could adversely affect the real
estate development and marketing operations of the Company and its
subsidiaries. Various jurisdictions also require inspection of properties
by appropriate authorities, approval of sales literature, disclosure to
purchasers of specific information, bonding for property improvements,
approval of real estate contract forms and delivery to purchasers of a
report describing the property.
Employees
As of March 1, 1997, the Company's real estate operations had
approximately 160 employees.
SAM HOUSTON RACE PARK
General
In July 1993, MAXXAM, through subsidiaries, acquired various
interests in SHRP, Ltd., a Texas limited partnership which owns and
operates Sam Houston Race Park (the "Race Park"), a Texas Class 1 horse
racing facility located within the greater Houston metropolitan area. On
January 15, 1995, SHRP, Ltd. defaulted on the $4.4 million semi-annual
interest payment due on its 11-3/4% Senior Secured Notes. On April 17,
1995, the Debtors, consisting of SHRP, Ltd. and two affiliated entities,
filed voluntary petitions, each seeking to reorganize under the provisions
of Chapter 11 of the United States Bankruptcy Code. On September 22, 1995,
the Bankruptcy Court confirmed the Debtors' plan of reorganization (the
"Plan") and on October 6, 1995, the transactions called for by the Plan
were completed.
The Plan provided for, among other things, a significant
modification of SHRP, Ltd.'s 11-3/4% Senior Secured Notes (the "Original
Notes" and, as modified, the "Extendible Notes"), an additional capital
infusion and a reorganization of SHRP, Ltd. The Extendible Notes have an
aggregate initial principal amount of $37.5 million, mature on September 1,
2001 and bear interest at the rate 11% per annum. The maturity date of the
Extendible Notes may be extended to September 1, 2003 (with an increase in
the rate of interest to 13% per annum) if the Texas legislature passes
significant gaming legislation (as defined) between January 1, 2001 and
August 15, 2001. Interest on the Extendible Notes will accrue in-kind and
will not be payable in cash until a certain level of cash flow from
operations has been achieved. Once cash interest payments commence,
interest payments may not thereafter be paid in-kind.
The New SHRP Investor Group made a capital contribution of cash
in the aggregate amount of $5.9 million (wholly owned subsidiaries of
MAXXAM contributed $5.8 million). Additionally, a wholly owned subsidiary
of MAXXAM contributed to SHRP, Ltd. an adjoining approximately 87 acre
tract of land (having a fair market value of $2.3 million). A wholly owned
subsidiary of MAXXAM is the new managing general partner of SHRP, Ltd.
Each member of the New SHRP Investor Group provided its pro rata share of a
$1.7 million line of credit, should the initial cash contributed to SHRP,
Ltd. prove insufficient to fund the future operating and working capital
requirements of SHRP, Ltd. MAXXAM has guaranteed its subsidiaries' share
of the line of credit, which totaled $1.6 million. The Company has
subsequently purchased certain of the Extendible Notes and the
corresponding shares of common stock of SHRP Equity, Inc. (a Delaware
corporation and an additional general partner of the reorganized SHRP,
Ltd.). After giving effect to these transactions, wholly owned
subsidiaries of MAXXAM hold, directly or indirectly, approximately 88.5% of
the equity in the reorganized SHRP, Ltd.
See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and Investing and
Financing Activities--Real Estate and Other Operations--Investing" for
information concerning the projected losses of SHRP, Ltd. for the next two
years.
Racing Operations and Race Park Facilities
The Race Park offers pari-mutuel wagering on live thoroughbred or
quarter horse racing or simulcast racing generally seven days a week
throughout the year. Simulcasting is the process by which live races held
at one facility are broadcast simultaneously to other locations at which
additional wagers are placed on the race being broadcast. The Race Park's
principal sources of revenue are its statutory and contractual share of
total wagering on live and simulcast racing. The Race Park also derives
revenues from admission fees, food services, club memberships, luxury
suites, advertising sales and other sources. The Race Park is located on
approximately 300 acres of land in northwest Harris County approximately 18
miles from the Houston central business district and approximately 15 miles
from Houston Intercontinental Airport.
Regulation of Racing Operations
The ownership and operation of horse racetracks in Texas are
subject to significant regulation by the Texas Racing Commission (the
"Racing Commission") under the Texas Racing Act and related regulations
(collectively, the "Racing Act"). The Racing Act provides, among other
things, for the allocation of wagering proceeds among betting participants,
horsemen's purses, racetracks, the State of Texas and for other purposes,
and empowers the Racing Commission to license and regulate substantially
all aspects of horse racing in the state. The Racing Commission must
approve the number of live race days that may be offered at the Race Park
each year, as well as all simulcast agreements. Class 1 racetracks in
Texas are entitled to conduct at least seventeen weeks of live racing for
each breed of horses (thoroughbreds and quarter horses).
Marketing and Competition
The Race Park believes that the majority of the patrons for the
Race Park reside within a 50-mile radius of the Race Park, which includes
the greater Houston metropolitan area, and that a secondary market of
occasional patrons can be developed outside the 50-mile radius but within a
100-mile radius of the Race Park. The Race Park uses a number of marketing
strategies in an attempt to reach these people and make them more frequent
visitors to the Race Park. The Race Park competes with other forms of
entertainment, including casinos located approximately 125 to 150 miles
from Houston, a greyhound racetrack located 60 miles from the Race Park and
a wide range of sporting events and other entertainment activities in the
Houston area. The Race Park could in the future also compete with other
forms of gambling in Texas, including casino gambling on Indian
reservations or otherwise. While the Race Park believes that the location
of the Race Park is a competitive advantage over the other more distant
gaming ventures mentioned above, the most significant challenge for the
Race Park is to develop and educate new racing fans in a market where
pari-mutuel wagering has been absent since the 1930's. Other competitive
factors faced by the Race Park include the allocation of sufficient live
race days by the Racing Commission and attraction of sufficient race
horses to run at the Race Park. The Race Park had 146 days of live racing
during 1996. The Race Park currently has 134 days of live racing scheduled
for 1997.
EMPLOYEES
At March 1, 1997, MAXXAM and its subsidiaries employed
approximately 2,040 persons, exclusive of those involved in Aluminum
Operations.
ITEM 2. PROPERTIES
For information concerning the principal properties of the
Company, see Item 1. "Business."
ITEM 3. LEGAL PROCEEDINGS
GENERAL
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.
The following describes certain legal proceedings in which the
Company or its subsidiaries are involved. The Company and certain of its
subsidiaries are also involved in various claims, lawsuits and other
proceedings not discussed herein which relate to a wide variety of matters.
Uncertainties are inherent in the final outcome of those and the
below-described matters and it is presently impossible to determine the
actual costs that ultimately may be incurred. Nevertheless, the Company
believes (unless otherwise indicated herein) 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. However, there can be no assurance that there
will not be adverse determinations or settlements in one or more of the
matters identified below or other proceedings that could have a material
adverse effect on the Company's financial condition, results of operations
and liquidity.
Certain present and former directors and officers of the Company
are defendants in certain of the actions described below. 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.
MAXXAM INC. LITIGATION
This section describes certain legal proceedings in which MAXXAM
Inc. (and in some instances, certain of its subsidiaries) is involved. The
term "Company," as used in this section, refers to MAXXAM Inc., except
where reference is made to the Company's consolidated financial position,
results of operations or liquidity.
USAT MATTERS
In October 1994, the Company learned that the United States
Department of Treasury's Office of Thrift Supervision ("OTS") had commenced
an investigation into United Financial Group, Inc. ("UFG") and the
insolvency of its wholly owned subsidiary, United Savings Association of
Texas ("USAT"). In December 1988, the Federal Home Loan Bank Board
("FHLBB") placed USAT into receivership and appointed the Federal Savings &
Loan Insurance Corp. as receiver. At the time of the receivership, the
Company owned approximately 13% of the voting stock of UFG.
On December 26, 1995, the OTS initiated a formal administrative
proceeding (the "OTS action") against the Company and others by filing a
Notice of Charges (No. AP 95-40; the "Notice"). The Notice alleges, among
other things, misconduct by the Company, Federated Development Company
("Federated"), Mr. Charles Hurwitz and others (the "respondents") with
respect to the failure of USAT. Mr. Hurwitz is the Chairman of the Board,
Chief Executive Officer and President of the Company. Mr. Hurwitz is also
the Chairman of the Board and Chief Executive Officer of Federated, a New
York business trust wholly owned by Mr. Hurwitz, members of his immediate
family and trusts for the benefit thereof. Mr. Hurwitz and a wholly owned
subsidiary of Federated collectively own approximately 61.1% of the
aggregate voting power of the Company. The Notice claims that the Company
was a savings and loan holding company, that with others it controlled
USAT, and that, as a result of such status and agreements with the FHLBB,
it was obligated to maintain the net worth of USAT. The Notice makes
numerous other allegations against the Company and the other respondents,
including that through USAT it was involved in prohibited transactions with
Drexel, Burnham, Lambert Inc. ("Drexel"). The OTS, among other things,
seeks unspecified damages in excess of $138.0 million from the Company and
Federated, civil money penalties from certain respondents and restitution
and reimbursement of certain losses as well as a removal from, and
prohibition against the Company and the other respondents engaging in, the
banking industry. The date for the hearing on the merits is scheduled for
September 22, 1997. It is impossible to predict the ultimate outcome of
the foregoing matter or its potential impact on the Company's consolidated
financial position, results of operations or liquidity. See also the
description of the FDIC action and the Martel action below.
In a separate but related matter, on December 7, 1995, the
Company filed a petition for review in the U.S. Fifth Circuit Court of
Appeals alleging various statutory violations by certain predecessor
agencies to the OTS and seeking to modify, terminate or set aside the
December 30, 1988 order awarding the bid to acquire USAT to a bidder whose
bid was more costly to the government and taxpayers. The action was
entitled MAXXAM Inc. v. Office of Thrift Supervision, Department of the
Treasury (No. 95-60753). By order dated December 10, 1996, the U.S. Fifth
Circuit Court of Appeals denied the Company's petition for review and
denied any relief to the Company.
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
(the "FDIC action") in the U.S. District Court for the Southern District of
Texas (No. H-95-3956). The original complaint was against Mr. Hurwitz and
sought damages in excess of $250.0 million based on the allegation that Mr.
Hurwitz was a controlling shareholder, de facto senior officer and director
of USAT, and was involved in certain decisions which contributed to the
insolvency of USAT. The original complaint further alleged, among other
things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and
MAXXAM maintained the net worth of USAT. This action did not name the
Company as a defendant. The Court has joined the OTS as a party to the
FDIC action and granted the motions to intervene filed by the Company and
three other respondents in the OTS action. The OTS is seeking to be
dismissed from the FDIC action. On January 15, 1997, the FDIC filed an
amended complaint which seeks, conditioned on the OTS prevailing in the OTS
action, unspecified damages from Mr. Hurwitz relating to amounts the OTS
does not collect from the Company and Federated with respect to alleged
obligations to maintain USAT's net worth. It is impossible to predict the
ultimate outcome of the foregoing matter or its potential impact on the
Company's consolidated financial position, results of operations or
liquidity.
In January 1995, an action entitled U.S., ex rel., Martel v.
Hurwitz, et al. (the "Martel action") was filed in the U.S. District Court
for the Northern District of California (No. C950322) and names as
defendants the Company, Mr. Hurwitz, MGI, Federated, UFG and a former
director of the Company. This action is purportedly brought by plaintiff on
behalf of the U.S. government; however, the U.S. government has declined to
participate in the suit. The suit alleges that defendants made false
statements and claims in violation of the Federal False Claims Act in
connection with USAT. Plaintiff alleges, among other things, that
defendants used the federally insured assets of USAT to acquire junk bonds
from Michael Milken and Drexel and that, in exchange, Mr. Milken and Drexel
arranged financing for defendants' various business ventures, including the
acquisition of Pacific Lumber. Plaintiff alleges that USAT became
insolvent in 1988 and that the defendants should be required to pay $1.6
billion (subject to trebling) to cover USAT's losses. The Company's
alleged portion of such damages has not been specified. Plaintiff seeks,
among other things, that the Court impose a constructive trust upon the
fruits of the alleged improper use of USAT funds. In August 1996, the
Court transferred this matter (No. 96-CV-1164) to the court handling the
FDIC action. The parties are awaiting a ruling or hearing on defendants'
motion to dismiss.
ZERO COUPON NOTE LITIGATION
In April 1989, an action was filed against MAXXAM, MGI, MAXXAM
Properties Inc. ("MPI"), a wholly owned subsidiary of MGI, and certain of
the Company's directors in the Court of Chancery of the State of Delaware,
entitled Progressive United Corporation v. MAXXAM Inc., et al. (No. 10785).
Plaintiff purports to bring this action as a stockholder of the Company
derivatively on behalf of the Company and MPI. In May 1989, a second
action containing substantially similar allegations was filed in the Court
of Chancery of the State of Delaware, entitled Wolf v. Hurwitz, et al. and
the two cases were consolidated (under case No. 10785; collectively, the
"Zero Coupon Note actions"). The Zero Coupon Note actions relate to a Put
and Call Agreement entered into between MPI and Mr. Hurwitz, as well as a
predecessor agreement (the "Prior Agreement"). Among other things, the Put
and Call Agreement provided that Mr. Hurwitz had the option (the "Call") to
purchase from MPI certain notes (or the Company's common stock into which
they were converted) for $10.3 million. In July 1989, Mr. Hurwitz exercised
the Call and acquired 990,400 shares of the Company's common stock. The
Zero Coupon Note actions generally allege that in entering into the Prior
Agreement Mr. Hurwitz usurped a corporate opportunity belonging to the
Company, that the Put and Call Agreement constituted a waste of corporate
assets of the Company and MPI, and that the defendant directors breached
their fiduciary duties in connection with these matters. Plaintiffs seek to
have the Put and Call Agreement declared null and void, among other
remedies.
RANCHO MIRAGE LITIGATION
In May 1991, a derivative action entitled Progressive United
Corporation v. MAXXAM Inc., et al. (No. 12111) (the "Progressive United
action") was filed in the Court of Chancery, State of Delaware against the
Company, Federated, certain of the Company's directors and MCO Properties
Inc., a subsidiary of the Company ("MCOP"). The action alleges abuse of
control and breaches of fiduciary obligations based on, and unfair
consideration for, the Company's Agreement in Principle with Federated to
(a) forgive payments of principal and interest of approximately $32.2
million due from Federated under two loan agreements entered into between
MCOP and Federated in 1987 (and later assigned by MCOP to the Company), and
(b) grant an additional $11.0 million of consideration to Federated, in
exchange for certain real estate assets valued at approximately $42.9
million in Rancho Mirage, California, held by Federated (the "Mirada
transactions"). Plaintiff seeks, among other things, an accounting under
the loan agreements, repayment of any losses or damages suffered by the
Company or MCOP, costs and attorneys fees.
The following six additional lawsuits, similar to the Progressive
United action, were filed in 1991 and 1992 in Delaware Chancery Court
challenging the Mirada transactions: NL Industries, et al. v. MAXXAM Inc.,
et al. (No. 12353) (the "NL Industries action"); Kahn, et al. v. Federated
Development Company, et al. (No. 12373); Thistlethwaite, et al. v. MAXXAM
Inc., et al. (No. 12377) (the "Thistlethwaite action"); Glinert, et al. v.
Hurwitz, et al. (No. 12383); Friscia, et al. v. MAXXAM Inc., et al. (No.
12390); and Kassoway, et al. v. MAXXAM Inc., et al. (No. 12404). The Kahn,
Glinert, Friscia and Kassoway actions have been consolidated with the
Progressive United action into In re MAXXAM Inc./Federated Development
Shareholders Litigation (No. 12111); the NL Industries action has been
"coordinated" with the consolidated actions; and the Thistlethwaite action
has been stayed pending the outcome of the consolidated actions. In January
1994, a derivative action entitled NL Industries, Inc., et al. v. Federated
Development Company, et al. (No. 94-00630) was filed in the District Court
of Dallas County, Texas, against the Company (as nominal defendant) and
Federated. This action contains allegations and seeks relief similar to
that contained in the In re MAXXAM Inc./Federated Development Shareholders
Litigation. The parties have agreed to stay this action in light of the In
re MAXXAM Inc./Federated Development Shareholders Litigation. With respect
to the In re MAXXAM Inc./Federated Development Shareholders Litigation, on
February 10, 1995, the Court issued its decision disapproving a previously
announced proposed settlement and on June 23, 1995, the Court denied
defendants' motion to dismiss certain of plaintiffs' claims. This matter
was tried before the Court commencing January 29, 1996. The Court held a
hearing on April 2, 1996 on various trial-related matters, including
defendants' motion to dismiss the claims relating to the 1987 loan
transactions. On August 14, 1996, the Court heard final oral argument on
the merits of the case, but has not issued its decision. By order dated
September 6, 1996, the Court denied defendants' motion to dismiss the 1987
loan claims and granted plaintiffs' motion to intervene and substitute a
new plaintiff to cure standing problems concerning plaintiffs' 1987 loan
claims. Based on post-trial briefs, plaintiffs have indicated they are
seeking $49 million in damages from the director defendants.
KAISER LITIGATION
ENVIRONMENTAL LITIGATION
Aberdeen Pesticide Dumps Site Matter
The Aberdeen Pesticide Dumps Site, listed on the Superfund
National Priorities List, is composed of five separate sites around the
town of Aberdeen, North Carolina (collectively, the "Sites"). The Sites are
of concern to the United States Environmental Protection Agency (the "EPA")
because of their past use as either pesticide formulation facilities or
pesticide disposal areas from approximately the mid-1930's through the late
1980's. The United States originally filed a cost recovery complaint (as
amended, the "Complaint") in the United States District Court for the
Middle District of North Carolina, Rockingham Division, No. C-89-231-R,
which, as amended, includes KACC and a number of other defendants. The
Complaint seeks reimbursement for past and future response costs and a
determination of liability of the defendants under Section 107 of CERCLA.
In 1993 and 1994, the EPA issued unilateral Administrative Orders
under Section 106(a) of CERCLA ordering the respondents, including KACC, to
perform soil remedial design and remedial action and groundwater
remediation for three of the Sites. In addition to KACC, a number of other
companies are also named as respondents. KACC has entered into interim PRP
Participation Agreements with certain of the respondents (the "Aberdeen
Site PRP Group" or the "Group") to participate jointly in responding to the
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
United States District Court.
In March 1997, certain members of the Group, including KACC,
entered into a Settlement Agreement and Participation Agreement which
allocates one hundred percent of all costs incurred or to be incurred for
work at each of the five Sites. Negotiations with the United States
Department of Justice ("DOJ") and the EPA concerning an acceptable consent
decree to resolve the outstanding litigation in whole or in part commenced
during the first quarter of 1997. Based on current estimates of future
costs, Kaiser believes that its aggregate financial exposure at these Sites
is less than $2.0 million.
United States of America v. Kaiser Aluminum & Chemical
Corporation
In February 1989, a civil action was filed by the DOJ at the
request of the EPA against KACC in the United States District Court for the
Eastern District of Washington, Case Number C-89-106-CLQ. The complaint
alleged that emissions from certain stacks at KACC's Trentwood facility in
Spokane, Washington, intermittently violated the opacity standard contained
in the Washington State Implementation Plan ("SIP"), approved by the EPA
under the federal Clean Air Act. KACC and the EPA, without adjudication of
any issue of fact or law, and without any admission of the violations
alleged in the underlying complaint, have entered into a Consent Decree,
which was approved by a Consent Order entered by the United States District
Court for the Eastern District of Washington in January 1996. As approved,
the Consent Decree settles the underlying disputes and requires KACC to (i)
pay a $.5 million civil penalty (which has been paid), (ii) complete a
program of plant improvements and operational changes that began in 1990 at
its Trentwood facility, including the installation of an emission control
system to capture particulate emissions from certain furnaces, and (iii)
achieve and maintain furnace compliance with the opacity standard in the
SIP. KACC anticipates that capital expenditures for the environmental
upgrade of the furnace operation at its Trentwood facility, including the
improvements and changes required by the Consent Decree, will be
approximately $20.0 million.
Catellus Development Corporation v. Kaiser Aluminum & Chemical
Corporation and James L. Ferry & Son, Inc.
In January 1991, the City of Richmond, et al. (the "Plaintiffs")
filed a Second Amended Complaint for Damages and Declaratory Relief against
the United States, Catellus Development Corporation ("Catellus") and other
defendants (collectively, the "Defendants") alleging, among other things,
that the Defendants caused or allowed hazardous substances to be discharged
or released on certain property located in Richmond, California (the
"Property") formerly owned by Catellus and leased to KACC for the purpose
of shipbuilding activities conducted by KACC on behalf of the United States
during World War II. The Plaintiffs sought recovery of response costs and
natural resource damages under CERCLA. Certain of the Plaintiffs alleged
that they had incurred or expect to incur costs and damages of
approximately $49.0 million. Catellus subsequently filed a third party
complaint (the "Third Party Complaint") against KACC in the United States
District Court for the Northern District of California, Case No. C-89-2935
DLJ. Thereafter, the Plaintiffs filed a separate complaint against KACC,
Case No. C-92-4176. The Plaintiffs settled their CERCLA and tort claims
against the United States for $3.5 million plus thirty-five percent (35%)
of future response costs.
The trial involving this case commenced in March 1995. During the
trial, Plaintiffs settled their claims against Catellus in exchange for
payment of approximately $3.3 million. On December 7, 1995, the United
States District Court issued a final judgment on those claims concluding
that KACC is liable for various costs and interest, aggregating
approximately $2.2 million, fifty percent (50%) of future costs of cleaning
up certain parts of the Property, and certain fees and costs associated
specifically with the claim by Catellus against KACC. KACC paid the City
of Richmond $1.8 million in partial satisfaction of this judgment. In
January 1996, Catellus filed a notice of appeal with respect to its
indemnity judgment against KACC. KACC has since filed a notice of cross
appeal as to the Court's decision adjudicating that KACC is obligated to
indemnify Catellus. On July 8, 1996, the Court issued an order awarding
Plaintiffs nominal costs, which amount has been paid. The order also
awarded Catellus de minimis costs. Catellus has filed a notice of appeal.
On August 12, 1996, the Court issued an order granting the Catellus motion
for attorneys' fees in the amount of approximately $.9 million. KACC and
Catellus have filed notices of appeal with respect to the attorneys' fees
award.
Asbestos-related Litigation
KACC is a defendant in a number of lawsuits, some of which
involve claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure to
asbestos during, and as a result of, their employment or association with
KACC or exposure to products containing asbestos produced or sold by KACC.
The lawsuits generally relate to products KACC has not manufactured for at
least 15 years. For a discussion of asbestos-related litigation, see Item
7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Financial Condition and Investing and Financing Activities--
Aluminum Operations--Asbestos Contingencies."
DOJ Proceedings
On August 24, 1994, the DOJ issued Civil Investigative Demand No.
11356 ("CID No. 11356") requesting information from Kaiser regarding (i)
its production, capacity to produce, and sales of primary aluminum from
January 1, 1991, to the date of the response; (ii) any actual or
contemplated reduction in its production of primary aluminum during that
period; and (iii) any communications with others regarding any actual,
contemplated, possible or desired reductions in primary aluminum production
by Kaiser or any of its competitors during that period. Kaiser believes
that its actions have at all times been appropriate, and KACC has submitted
documents and interrogatory answers to the DOJ responding to CID No. 11356.
On March 27, 1995, the DOJ issued Civil Investigative Demand No.
12503 ("CID No. 12503"), as part of an industry-wide investigation,
requesting information from KACC regarding (i) any actual or contemplated
changes in its method of pricing can sheet from January 1, 1994, through
March 31, 1995, (ii) the percentage of aluminum scrap and primary aluminum
ingot used by KACC to produce can sheet and the manner in which KACC's cost
of acquiring aluminum scrap is factored into its can sheet prices, and
(iii) any communications with others regarding any actual or contemplated
changes in its method of pricing can sheet from January 1, 1994, through
March 31, 1995. Kaiser believes that its actions have at all times been
appropriate, and KACC has submitted documents and interrogatory answers to
the DOJ responding to CID No. 12503. KACC was informed in November 1996
that the DOJ has officially closed its investigation of CID No. 12503, and
has returned the documents submitted by KACC.
OTHER PROCEEDINGS
Matheson, et al. v. Kaiser Aluminum Corporation, et al.
On March 19, 1996, a lawsuit was filed against the Company,
Kaiser and Kaiser's directors challenging and seeking to enjoin a proposed
recapitalization of Kaiser (the "Proposed Recapitalization"). See Note 7
to the Consolidated Financial Statements. The suit, which is entitled
Matheson, et al. v. Kaiser Aluminum Corporation, et al. (No. 14900) and was
filed in the Delaware Court of Chancery, alleges, among other things,
breaches of fiduciary duties by certain defendants and that the Proposed
Recapitalization violates Delaware law and the certificate of designations
for the outstanding preferred stock of Kaiser. On April 8, 1996, the
Delaware Court of Chancery issued a ruling which preliminarily enjoined
Kaiser from implementing the Proposed Recapitalization. On May 1, 1996,
Kaiser's stockholders approved the Proposed Recapitalization which was not
implemented at that time due to a pending appeal of the trial court's
ruling. On August 29, 1996, the Delaware Supreme Court upheld the
preliminary injunction and remanded the case to the Court of Chancery. On
September 24, 1996, the plaintiffs filed a motion to make permanent the
temporary injunction issued on April 8, 1996. On September 27, 1996,
Kaiser's Board of Directors adopted a resolution abandoning the Proposed
Recapitalization. On March 18, 1997, plaintiffs withdrew their motion for
a permanent injunction, leaving their fee application as the only issue for
the Court of Chancery to consider. On March 25, 1997, the Court of
Chancery awarded plaintiffs' attorneys' fees and expenses in the total
amount of $800,000. It is anticipated that the Court of Chancery will sign
an order approved as to form by all parties, awarding such fees,
dissolving the preliminary injunction, and dismissing plaintiffs' case with
prejudice. The decision to abandon the Proposed Recapitalization does not
preclude a recapitalization being proposed to the stockholders of Kaiser in
the future.
Hammons v. Alcan Aluminum Corp., et al.
In March 1996, a class action complaint was filed against KACC,
Alcan Aluminum Corp., Aluminum Company of America, Alumax, Inc., Reynolds
Metals Company and the Aluminum Association in the Superior Court of
California for the County of Los Angeles, Case No. BC145612. The complaint
claims that the defendants conspired, in violation of the California
Cartwright Act, in conjunction with a Memorandum of Understanding ("MOU")
entered into by representatives of Australia, Canada, the European Union,
Norway, the Russian Federation and the United States in 1994, to restrict
the production of primary aluminum resulting in increased prices for
primary aluminum and aluminum products. The complaint seeks certification
of a class consisting of persons who at any time between January 1, 1994,
and the date of the complaint purchased aluminum or aluminum products
manufactured by one or more of the defendants and estimates damages
sustained by the class to be $4.4 billion during the year 1994, before
trebling. Plaintiff's counsel has estimated damages to be $4.4 billion per
year for each of the two years the MOU was active, which when trebled
equals $26.4 billion. In April 1996 the case was removed to the United
States District Court for the Central District of California. In July 1996,
the Court granted summary judgment in favor of KACC and other defendants
and dismissed the complaint as to all defendants. In July 1996, the
plaintiff filed a notice of appeal to the United States Court of Appeals
for the Ninth Circuit.
Other Matters
Various other lawsuits and claims are pending against KACC. While
uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management believes that the resolution of such uncertainties and
the incurrence of such costs should not have a material adverse effect on
Kaiser's consolidated financial position, results of operations or
liquidity.
PACIFIC LUMBER LITIGATION
Various actions, similar to each other, have been filed against
the Company, MGI, Pacific Lumber and its subsidiaries, various state
officials and others, alleging, among other things, violations of the
Forest Practice Act, CEQA, ESA, CESA and/or related regulations. These
actions seek to prevent Pacific Lumber and its subsidiaries from harvesting
certain of their THPs and conducting certain other timber operations.
On September 15, 1995, an action entitled Marbled Murrelet, et
al. v. Bruce Babbitt, et al. (No. C-95-3261) (the "Marbled Murrelet
action") was filed in the U.S. District Court for the Northern District of
California. This action relates to, among other things, exemptions for
forest health which Pacific Lumber and its subsidiaries had previously
filed covering their entire timberlands. These exemptions allow Pacific
Lumber to harvest dead, dying or diseased trees ("exempt harvesting
operations"). As amended, the complaint alleges, among other things,
violations of the ESA, the National Environmental Protection Act ("NEPA")
and the Administrative Procedures Act ("APA"). Plaintiffs claim, among
other things, that the exempt harvesting operations will contribute to the
destruction of habitat for the marbled murrelet and the northern spotted
owl. After the U.S. Ninth Circuit Court of Appeals reversed a preliminary
injunction granted by the trial court enjoining the exempt harvesting
operations, the plaintiffs asked for leave to amend their pleadings. On
April 3, 1996, the trial court granted a preliminary injunction preventing
harvesting on eight already-approved THPs to the extent that they rely on
the Federal Owl Plan. In addition to appealing the preliminary injunction,
Pacific Lumber has obtained regulatory reapproval of seven of the eight
enjoined THPs without reliance on the Federal Owl Plan and has, to date,
confirmed with the trial court that six of those THPs are not subject to
the preliminary injunction. On November 4, 1996, the U.S. Ninth Circuit
Court of Appeals heard oral arguments concerning Pacific Lumber's appeal
but has not yet rendered a decision on this matter. In January 1997, the
trial court dismissed plaintiffs' claims that Pacific Lumber had and was
causing "takes" of the marbled murrelet and northern spotted owl.
See Item 1. "Business--Forest Products Operations--Pacific Lumber
Operations--Regulatory and Environmental Factors" above for a description
of regulatory and similar matters which could affect Pacific Lumber's
timber harvesting practices and future operating results.
The EPIC, et al. v. California State Board of Forestry, et al.
(No. 91CP244) action in the Superior Court of Humboldt County, filed by the
Sierra Club and the Environmental Protection Information Center ("EPIC") in
1991, relates to a THP for approximately 237 acres of virgin old growth
timber. After the Superior Court reversed the BOF's approval of this THP,
certain modifications were made to the THP, which was then unanimously
approved by the BOF. The Superior Court later issued judgment in favor of
Pacific Lumber. On appeal, the Court of Appeal in October 1993 affirmed the
trial court's judgment approving harvesting under this THP. In April 1993,
EPIC filed another action with respect to this THP entitled EPIC, Marbled
Murrelet, et al. v. Bruce Babbitt, Secretary, Department of Interior, et
al. (No. C93-1400) (the "EPIC action") in the U.S. District Court for the
Northern District of California, alleging an unlawful "taking" of the
marbled murrelet under the ESA. In February 1995, the Court ruled that the
area covered by the THP is occupied by the marbled murrelet and permanently
enjoined implementation of the THP in order to protect the marbled
murrelet. Upon appeal, the U.S. Ninth Circuit Court of Appeals affirmed
the District Court's decision. Pacific Lumber subsequently appealed the
matter to the U.S. Supreme Court, but on February 19, 1997, the U.S.
Supreme Court ruled that it would not consider Pacific Lumber's appeal. In
March 1997, Pacific Lumber paid approximately $1.4 million in legal fees
which the trial court had awarded to the plaintiffs.
On April 22, 1996, Salmon Creek filed a lawsuit entitled Salmon
Creek Corporation v. California State Board of Forestry, et al. (No.
96CS01057) in the Superior Court of Sacramento County. This action seeks to
overturn the BOF's decision denying approval of a THP for approximately 8
acres of virgin old growth timber in the Headwaters Forest. Salmon Creek
seeks a court order requiring approval of the THP so that it may harvest in
accordance with the THP. Salmon Creek also seeks constitutional "just
compensation" damages to the extent that its old growth timber within and
surrounding the THP has been "taken" by reason of this regulatory denial
and previous actions of governmental authorities. In addition, on May 7,
1996, Pacific Lumber, Scotia Pacific and Salmon Creek filed a lawsuit
entitled The Pacific Lumber Company, et al. v. The United States of America
in the United States Court of Federal Claims. The suit alleges that the
federal government has "taken" over 3,800 acres of Pacific Lumber's old
growth timberlands (including the Headwaters Forest) through its
application of the ESA. Pacific Lumber, Scotia Pacific and Salmon Creek
seek constitutional "just compensation" damages for the taking of these
timberlands by the federal government's actions. The Court in each of these
actions has granted the parties' agreed motions to stay the actions
pursuant to the Headwaters Agreement. These actions would be dismissed if
the Headwaters Agreement is consummated. See Item 1. "Business--Forest
Products Operations--Pacific Lumber Operations--Headwaters Agreement" for a
description of the Headwaters Agreement.
OTHER MATTERS
Groundwater contamination has been found on property sold to a
subsidiary of the Company by a subsidiary of Rockwell International
Corporation ("Rockwell"). In March 1992, an enforcement action was filed
against Rockwell and the current property owners by the Nevada Division of
Environmental Protection seeking an order that would require defendants to
investigate and report on the nature and extent of the pollution and
contamination on the property. This action has been stayed, pending
continued environmental investigation and remediation by Rockwell. The
Company was named as a defendant in three related damage actions filed by
certain persons. Two of these cases have settled to date and in each case
the Company's share of the settlement was 21%. In September 1996, Rockwell
submitted a global settlement package to the Company. An Environmental
Cleanup Liability report, which accompanied Rockwell's settlement package
and which was prepared by Rockwell's experts, estimates total costs to be
$26.1 million (which the Company is disputing). No further settlement
discussions have taken place between Rockwell and the Company concerning
the indemnification issue since the settlement package was presented.
The Company is involved in other claims, lawsuits and other
proceedings. While uncertainties are inherent in the final outcome of such
matters and it is presently impossible to determine the actual costs that
ultimately may be incurred, management believes that the resolution of such
uncertainties and the incurrence of such costs should not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Reference is made to this section in the portions of the
Company's 1996 Annual Report to Stockholders (the "Annual Report") which
are included as part of Exhibit 13.1 hereto and incorporated herein by
reference.
On December 23, 1996, the Company's wholly owned subsidiary,
MAXXAM Group Holdings Inc. consummated an offering of $130.0 million
aggregate principal amount of 12% Senior Secured Notes due 2003 (the "MGHI
Notes"). The Company guaranteed the MGHI Notes on a senior, unsecured
basis. The principal underwriters for this offering were Bear, Stearns &
Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation (the
"Initial Purchasers"). The MGHI Notes were sold for cash (at 100% of
principal amount) and the aggregate discount of the Initial Purchasers was
$3,575,000. Sales were made to Qualified Institutional Buyers ("QIBs") in
reliance on Rule 144A under the Securities Act of 1933 (the "Securities
Act") and to a limited number of Institutional Accredited Investors (as
defined under Rule 501(a)(1), (2), (3), or (7) under the Securities Act),
that prior to their purchase of MGHI Notes, delivered to the Initial
Purchasers a letter containing, among other things, certain representations
from prospective Institutional Accredited Investors). This reliance was
based on the Initial Purchasers' knowledge of the QIBs and the
representation letters received from the Institutional Accredited
Investors. On December 24, 1996, MGHI and the Company filed a Form S-4
Registration Statement relating to an exchange offer pursuant to which the
MGHI Notes could be exchanged for registered notes containing substantially
identical terms. The Form S-4 Registration Statement was declared
effective on January 8, 1997 and the exchange offer was consummated on
February 11, 1997.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to this section in the portions of the Annual
Report which are included as part of Exhibit 13.1 hereto and incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Reference is made to this section in the portions of the Annual
Report which are included as part of Exhibit 13.1 hereto and incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements and
Notes thereto and the quarterly financial information in the portions of
the Annual Report which are included as part of Exhibit 13.1 hereto and
incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
Information required under Part III (Items 10, 11, 12 and 13) has
been omitted from this report since the Company intends to file with the
Securities and Exchange Commission, not later than 120 days after the close
of its fiscal year, a definitive proxy statement pursuant to Regulation 14A
which involves the election of directors.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Financial Statements
1. FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):
The Consolidated Financial Statements and the Report of
Independent Public Accountants are included on pages 31 to 62 of the Annual
Report which are included as part of Exhibit 13.1 hereto and incorporated
herein by reference.
2. FINANCIAL STATEMENT SCHEDULES: PAGE
----
Report of Independent Public Accountants on
Financial Statement Schedule 42
Schedule I - Condensed Financial Information of
Registrant at December 31, 1996
and 1995 and for the years ended December
31, 1996, 1995 and 1994 43-46
All other schedules are inapplicable or the required
information is included in the Consolidated Financial
Statements or the Notes thereto.
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K during the fourth quarter of
1996; however, on March 12, 1997, the Company filed a Current Report on Form
8-K (under Item 5), dated March 11, 1997, concerning an agreement to amend
the Headwaters Agreement to extend to February 17, 1998 the period of time
during which the closing conditions must be met.
(C) EXHIBITS
Reference is made to the Index of Exhibits immediately preceding
the exhibits hereto (beginning on page 48), which index is incorporated
herein by reference.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of MAXXAM Inc.:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in MAXXAM Inc.'s
1996 Annual Report to Stockholders incorporated by reference in this Form
10-K, and have issued our report thereon dated February 14, 1997. Our
audits were made for the purpose of forming an opinion on those statements
taken as a whole. The schedule listed in the index on page 41 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not
part of the basic consolidated financial statements. This schedule has
been subjected to the auditing procedures applied in the audits of the
basic consolidated financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth
therein in relation to the basic consolidated financial statements taken as
a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 14, 1997
MAXXAM INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET (UNCONSOLIDATED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 169.6 $ 20.4
Marketable securities 18.9 9.3
Other current assets 14.6 13.9
------------- -------------
Total current assets 203.1 43.6
Deferred income taxes 66.1 52.1
Investment in subsidiaries 16.5 --
Other assets 3.9 3.7
------------- -------------
$ 289.6 $ 99.4
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 8.3 $ 7.4
Long-term debt, current maturities 42.6 .2
------------- -------------
Total current liabilities 50.9 7.6
Long-term debt, less current maturities -- 41.6
Losses recognized in excess of investment in
subsidiaries -- 12.4
Notes payable to subsidiaries, net of notes
receivable and advances 192.2 18.8
Other noncurrent liabilities 97.3 102.8
------------- -------------
Total liabilities 340.4 183.2
------------- -------------
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:
10,063,885 and 10,063,359, respectively 5.0 5.0
Additional capital 155.9 155.0
Accumulated deficit (185.6) (208.5)
Pension liability adjustment (5.1) (16.1)
Treasury stock, at cost (shares held:
preferred - 845; common: 1,400,112 and
1,355,512, respectively) (21.3) (19.5)
------------- -------------
Total stockholders' deficit (50.8) (83.8)
------------- -------------
$ 289.6 $ 99.4
============= =============
<FN>
See notes to consolidated financial statements and accompanying notes.
</TABLE>
MAXXAM INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS (UNCONSOLIDATED)
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Investment, interest and other income
(expense) $ (1.5) $ 5.6 $ 12.6
Interest expense (7.0) (6.2) (11.7)
General and administrative expenses (32.8) (18.9) (11.0)
Equity in earnings (losses) of subsidiaries 15.1 43.6 (132.0)
------------- ------------- -------------
Income (loss) before income taxes (26.2) 24.1 (142.1)
Credit for income taxes 49.1 33.4 20.0
------------- ------------- -------------
Net income (loss) $ 22.9 $ 57.5 $ (122.1)
============= ============= =============
<FN>
See notes to consolidated financial statements and accompanying notes.
</TABLE>
MAXXAM INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 22.9 $ 57.5 $ (122.1)
Adjustments to reconcile net income
(loss) to net cash provided by
(used for) operating activities:
Equity in losses (earnings) of
subsidiaries (15.1) (43.6) 132.0
Net sales (purchases) of
marketable securities (7.1) 14.5 6.8
Amortization of deferred financing
costs and discounts on
long-term debt .3 .3 .3
Decrease in receivables .3 .6 1.1
Increase in accrued and deferred
income taxes (30.2) (18.9) (7.9)
Decrease in accounts payable and
other liabilities (.1) (14.5) (5.3)
Other 2.1 2.3 (.2)
------------- ------------- -------------
Net cash provided by (used
for) operating
activities (26.9) (1.8) 4.7
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Kaiser Depositary
Shares -- 7.6 10.3
Dividends received from subsidiaries 3.9 4.8 7.5
Investments in and net advances from
(to) subsidiaries 49.7 .4 (27.5)
Capital expenditures (.4) (.2) (.4)
------------- ------------- -------------
Net cash provided by (used
for) investing
activities 53.2 12.6 (10.1)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of intercompany
note 125.0 -- --
Redemption, repurchase of and principal
payments on long-term debt (.3) (5.9) (5.8)
Other (1.8) -- --
------------- ------------- -------------
Net cash provided by (used
for) financing
activities 122.9 (5.9) (5.8)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 149.2 4.9 (11.2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 20.4 15.5 26.7
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 169.6 $ 20.4 $ 15.5
============= ============= =============
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Reduction of stockholders' deficit due
to redemption of Kaiser preferred
stock $ -- $ 136.2 $ --
Distribution of intercompany payable
received from a subsidiary 20.0 8.0 132.0
Assumption by the Company of
subsidiary's payables to the
Company and affiliates -- -- (63.1)
Net assets transferred to subsidiary -- (14.5) --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 6.7 $ 6.0 $ 7.0
Income taxes paid (refunded) 1.5 (.3) 1.1
<FN>
See notes to consolidated financial statements and accompanying notes.
</TABLE>
MAXXAM INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS)
A. DEFERRED INCOME TAXES
The deferred income tax assets and liabilities reported in the
accompanying unconsolidated balance sheet are determined by computing such
amounts on a consolidated basis, for the Company and members of its
consolidated federal income tax return group, and then reducing such
consolidated amounts by the amounts recorded by the Company's subsidiaries
pursuant to their respective tax allocation agreements with the Company.
The Company's net deferred income tax assets relate primarily to the excess
of the tax basis over financial statement basis with respect to timber and
timberlands and real estate held for sale by various subsidiaries. The
Company has concluded that it is more likely than not that these net
deferred income tax assets will be realized based in part upon the
estimated values of the underlying assets which are in excess of their tax
basis.
B. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
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 17.6 16.5
Other -- .3
------------- -------------
42.6 41.8
Less: current maturities (42.6) (.2)
------------- -------------
$ -- $ 41.6
============= =============
</TABLE>
The Company redeemed the 14% Senior Subordinated Reset Notes and
the 12-1/2% Subordinated Debentures at par on January 7, 1997 and January
22, 1997, respectively.
C. NOTES PAYABLE TO SUBSIDIARIES, NET OF NOTES RECEIVABLE AND ADVANCES
At December 31, 1996, the Company's indebtedness to its
subsidiaries, which includes accrued interest, consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
Note payable, interest at 11% $ 125.0 $ --
Unsecured note payable, interest at 6% 19.3 18.3
Unsecured notes payable, interest at 7% 14.6 13.7
Net advances 33.3 (13.2)
------------- -------------
$ 192.2 $ 18.8
============= =============
</TABLE>
The increase in net advances is principally due to cash receipts
from the sale of real property and notes from the RTC Portfolio. There are
no restrictions which would preclude the Company's subsidiaries from
declaring a dividend of such advances to the Company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 28, 1997 By: /S/ PAUL N. SCHWARTZ
Paul N. Schwartz
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Date: March 28, 1997 By: /S/ CHARLES E. HURWITZ
Charles E. Hurwitz
Chairman of the Board, President,
Chief Executive Officer and
Director
Date: March 28, 1997 By: /S/ ROBERT J. CRUIKSHANK
Robert J. Cruikshank
Director
Date: March 28, 1997 By: /S/ EZRA G. LEVIN
Ezra G. Levin
Director
Date: March 28, 1997 By: /S/ STANLEY D. ROSENBERG
Stanley D. Rosenberg
Director
Date: March 28, 1997 By: /S/ PAUL N. SCHWARTZ
Paul N. Schwartz
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date: March 28, 1997 By: /S/ TERRY L. FREEMAN
Terry L. Freeman
Controller
(Principal Accounting Officer)
MAXXAM INC.
INDEX OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
-------- -------------------------------------------------------
3.1 Restated Certificate of Incorporation of MAXXAM Inc.
(the "Company" or "MAXXAM") dated April 10, 1989
(incorporated herein by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1989)
3.2 Certificate of Powers, Designations, Preferences and
Relative, Participating, Optional and Other Rights of
the Company's Class B Junior Participating Preferred
Stock (incorporated herein by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1989)
3.3 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)
*3.4 Amended and Restated By-laws of the Company dated
February 3, 1997
4.1 Non-Negotiable Intercompany Note, dated December 23,
1996, executed by the Company in favor of MAXXAM Group
Holdings Inc. (incorporated herein by reference to
Exhibit 10.8 to the Registration Statement on Form S-4
of MAXXAM Group Holdings Inc. ("MGHI"), Registration
No. 333-18723)
4.2 Loan and Pledge Agreement, dated as of June 28, 1996,
between Custodial Trust Company and the Company (the
"CTC Loan Agreement"; incorporated herein by reference
to Exhibit 4 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996)
4.3 Amendment Agreement, dated December 23, 1996, relating
to the CTC Loan Agreement, (incorporated herein by
reference to Exhibit 4.33 to Amendment No. 1 to MGHI's
Registration Statement on Form S-4, Registration No.
333-18723)
4.4 Indenture, dated as of December 23, 1996, among MGHI,
as Issuer, the Company, as Guarantor, and First Bank
National Association, as Trustee, regarding the 12%
Senior Secured Notes due 2003 of MGHI (incorporated
herein by reference to Exhibit 4.1 to MGHI's
Registration Statement on Form S-4, Registration No.
333-18723)
4.5 Indenture, dated as of August 4, 1993, between Shawmut
Bank, N.A. and MAXXAM Group Inc. ("MGI") regarding
MGI's 11-1/4% Senior Secured Notes due 2003 and 12-1/4%
Senior Secured Discount Notes due 2003 (the "MGI
Indenture"; incorporated herein by reference to Exhibit
4.1 to MGI's Annual Report on Form 10-K for the year
ended December 31, 1993, File No. 1-8857)
4.6 First Supplemental Indenture, dated as of December 17,
1996, to the MGI Indenture (incorporated herein by
reference to Exhibit 4.35 to Amendment No. 1 to MGHI's
Registration Statement on Form S-4, Registration No.
333-18723)
4.7 Second Supplemental Indenture, dated as of December 23,
1996, to the MGI Indenture (incorporated herein by
reference to Exhibit 4.36 to Amendment No. 1 to MGHI's
Registration Statement on Form S-4, Registration No.
333-18723)
4.8 Indenture, dated December 23, 1996, among Kaiser
Aluminum & Chemical Corporation ("KACC"), Kaiser
Aluminum Australia Corporation, Alpart Jamaica Inc.,
Kaiser Jamaica Corporation, Kaiser Finance Corporation,
Kaiser Micromill Holdings, LLC, Kaiser Sierra
Micromills, LLC, Kaiser Texas Micromill Holdings, LLC
and Kaiser Texas Sierra Micromills, LLC, as subsidiary
guarantors ("the Subsidiary Guarantors") and First
Trust National Association, as Trustee, regarding
KACC's 10-7/8% Series C Senior Notes due 2006
(incorporated herein by reference to KACC's
Registration Statement on Form S-4, Registration No.
333-19143)
4.9 Indenture, dated as of October 23, 1996, among KACC, as
Issuer, the Subsidiary Guarantors, and First Trust
National Association, as Trustee, regarding KACC's
10-7/8% Senior Notes due 2006 (incorporated by
reference to Exhibit 4.2 to Kaiser Aluminum
Corporation's ("Kaiser") Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, File No. 1-
9447)
4.10 Indenture, dated as of February 1, 1993, among KACC, as
Issuer, Kaiser Alumina Australia Corporation, Alpart
Jamaica Inc., and Kaiser Jamaica Corporation, as
subsidiary guarantors, and State Street Bank and Trust
Company (as successor trustee to The First National
Bank of Boston; "State Street"), regarding KACC's
12-3/4% Senior Subordinated Notes due 2003 (the "KACC
Senior Subordinated Note Indenture"; incorporated
herein by reference to Exhibit 4.1 to KACC's Annual
Report on Form 10-K for the year ended December 31,
1993, File No. 1-3605)
4.11 First Supplemental Indenture, dated as of May 1, 1993,
to the KACC Senior Subordinated Note Indenture
(incorporated herein by reference to Exhibit 4.2 to
KACC's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993, File No. 1-3605)
4.12 Second Supplemental Indenture, dated as of February 1,
1996, to the KACC Senior Subordinated Note Indenture
(incorporated herein by reference to Exhibit 4.3 to
Kaiser's Annual Report on Form 10-K for the year ended
December 31, 1995, File No. 1-9447)
4.13 Indenture, dated as of February 17, 1994, among KACC,
as Issuer, Kaiser Alumina Australia Corporation, Alpart
Jamaica Inc., Kaiser Jamaica Corporation, and Kaiser
Finance Corporation, as subsidiary guarantors, and
First Trust National Association, Trustee, regarding
Kaiser's 9-7/8% Senior Notes due 2002 (incorporated
herein by reference to Exhibit 4.3 to KACC's Annual
Report on Form 10-K for the year ended December 31,
1993, File No. 1-9447; the "Kaiser 1993 Form 10-K")
4.14 First Supplemental Indenture, dated as of February 1,
1996, among KACC, as Issuer, Kaiser Alumina Australia
Corporation, Alpart Jamaica Inc., Kaiser Jamaica
Corporation, and Kaiser Finance Corporation, as
subsidiary guarantors, and First Trust National
Association, Trustee, regarding KACC's 9-7/8% Senior
Notes (incorporated herein by reference to Exhibit 4.5
to Kaiser's Annual Report on Form 10-K for the year
ended December 31, 1995, File No. 1-9447)
4.15 Credit Agreement, dated as of February 17, 1994 (the
"Kaiser Credit Agreement"), among Kaiser, KACC, certain
financial institutions and BankAmerica Business Credit,
Inc., as Agent (incorporated herein by reference to
Exhibit 4.4 to the Kaiser 1993 Form 10-K)
4.16 First Amendment, dated July 21, 1994, to the Kaiser
Credit Agreement (incorporated herein by reference to
Exhibit 4.1 to Kaiser's Quarterly Report on Form 10-Q
of Kaiser for the quarter ended June 30, 1994, File No.
1-9447)
4.17 Second Amendment, dated March 10, 1995, to the Kaiser
Credit Agreement (incorporated herein by reference to
Exhibit 4.6 to Kaiser's Annual Report on Form 10-K for
the year ended December 31, 1994, File No. 1-9447)
4.18 Third Amendment, dated as of July 20, 1995, to the
Kaiser Credit Agreement (incorporated herein by
reference to Exhibit 4.1 to Kaiser's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1995, File
No. 1-9447)
4.19 Fourth Amendment, dated as of October 17, 1995, to the
Kaiser Credit Agreement (incorporated herein by
reference to Exhibit 4.1 to Kaiser's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995,
File No. 1-9447)
4.20 Fifth Amendment, dated December 11, 1995, to the Kaiser
Credit Agreement (incorporated herein by reference to
Exhibit 4.11 to Kaiser's Annual Report on Form 10-K for
the year ended December 31, 1995, File No. 1-9447)
4.21 Sixth Amendment, dated as of October 1, 1996, to the
Kaiser Credit Agreement (incorporated herein by
reference to Exhibit 4.1 to KACC's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996,
File No. 1-3605)
4.22 Seventh Amendment, dated December 17, 1996, to the
Kaiser Credit Agreement (incorporated herein by
reference to Exhibit 4.18 to KACC's Registration
Statement on Form S-4 dated January 2, 1997; File No.
333-19143)
4.23 Eighth Amendment, dated February 24, 1997, to the
Kaiser Credit Agreement (incorporated herein by
reference to Kaiser's Annual Report on Form 10-K for
the year ended December 31, 1996, File No. 1-9447)
4.25 Certificate of Designation of 8.255% Preferred
Redeemable Increased Dividend Equity Securities of
Kaiser, dated February 17, 1994 (incorporated herein by
reference to Exhibit 4.21 to Kaiser 1993 Form 10-K)
4.26 Indenture, dated as of March 23, 1993, between The
Pacific Lumber Company ("Pacific Lumber") and State
Street (as successor trustee to The First National Bank
of Boston) regarding Pacific Lumber's 10-1/2% Senior
Notes due 2003 (incorporated herein by reference to
Exhibit 4.1 to Pacific Lumber's Annual Report on Form
10-K for the year ended December 31, 1993, File No. 1-
9204)
4.27 Indenture, dated as of March 23, 1993, between Scotia
Pacific Holding Company ("Scotia Pacific") and State
Street, as Trustee, regarding Scotia Pacific's 7.95%
Timber Collateralized Notes due 2015 (incorporated
herein by reference to Exhibit 4.1 to Scotia Pacific's
Annual Report on Form 10-K for the year ended December
31, 1993, File No. 33-55538)
4.28 Amended and Restated Credit Agreement of Pacific
Lumber, dated November 10, 1995 (the "Pacific Lumber
Credit Agreement"; incorporated herein by reference to
Exhibit 4.1 to Pacific Lumber's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995,
File No. 1-9204)
4.29 First Amendment, dated as of February 10, 1997, to the
Pacific Lumber Credit Agreement (incorporated by
reference to Exhibit 4.4 to The Pacific Lumber
Company's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-9204)
4.30 Second Amended and Restated Credit and Security
Agreement, dated July 15, 1995, among the First
National Bank of Boston, MCO Properties, Inc.,
Westcliff Development Corporation, Horizon Corporation,
Horizon Properties Corporation and MCO Properties L.P.
(incorporated herein by reference to Exhibit 4.25 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
4.31 Amended and Restated Indenture, dated October 6, 1995,
by and among Sam Houston Race Park, Ltd. ("SHRP"), New
SHRP Capital Corp., SHRP General Partner, Inc. and
First Bank National Association, Trustee (incorporated
herein by reference to Exhibit 4.1 to the Quarterly
Report on Form 10-Q of SHRP for the quarter ended June
30, 1995, File No. 33-67738)
Note: Pursuant to Regulation Section 229.601, Item
601(b)(4)(iii) of Regulation S-K, upon request of the
Securities and Exchange Commission, the Company hereby
agrees to furnish a copy of any unfiled instrument
which defines the rights of holders of long-term debt
of the Company and its consolidated subsidiaries (and
for any of its unconsolidated subsidiaries for which
financial statements are required to be filed) wherein
the total amount of securities authorized thereunder
does not exceed 10 percent of the total consolidated
assets of the Company.
10.1 Tax Allocation Agreement, dated December 23, 1996,
between the Company and MGHI (incorporated herein by
reference to Exhibit 10.1 to MGHI's Registration
Statement on Form S-4, Registration No. 333-18723)
10.2 Tax Allocation Agreement, dated as of December 21,
1989, between the Company and KACC (incorporated herein
by reference to Exhibit 10.21 to Amendment No. 6 to the
Registration Statement of KACC on Form S-1,
Registration No. 33-30645)
10.3 Tax Allocation Agreement, dated as of February 26,
1991, between Kaiser and the Company (incorporated
herein by reference to Exhibit 10.23 to Amendment No. 2
to the Registration Statement of Kaiser on Form S-1,
Registration No. 33-37895)
10.4 Tax Allocation Agreement, dated August 4, 1993, between
the Company and MGI (incorporated herein by reference
to Exhibit 10.6 to Amendment No. 2 to the Form S-2
Registration Statement of MGI, Registration No.
33-56332)
10.5 Tax Allocation Agreement, dated as of May 21, 1988,
among the Company, MGI, Pacific Lumber and the
corporations signatory thereto (incorporated herein by
reference to Exhibit 10.8 to Pacific Lumber's Annual
Report on Form 10-K for the year ended December 31,
1988, File No. 1-9204)
10.6 Tax Allocation Agreement, dated as of March 23, 1993,
among Pacific Lumber, Scotia Pacific, Salmon Creek
Corporation and the Company (incorporated herein by
reference to Exhibit 10.1 to Amendment No. 3 to the
Form S-1 Registration Statement of Scotia Pacific,
Registration No. 33-55538)
10.7 Tax Allocation Agreement, dated as of July 3, 1990,
between the Company and Britt Lumber Co., Inc.
(incorporated herein by reference to Exhibit 10.4 to
MGI's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, File No. 1-8857)
10.8 Senior Subordinated Intercompany Note , dated February
15, 1994 , executed by KACC in favor of Kaiser
(incorporated herein by reference to Exhibit 4.22 to
the Kaiser 1993 Form 10-K)
10.9 Senior Subordinated Intercompany Note, dated March 17,
1994, executed by KACC in favor of Kaiser (incorporated
herein by reference to Exhibit 4.23 to the Kaiser 1993
Form 10-K)
*10.10 Intercompany Note, dated December 21, 1989, executed by
Kaiser in favor of KACC
*10.11 Confirmation of Amendment of Non-Negotiable
Intercompany Note, dated as of October 6, 1993, between
Kaiser and KACC
10.12 Agreement, dated as of June 30, 1993, between Kaiser
and the Company (incorporated herein by reference to
Exhibit 10.2 to KACC's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993, File No. 1-3605)
10.13 Agreement, dated September 28, 1996, among MAXXAM Inc.,
The Pacific Lumber Company (on behalf of itself, its
subsidiaries and its affiliates), the United States of
America and the State of California (incorporated
herein by reference to Exhibit 10.1 to the Company's
Form 8-K dated September 28, 1996)
10.14 Exchange Agreement, dated as of May 20, 1991, by and
among the Company, MCO Properties Inc. ("MCOP") and
Federated Development Company (incorporated by
reference to Exhibit 10(ff) to Amendment No. 4 to MGI's
Registration Statement on Form S-4 on Form S-2,
Registration No. 33-42300)
10.15 Revolving Credit and Term Loan Agreement, dated as of
August 27, 1987, as amended, between MCOP and Federated
Development Company (incorporated herein by reference
to Exhibit 10.82 to the Company's Registration
Statement on Form S-4, Registration No. 33-20096)
10.16 Term Loan Agreement, dated as of November 17, 1987,
between MCOP and Federated Development Company
(incorporated herein by reference to Exhibit 10.83 to
the Company's Registration Statement on Form S-4,
Registration No. 33-20096)
10.17 Put and Call Agreement, dated November 16, 1987 (the
"Put and Call Agreement") between Charles E. Hurwitz
and MAXXAM Properties Inc. ("MPI") (incorporated herein
by reference to Exhibit C to Schedule 13D dated
November 24, 1987, filed by MGI with respect to the
Company's common stock)
10.18 Amendment to Put and Call Agreement, dated May 18,
1988, (incorporated herein by reference to Exhibit D to
the Final Amendment to Schedule 13D dated May 20, 1988,
filed by MGI relating to the Company's common stock)
10.19 Amendment to Put and Call Agreement, dated as of
February 17, 1989 (incorporated herein by reference to
Exhibit 10.35 to the Company's Annual Report on Form
10-K for the year ended December 31, 1988, File No. 1-
3924)
10.20 Note Purchase Agreement, dated July 26, 1982, as
amended, between the Company and Drexel Burnham Lambert
Incorporated, relating to the Company's Zero Coupon
Senior Subordinated Notes due 2007 (incorporated herein
by reference to Exhibit B to Schedule 13D dated
November 24, 1987, filed by MGI relating to the
Company's common stock)
10.21 Third Amended and Restated Limited Partnership
Agreement of Sam Houston Race Park, Ltd., dated as of
October 6, 1995 (incorporated herein by reference to
Exhibit 3.1 to the Quarterly Report on Form 10-Q of
SHRP for the quarter ended June 30, 1995, File No. 33-
67738)
Executive Compensation Plans and Arrangements
---------------------------------------------
10.22 MAXXAM 1994 Omnibus Employee Incentive Plan
(incorporated herein by reference to Exhibit 99 to the
Company's Proxy Statement dated April 29, 1994; the
"Company 1994 Proxy Statement")
10.23 Form of Stock Option Agreement under the MAXXAM 1994
Omnibus Employee Incentive Plan (incorporated herein by
reference to Exhibit 10.30 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1994)
10.24 MAXXAM 1994 Non-Employee Director Plan (incorporated
herein by reference to Exhibit 99 to the Company 1994
Proxy Statement)
10.25 Form of Stock Option Agreement under the MAXXAM 1994
Non-Employee Director Plan (incorporated herein by
reference to Exhibit 10.32 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1994)
*10.26 Form of Deferred Fee Agreement under the MAXXAM 1994
Non-Employee Director Plan
10.27 MAXXAM 1994 Executive Bonus Plan (incorporated herein
by reference to Exhibit 99 to the Company 1994 Proxy
Statement)
10.28 MAXXAM Revised Capital Accumulation Plan of 1988, as
amended December 12, 1988 (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1995)
10.29 The Company's 1984 Phantom Share Plan, as amended (the
"Company Phantom Share Plan") (incorporated herein by
reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1990; the "Company 1990 Form 10-K")
10.30 Amendment, dated as of March 8, 1990, relating to the
Company Phantom Share Plan (incorporated herein by
reference to Exhibit 10.7 to the Company 1990 Form
10-K)
10.31 Form of Phantom Share Agreement relating to the Company
Phantom Share Plan (incorporated herein by reference to
Exhibit 10.20 to the Company's Annual Report on Form
10-K for the year ended December 31, 1988)
10.32 MAXXAM Supplemental Executive Retirement Plan
(incorporated herein by reference to Exhibit 10(ii) to
MGI's Registration Statement on Form S-4 on Form S-2,
Registration No. 33-42300)
10.33 Form of Company Deferred Compensation Agreement
(incorporated herein by reference to Exhibit 10.35 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1995)
10.34 Kaiser 1993 Omnibus Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.1 to KACC's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1993, File No. 1-3605)
10.35 Form of Stock Option Agreement under the Kaiser 1993
Omnibus Stock Incentive Plan (incorporated herein by
reference to Exhibit 10.41 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1994)
10.36 KACC's Bonus Plan (incorporated herein by reference to
Exhibit 10.25 to Amendment No. 6 to the Registration
Statement of KACC on Form S-1, Registration No. 33-
30645)
10.37 Kaiser 1995 Employee Incentive Compensation Program
(incorporated herein by reference to Exhibit 10.1 to
Kaiser's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995, File No. 1-9447)
10.38 Kaiser 1995 Executive Incentive Compensation Program
(incorporated herein by reference to Exhibit 99 to
Kaiser's Proxy Statement dated April 26, 1995)
10.39 Promissory Note, dated February 1, 1989, by Anthony R.
Pierno and Beverly J. Pierno in favor of the Company
(the "1989 Pierno Note") (incorporated herein by
reference to Exhibit 10.30 to the Company 1990 Form 10-
K)
10.40 Letter amendment, dated February 28, 1995, to the 1989
Pierno Note (incorporated herein by reference to
Exhibit 10.44 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994)
10.41 Promissory Note dated July 19, 1990 by Anthony R.
Pierno in favor of the Company (the "1990 Pierno Note")
(incorporated herein by reference to Exhibit 10.31 to
the Company 1990 Form 10-K)
10.42 Letter amendment, dated February 28, 1995, to the 1990
Pierno Note (incorporated herein by reference to
Exhibit 10.46 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994)
10.43 Employment Agreement, dated August 20, 1993 between
KACC and Robert E. Cole (incorporated herein by
reference to Exhibit 10.63 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1993)
*11 Computation of Net Income Per Common and Common
Equivalent Share Information
*13.1 The portions of the Company's Annual Report to
Stockholders for the year ended December 31, 1996 which
are incorporated herein by reference
*21 List of the Company's Subsidiaries
*23 Consent of Independent Public Accountants by Arthur
Andersen LLP
*27 Financial Data Schedule
- ---------------
* Included with this filing.
AMENDED AND RESTATED BY-LAWS
OF
MAXXAM INC.
ARTICLE I
OFFICES
Section 1. Registered Office. The corporation shall maintain a
registered office in the State of Delaware as required by law.
Section 2. Other Offices. The corporation may also have offices
at other places, within or without the State of Delaware, as the Board of
Directors may from time to time designate or the business of the
corporation may require.
ARTICLE II
STOCKHOLDERS
Section 1. Place of Meetings. All meetings of stockholders shall
be held at such places, either within or without the State of Delaware, as
may be fixed from time to time by the Board of Directors.
Section 2. Annual Meeting. Annual meetings of stockholders shall
be held on such date during the month of May or June of each year, or such
other date as may be determined by the Board of Directors, and at such time
as may be fixed from time to time by the Board of Directors. At each annual
meeting of stockholders, the stockholders shall elect directors by a
plurality vote, and may transact such other business as may properly be
brought before the meeting. The Board of Directors acting by resolution
may postpone and reschedule any previously scheduled annual meeting of
stockholders.
Nominations of persons for election to the Board of Directors of the
corporation and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (a) pursuant
to the corporation's notice of meeting, (b) by or at the direction of the
Board of Directors, or (c) by any stockholder of the corporation who was a
stockholder of record at the time of giving of notice, who is entitled to
vote at the meeting and who complied with the applicable notice procedures.
The provisions governing the required notice are set forth in (i) the
Fifteenth paragraph of the corporation's Restated Certificate of
Incorporation for purposes of nominations for directors, and (ii) this By-
Law for purposes of proposal of other business.
For business, other than nominations for directors, to be properly
brought before an annual meeting by a stockholder pursuant to clause (c) of
the foregoing paragraph of this By-Law, the stockholder must have given
timely notice thereof in writing to the Secretary of the corporation. To
be timely, a stockholder's notice shall be delivered to the Secretary at
the principal executive offices of the corporation not less than 60 days
nor more than 90 days prior to the first anniversary of the preceding
year's annual meeting; provided, however, that in the event that the date
of the annual meeting is advanced by more than 30 days or delayed by more
than 60 days from such anniversary date, notice by the stockholder to be
timely must be so delivered not earlier than the 90th day prior to such
annual meeting and not later than the close of business on the later of the
60th day prior to such annual meeting or the 10th day following the day on
which public announcement of the date of such meeting is first made. Such
stockholder's notice shall set forth, as to any other business that the
stockholder proposes to bring before the meeting, a brief description of
the business desired to be brought before the meeting, the reasons for
conducting such business at the meeting and any material interest in such
business of such stockholder and the beneficial owner, if any, on whose
behalf the nomination or proposal is made as well as (i) the name and
address of such stockholder, as they appear on the corporation's books, and
of such beneficial owner, if applicable, and (ii) the class and number of
shares of the corporation which are owned beneficially and of record by
such stockholder and such beneficial owner, if applicable.
In addition to the information required in the Fifteenth paragraph of
the corporation's Restated Certificate of Incorporation, any stockholder's
notice relating to nominations for directors shall set forth all
information relating to such person that is required to be disclosed in
solicitation of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (including such
person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected)
Notwithstanding anything herein to the contrary, in the event that the
number of directors to be elected to the Board of Directors of the
corporation is increased and there is no public announcement naming all of
the nominees for director or specifying the size of the increased Board of
Directors made by the corporation at least 70 days prior to the first
anniversary of the preceding year's annual meeting, a stockholder's notice
required by this By-Law shall also be considered timely, but only with
respect to nominees for any new positions created by such increase, if it
shall be delivered to the Secretary at the principal executive offices of
the corporation not later than the close of business on the 10th day
following the day on which such public announcement is first made by the
corporation.
Only such persons who are nominated in accordance with the procedures
set forth in the corporation's Restated Certificate of Incorporation and
these By-Laws shall be eligible to serve as directors and only such
business shall be conducted at an annual meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set
forth in this By-Law. The chairman of the meeting shall have the power and
duty to determine whether any nomination or business proposed to be brought
before the meeting was made in accordance with the procedures set forth in
the corporation's Restated Certificate of Incorporation or these By-Laws,
as applicable, and if any proposed nomination or business is not in
compliance with the corporation's Restated Certificate of Incorporation or
these By-Laws, as applicable, to declare that such defective nomination or
proposal shall be disregarded.
For purposes of this By-Law, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Services,
Associated Press or comparable national news service or in a document
publicly filed by the corporation with the Securities and Exchange
Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act.
Notwithstanding the Fifteenth paragraph of the corporation's Restated
Certificate of Incorporation or the foregoing provisions of this By-Law, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in the Fifteenth paragraph of the corporation's Restated
Certificate of Incorporation and this By-Law. Nothing in the Fifteenth
paragraph of the corporation's Restated Certificate of Incorporation or
this By-Law shall be deemed to affect any rights of stockholders to request
inclusion of proposals in the corporation's proxy statement pursuant to
Rule 14a-8 under the Exchange Act.
Section 3. Special Meetings. Special meetings of the stockholders for
any purpose or purposes may only be called by the Board of Directors as
required by the Sixteenth paragraph of the corporation's Restated
Certificate of Incorporation. The power of stockholders to call a special
meeting is specifically denied in the corporation's Restated Certificate of
Incorporation. Business transacted at all special meetings shall be
confined to the specific purpose or purposes of the persons authorized to
request such special meeting as set forth in this Section 3 and only such
purpose or purposes shall be set forth in the notice of such meeting. The
Board of Directors acting by resolution may postpone and reschedule any
previously scheduled special meeting of stockholders.
Nominations of persons for election to the Board of Directors may be
made at a special meeting of stockholders at which directors are to be
elected (a) pursuant to the corporation's notice of meeting (b) by or at
the direction of the Board of Directors or (c) by any stockholder of the
corporation who is a stockholder of record at the time of giving of notice
provided for in this By-Law, who shall be entitled to vote at the meeting
and who complies with the notice procedures set forth in this By-Law.
Nominations by stockholders of persons for election to the Board of
Directors may be made at such a special meeting of stockholders if the
stockholder's notice required by the third paragraph of Section 2 of
Article II of these By-Laws shall be delivered to the Secretary at the
principal executive offices of the corporation not earlier than the 90th
day prior to such special meeting and not later than the close of business
on the later of the 60th day prior to such special meeting or the 10th day
following the day on which public announcement is first made of the date of
the special meeting and of the nominees proposed by the Board of Directors
to be elected at such meeting.
Only such persons who are nominated in accordance with the procedures
set forth in these By-Laws shall be eligible to serve as directors and only
such business shall be conducted at a special meeting of the stockholders
as shall have been brought before the meeting in accordance with the
procedures set forth in this By-Law. The chairman of the meeting shall
have the power and duty to determine whether any nomination or business
proposed to be brought before the meeting was made in compliance with the
procedures set forth in this By-Law, and if any proposed nomination or
business is not in compliance, to declare that such defective nomination or
proposal shall be disregarded.
Notwithstanding the foregoing provisions of this By-Law, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this By-Law. Nothing in this By-Law shall be deemed
to affect any rights of stockholders to request inclusion of proposals in
the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange
Act.
Section 4. Notice of Meetings. Written or printed notice of all
meetings of the stockholders shall be mailed or delivered to each
stockholder entitled to vote thereat at least ten, but not more than sixty,
days prior to the meeting. Notice of any special meeting shall state in
general terms the purpose or purposes for which the meeting is to be held,
and no other business shall be transacted thereat except as stated in such
notice.
Section 5. Quorum; Adjournments of Meetings. The holders of
outstanding shares of stock of the Corporation entitled to cast a majority
of the votes entitled to be cast by the holders of all classes of capital
stock of the Corporation entitled to vote generally in elections of
directors, considered for this purpose as one class, present in person or
represented by proxy, shall constitute a quorum for the transaction of
business at all meetings of the stockholders, but if there be less than a
quorum, the holders of shares of stock of the Corporation entitled to cast
a majority of the votes entitled to be cast by the holders of all classes
of the Corporation's capital stock so present or represented may adjourn
the meeting from time to time until a quorum shall be present, whereupon
the meeting may be held, as adjourned, without further notice, except as
required by law, and any business may be transacted thereat that might have
been transacted on the original date of the meeting. In the event that at
any meeting there are not present, in person or by proxy, holders of shares
of stock of the Corporation entitled to cast that number of votes which may
be required by the laws of the State of Delaware, or other applicable
statute, the Certificate of Incorporation or these By-Laws, for action upon
any given matter, action may nevertheless be taken at such meeting upon any
other matter or matters which may properly come before the meeting if there
shall be present thereat, in person or by proxy, holders of shares of stock
of the Corporation entitled to cast that number of votes required for
action in respect of such other matter or matters.
Section 6. Voting. At any meeting of the stockholders every
registered owner of shares entitled to vote may vote in person or by proxy
and, except as otherwise provided by statute, in the Certificate of
Incorporation or these By-Laws, shall have one vote for each such share
standing in his/her or its name on the books of the corporation. Except
as otherwise required by statute, the Certificate of Incorporation or these
By-Laws, all matters, other than the election of directors, brought before
any meeting of the stockholder shall be decided by a vote of a majority in
interest of the stockholders of the corporation pre sent in person or by
proxy at such meeting and voting thereon, a quorum being present.
Section 7. Inspectors of Election. The Board of Directors, or, if
the Board shall not have made the appointment, the chairman presiding at
any meeting of stockholders, shall have power to appoint one or more
persons to act as inspectors of election, to receive, canvass and report
the votes cast by the stockholders at such meeting or any adjournment
thereof, but no candidate for the office of director shall be appointed as
an inspector at any meeting for the election of directors.
Section 8. Chairman of Meetings. The Chairman of the Board of
Directors or, in his absence, the President, shall preside at all meetings
of the stockholders. In the absence of both the Chairman of the Board and
the President, a majority of the members of the Board of Directors present
in person at such meeting may appoint any other officer or director to act
as chairman of any meeting.
Section 9. Secretary of Meetings. The Secretary or an Assistant
Secretary of the corporation shall act as secretary of all meetings of the
stockholders, and, in their absence, the chairman of the meeting shall
appoint any other person to act as secretary of the meeting.
Section 10. List of Stockholders. It shall be the duty of the
officer of the corporation who has charge of the stock ledger of the
corporation to prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at said
meeting (the "stockholder list"), arranged in alphabetical order and
showing the address of each stockholder and the number of shares registered
in his/her or its name. The stockholder list shall be open to the
examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for such ten day period either at a place
within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the
place where said meeting is to be held. The stockholder list shall also be
produced and kept at the place of the meeting during the whole time
thereof, and may be inspected by any stockholder who may be present at said
meeting.
Section 11. Procedural Rules. The Board of Directors of the
corporation shall be entitled to make such rules or regulations for the
conduct of meetings of stockholders as it shall deem necessary, appropriate
or convenient. Subject to such rules and regulations of the Board of
Directors, if any, the chairman of the meeting shall have the right and
authority to prescribe such rules, regulations and procedures and to do all
such acts as, in the proper conduct of the meeting, including, without
limitation, establishing an agenda or order of business of the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders
of record of the corporation and their duly authorized and constituted
proxies, and such other persons as the chairman of the meeting shall
permit, restrictions on entry to the meeting after the time fixed for the
commencement thereof, limitations on the time allotted to questions or
comment by participants and regulation of the opening and closing of the
polls for balloting determined by the Board of Directors or the chairman of
the meeting. Meetings of stockholders shall not be required to be held in
accordance with rules of parliamentary procedure.
ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers. Except as otherwise provided in the
Certificate of Incorporation or these By-Laws, the property, business and
affairs of the corporation shall be managed and controlled by the Board of
Directors. The Board may exercise all such authority and powers of the
corporation and do all such lawful acts and things as are not by statute or
the Certificate of Incorporation directed or required to be exercised or
done by the stockholders.
Section 2. Number of Directors. The number of directors of the
corporation (exclusive of directors to be elected by the holders of any one
or more classes or series of Preferred Stock of the corporation or any
other class or series of stock of the corporation, which may at some time
be outstanding, voting separately as a class or classes) shall not be less
than three nor more than fourteen, and may be changed from time to time by
action of not less than a majority of the members of the Board then in
office. Whenever the words "whole Board," "entire Board" or "total number
of directors" are used in these By-Laws, such words shall mean the number
of directors fixed by the Board and then in effect in accordance with the
provisions of the Certificate of Incorporation or these By-Laws.
Section 3. Annual Meeting. The annual meeting of the Board of
Directors, of which no notice shall be necessary, shall be held immediately
following the annual meeting of stockholders or any adjournment thereof at
the principal office, if any, of the corporation in the city in which the
annual meeting of stockholders was held at which any of such directors were
elected, or at such other place as a majority of the members of the newly
elected Board who are then present shall determine, for the election or
appointment of officers for the ensuing year and the transaction of such
other business as may be brought before such meeting.
Section 4. Regular Meetings. Regular meetings of the Board of
Directors, other than the annual meeting, shall be held at such times and
places, and on such notice, if any, as the Board of Directors may from time
to time determine.
Section 5. Special Meetings. Special meetings of the Board of
Directors may be called by order of the Chairman of the Board or the
President or may be called at the request of any two directors. Notice of
the time and place of each special meeting shall be given by or at the
direction of the Secretary of the corporation or an Assistant Secretary of
the corporation, or, in their absence, by the person or persons calling the
meeting by mailing the same at least five days before the meeting or by
telephoning, telegraphing or delivering personally the same at least
twenty-four hours before the meeting to each director. Except as otherwise
specified in the notice thereof, or as required by statute, the Certificate
of Incorporation or these By-Laws, any and all business may be transacted
at any special meeting.
Section 6. Attendance By Communications Equipment. Unless
otherwise restricted by the Certificate of Incorporation, members of the
Board of Directors or of any committee designated by the Board may
participate in a meeting of the Board or any such committee by means of
conference telephone or similar communications equipment whereby all
persons participating in the meeting can hear each other. Participation in
any meeting by such means shall constitute presence in person at such
meeting. Any meeting at which one or more members of the Board of
Directors or of any committee designated by the Board shall participate by
means of conference telephone or similar communications equipment shall be
deemed to have been held at the place designated for such meeting, provided
that at least one member is at such place while participating in the
meeting.
Section 7. Organization. Every meeting of the Board of Directors
shall be presided over by the Chairman of the Board or, in his absence, the
President. In the absence of the Chairman of the Board and the President,
a presiding officer shall be chosen by a majority of the directors present.
The Secretary of the corporation, or, in his absence, an Assistant
Secretary of the corporation, shall act as secretary of the meeting, but,
in their absence, the presiding officer may appoint any person to act as
secretary of the meeting.
Section 8. Quorum; Vote. A majority of the directors then in
office (but in no event less than one-third of the total number of
directors) shall constitute a quorum for the transaction of business, but
less than a quorum may adjourn any meeting to another time or place from
time to time until a quorum shall be present, whereupon the meeting may be
held, as adjourned, without further notice. Except as otherwise required
by statute, the Certificate of Incorporation or these By-Laws, all matters
coming before any meeting of the Board of Directors shall be decided by the
vote of a majority of the directors present at the meeting, a quorum being
present.
Section 9. Compensation. The directors shall receive such
compensation for their services as directors and as members of any
committee appointed by the Board as may be prescribed by the Board of
Directors and shall be reimbursed by the Corporation for ordinary and
reasonable expenses incurred in the performance of their duties, and the
foregoing shall not be construed as prohibiting the payment to any director
of compensation for services rendered in any other capacity.
ARTICLE IV
COMMITTEES
Section 1. Executive Committee. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate from among
its members an Executive Committee to consist of three or more members and
may designate one of such members as chairman. The Board may also
designate one or more of its members as alternates to serve as a member or
members of the Executive Committee in the absence of a regular member or
members. Except as provided in Section 4 of this Article IV, the
Executive Committee shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the corporation, and the Executive Committee may
authorize the seal of the corporation to be affixed to all papers which may
require it.
Section 2. Other Committees. The Board of Directors, acting by a
majority of the whole Board, may also appoint from among its own members or
otherwise such other committees as the Board may determine, to have such
powers and duties as shall from time to time be prescribed by the Board and
which, in the discretion of the Board, may be designated as committees of
the Board.
Section 3. Quorum and Discharge. A majority of the entire
committee shall constitute a quorum for the transaction of business of any
committee and may fix its rules of procedure. The Board of Directors may
discharge any committee either with or without cause at any time.
Section 4. Powers of Committees. No committee designated or
appointed by the Board of Directors shall have the power or authority of
the Board in reference to (a) amending the Certificate of Incorporation,
(b) adopting an agreement of merger or consolidation, (c) recommending to
the stockholders the sale, lease or exchange of all or substantially all of
the corporation's property and assets, (d) recommending to the stockholders
a dissolution of the corporation or a revocation of a dissolution, (e)
amending the By-Laws of the corporation, (f) declaring dividends, (g)
designating committees, (h) filling vacancies among committee members or
(i) removing officers. The Executive Committee shall have the power and
authority of the Board to authorize the issuance of shares of capital stock
of the corporation of any class or any series of any class.
Section 5. Committee Meetings. Regular meetings of any committee
designated or appointed by the Board of Directors shall be held at such
times and places and on such notice, if any, as the committee may from time
to time determine. Special meetings of any committee designated or
appointed by the Board may be called by order of the Chairman of the Board,
Vice Chairman of the Board, President of the corporation, Chairman of the
committee or any two members of any such committee. Notice shall be given
of the time and place of each special meeting by mailing the same at least
two days before the meeting or by telephoning, telegraphing or
delivering personally the same at least twenty-four hours before the
meeting to each committee member. Except as otherwise specified in the
notice thereof or as required by law, the Certificate of Incorporation or
these By-Laws, any and all business may be transacted at any regular or
special meeting of a committee. The Secretary of the corporation shall
keep the minutes of the meetings of all committees designated or appointed
by the Board of Directors and shall be the custodian of all corporation
records.
ARTICLE V
OFFICERS
Section 1. General. The Board of Directors shall elect the
following executive officers: a Chairman of the Board, a President, one or
more Vice Presidents and a Secretary; and it may elect or appoint from time
to time such other or additional officers as in its opinion are desirable
for the conduct of the business of the corporation.
Section 2. Term of Office: Removal and Vacancy. Each officer
shall hold his/her office until his/her successor is elected and qualified
or until his/her earlier resignation or removal. Any officer or agent shall
be subject to removal with or without cause at any time by the Board of
Directors. Vacancies in any office, whether occurring by death,
resignation, removal or otherwise, may be filled at any regular or special
meeting of the Board of Directors.
Section 3. Powers and Duties. Each of the officers of the
corporation shall, unless otherwise ordered by the Board of Directors, have
such powers and duties as generally pertain to his/her respective office as
well as such powers and duties as from time to time may be conferred upon
him/her by the Board of Directors. Unless otherwise ordered by the Board
of Directors after the adoption of these By-Laws, the Chairman of the
Board, or, when the office of Chairman of the Board is vacant, the
President, shall be the chief executive officer of the corporation.
Section 4. Power to Vote Stock. Unless otherwise ordered by the
Board of Directors, the Chairman of the Board and the President each shall
have full power and authority on behalf of the corporation to attend and to
vote at any meeting of stockholders of any corporation in which this
corporation may hold stock, and may exercise on behalf of this corporation
any and all of the rights and powers incident to the ownership of such
stock at any such meeting and shall have power and authority to execute and
deliver proxies, waivers and consents on behalf of the corporation in
connection with the exercise by the corporation of the rights and powers
incident to the ownership of such stock. The Board of Directors, from time
to time, may confer like powers upon any other person or persons.
ARTICLE VI
CAPITAL STOCK
Section 1. Certificates of Stock. Certificates for stock of the
corporation shall be in such form as the Board of Directors may from time
to time prescribe and shall be signed by the Chairman of the Board or a
Vice Chairman of the Board or the President or a Vice President and by the
Secretary of the corporation or an Assistant Secretary of the corporation.
Section 2. Transfer of Stock. Shares of capital stock of the
corporation shall be transferable on the books of the corporation only by
the holder of record thereof, in person or by duly authorized attorney,
upon surrender and cancellation of certificates for a like number of
shares, with an assignment or power of transfer endorsed thereon or
delivered therewith, duly executed, and with such proof of the authenticity
of the signature and of authority to transfer, and of payment of transfer
taxes, as the corporation or its agents may require.
Section 3. Ownership of Stock. The corporation shall be entitled
to treat the holder of record of any share or shares of stock as the owner
thereof in fact and shall not be bound to recognize any equitable or other
claim to or interest in such shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise expressly provided by law.
ARTICLE VII
MISCELLANEOUS
Section 1. Corporate Seal. The seal of the corporation shall be
circular in form and shall contain the name of the corporation and the year
and State of incorporation. The Secretary of the corporation shall be the
custodian of the seal of the corporation.
Section 2. Fiscal Year. The Board of Directors shall have power
to fix, and from time to time to change, the fiscal year of the
corporation.
Section 3. Waiver of Notice. Any notice required to be given
under the provisions of these By-Laws or otherwise may be waived by the
stockholder, director, member of any committee or officer to whom such
notice is required to be given, before or after the meeting or other action
of which notice was required to be given.
ARTICLE VIII
AMENDMENT
The Board of Directors shall have the power to make, alter or repeal
the By-Laws of the corporation subject to the power of the stockholders to
alter or repeal the By-Laws made or altered by the Board of Directors.
ARTICLE IX
INDEMNIFICATION
Section 1. Obligation to Indemnify. This corporation shall, to
the fullest extent permitted by Delaware law, as in effect from time to
time (but, in the case of any amendment of the Delaware General Corporation
Law, only to the extent that such amendment permits this corporation to
provide broader indemnification rights than said law permitted this
corporation to provide prior to such amendment), indemnify each person who
is or was a director or officer of this corporation or of any of its wholly
owned subsidiaries at any time on or after August 1, 1988, who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, or was or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he
or she is or was a director, officer, employee or agent of this corporation
or of any of its wholly owned subsidiaries, or is or was at any time
serving, at the request of this corporation, any other corporation,
partnership, joint venture, trust, employee benefit plan or other
enterprise in any capacity against all expense, liability and loss
(including, but not limited to, attorneys' fees, judgments, fines, excise
taxes or penalties (with respect to any employee benefit plan or
otherwise), and amounts paid or to be paid in settlement) incurred or
suffered by such director or officer in connection with such proceeding;
provided, however, that, except as provided in Section 5 of this ARTICLE
IX, this corporation shall not be obligated to indemnify any person
under this ARTICLE IX in connection with a proceeding (or part thereof) if
such proceeding (or part thereof) was not authorized by the Board of
Directors of this corporation and was initiated by such person against (i)
this corporation or any of its subsidiaries, (ii) any person who is or was
a director, officer, employee or agent of this corporation or any of its
subsidiaries and/or (iii) any person or entity which is or was controlled,
controlled by, or under common control with, this corporation or has or had
business relations with this corporation or any of its subsidiaries.
Section 2. Contract Right; Advance Payment of Expenses. The right
to indemnification conferred in this ARTICLE IX shall be a contract right,
shall continue as to a person who has ceased to be a director or officer of
this corporation or of any of its wholly owned subsidiaries and shall inure
to the benefit of his or her heirs, executors and administrators, and
shall include the right to be paid by this corporation the expenses
incurred in connection with the defense or investigation of any such
proceeding in advance of its final disposition; provided, however, that, if
and to the extent that Delaware law so requires, the payment of such
expenses in advance of the final disposition of a proceeding shall be made
only upon delivery to this corporation of an undertaking, by or on behalf
of such director or officer or former director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director
or officer or former director or officer is not entitled to be indemnified
by this corporation.
Section 3. Vesting of Rights. The corporation's obligation to
indemnify and to pay expenses in advance of the final disposition of a
proceeding under this ARTICLE IX shall arise, and all rights and
protections granted to directors and officers under this ARTICLE IX shall
vest, at the time of the occurrence of the transaction or event to which
any proceeding relates, or at the time that the action or conduct to which
any proceeding relates was first taken or engaged in (or omitted to be
taken or engaged in), regardless of when any proceeding is first
threatened, commenced or completed.
Section 4. Continuing of Obligations. Notwithstanding any other
provision of these By-laws or the Restated Certificate of Incorporation of
this corporation, no action by this corporation, either by amendment to or
repeal of this ARTICLE IX or the Restated Certificate of Incorporation of
this corporation or otherwise shall diminish or adversely affect any right
or protection granted under this ARTICLE IX to any director or officer or
former director or officer of this corporation or of any of its
wholly-owned subsidiaries which shall have become vested as
aforesaid prior to the date that any such amendment, repeal or other
corporate action is taken.
Section 5. Right to Sue for Unpaid Claims. If a claim for
indemnification and/or for payment of expenses in advance of the final
disposition of a proceeding arising under this ARTICLE IX is not paid in
full by this corporation within thirty days after a written claim has been
received by this corporation, the claimant may at any time thereafter bring
suit against this corporation to recover the unpaid amount of the claim
and, if successful in whole or in part, the claimant shall be entitled to
be paid also the expense of prosecuting such claim.
Section 6. Non-Exclusivity. The right to indemnification and the
payment of expenses incurred in connection with the defense or
investigation of a proceeding in advance of its final disposition conferred
in this ARTICLE IX shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, provision of the
By-Laws, Restated Certificate of Incorporation, agreement, vote of
stockholders or disinterested directors or otherwise. This corporation may
also indemnify all other persons to the fullest extent permitted by
Delaware law.
Section 7. Effective Date. The provisions of this ARTICLE IX
shall apply to any proceeding commenced on or after August 1, 1988. The
provisions of this ARTICLE IX of this corporation's By-Laws, as in effect
on July 31, 1988, shall govern indemnification in respect of any proceeding
commenced prior to August 1, 1988 and in respect of any rights to
indemnification or prepayment of expenses granted under the provisions of
said ARTICLE IX which shall have become vested.
ARTICLE X
LIABILITY INSURANCE
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted
against him or her and incurred by him or her in any such capacity, or
arising out of his status as such, whether or not the corporation would
have the power to indemnify him or her against such liability under the
provisions of ARTICLE IX hereof.
NON-NEGOTIABLE INTERCOMPANY NOTE
New York, New York
December 21, 1989
FOR VALUE RECEIVED, the undersigned, KaiserTech Limited, a Delaware
corporation (the "Company"), HEREBY PROMISES TO PAY to the order of Kaiser
Aluminum & Chemical Corporation, a Delaware corporation (the "Payee"), the
principal sum of EIGHT HUNDRED MILLION FIVE HUNDRED EIGHTY-FIVE THOUSAND
TWO HUNDRED EIGHTY AND NO/100 DOLLARS ($818,585,280.00), with interest
thereon, which shall be due and payable as hereinafter provided.
1. This Note shall bear interest, compounded annually (computed on
the basis of the actual number of days elapsed in a year of 365 or 366
days, as appropriate), on the unpaid principal amount outstanding hereunder
plus all accrued and unpaid interest thereon, from the date this Note is
issued (the "Issuance Date"), until such principal amount is repaid in
full, at a rate equal to the lower of (i) thirteen percent (13%) per annum
or (ii) the maximum rate per annum which would result in this Note not
being an "applicable high yield discount obligation" as defined in Section
7202(b) of the Omnibus Revenue Reconciliation Act of 1989, as passed by
Congress on November 22, 1989, as the same or any similar provision may be
enacted.
2. Subject to Section 5 hereof, no payment of principal or interest
shall be required to be made on this Note prior to December 21, 2000.
Beginning on December 21, 2000, this Note shall be due and payable annually
on each anniversary of the date of this Note as to principal and interest
(including interest accrued hereon from the Issuance Date through December
21, 1999 which shall be added to the unpaid principal amount hereof) in
level installments which, if timely made, would be sufficient fully to
satisfy the outstanding principal balance hereof (including interest
accrued hereon from the Issuance Date through December 21, 1999) plus
interest hereon over a 15-year term, commencing on December 21, 2000. Each
such level payment shall be applied first to interest and the balance to
principal.
3. The Company shall make each payment hereunder not later than 5:00
p.m. (New York City time) on the day when due in lawful money of the United
State of America to the holder of this Note by delivery of a certified or
bank cashier's check in the amount of such payment or, at such holder's
option, by wire transfer of immediately available funds.
4. Whenever any payment to be made hereunder shall be stated to be
due on a Saturday, Sunday or a public or bank holiday or the equivalent for
banks generally under the laws of the State of New York (any other day
being a "Business Day"), such payment may be made on the next succeeding
Business Day.
5. The Company shall have the right to prepay the principal amount
of this Note, in whole or in part, at any time or from time to time,
without premium or penalty, but with interest on the portion of the
principal amount so prepaid accrued to the date of prepayment.
6. If any of the following events (an "Event of Default") shall
occur and shall not have been remedied, the holder of this Note may, at its
option, declare this Note to be, and the same shall forthwith become, due
and payable for the entire unpaid principal amount hereof and all interest
accrued hereon:
(a) The Company fails to pay any installment of principal of, or
interest on, this Note when due; or
(b) The Company (i) becomes bankrupt or insolvent, or (ii)
admits in writing its inability to pay its debts as they mature, or (iii)
files a petition in voluntary bankruptcy, or (iv) seeks relief under any
provisions of any bankruptcy, reorganization, arrangement, insolvency or
readjustment of debt, dissolution or liquidation law of any jurisdiction
whether now or hereafter in effect, or (v) makes a general assignment for
the benefit of creditors, or (vi) has a petition or proceeding filed
against it under any provisions of the Bankruptcy Code or any insolvency
law or statute of the United States of America or any state or subdivision
thereof, which petition or proceeding is not dismissed within thirty days
from the date of commencement thereof, or (vii) has a receiver, trustee,
custodian, conservator or other person appointed by any court to take
charge of its affairs or assets or business and such appointment is not
vacated or discharged within thirty days thereafter.
7. No failure on the part of any holder of this Note to exercise,
and no delay in exercising, any right or remedy hereunder shall operate as
a waiver thereof; nor shall any single or partial exercise by any such
holder of any right or remedy hereunder preclude any other or further
exercise thereof or the exercise of any other right or remedy. The rights
and remedies provided herein are cumulative and not exclusive and are in
addition to all others that may be provided by applicable law and other
agreements and documents.
8. This Note shall be binding upon the Company and its successors
and assigns, and the terms and provisions of this Note shall inure to the
benefit of Payee and its successors and assigns, including subsequent
holders hereof.
9. The terms and provisions of this Note are severable, and if any
term or provision shall be determined to be superseded, illegal, invalid or
otherwise unenforceable in whole or in part pursuant to applicable law by a
governmental authority having jurisdiction, such determination shall not in
any manner impair or otherwise affect the validity, legality or
enforceability of that term or provision in any other jurisdiction or any
of the remaining terms and provisions of this Note in any jurisdiction.
10. Presentment for payment, notice of dishonor, protest, notice of
protest and any other notice are hereby waived. This Note shall be
governed by, and construed in accordance with the internal laws of the
State of New York without regard to principles of conflict of laws.
11. No amendment, modification or waiver of any term or provision of
this Note, nor consent to any departure by the Company herefrom, shall be
effective unless the same shall be in writing and signed by the holder of
this Note and then such waiver, modification or consent shall be effective
only in the specific instance and for the specific purpose for which given.
IN WITNESS WHEREOF, the company has caused this Note to be executed
and delivered to the Payee on the date and year first above written.
KAISERTECH LIMITED
By: /s/ John A. Moore
------------------------------
Name: John A. Moore
Title: Vice President
Pay to the order of MELLON BANK, N.A., as Collateral Agent (the "Collateral
Agent"), pursuant to the terms of that certain Company Pledge Agreement
dated as of December 21, 1989, as the same may be amended, supplemented,
amended and restated, or otherwise modified and in effect from time to
time, by and between KAISER ALUMINUM & CHEMICAL CORPORATION and the
Collateral Agent.
KAISER ALUMINUM & CHEMICAL
CORPORATION
By: /s/ John A. Moore
------------------------------
Name: John A. Moore
Title: Vice President
Confirmation of Amendment
of
Non-Negotiable Intercompany Note
WHEREAS, Kaiser Aluminum Corporation ("KAC"), formerly known as
KaiserTech Limited, executed a Non-Negotiable Intercompany Note (the "KT
Note"), dated December 21, 1989, payable to the order of Kaiser Aluminum &
Chemical Corporation ("KACC"); and
WHEREAS, the KT Note has been endorsed, pledged and delivered to
Mellon Bank, N.A., as collateral agent (the "Collateral Agent"), under that
certain Company Pledge Agreement, dated as of December 21, 1989 (the
"Company Pledge Agreement"); and
WHEREAS, KAC and KACC agreed in July, 1993, that the KT Note should be
amended, effective as of July 1, 1993, as hereinafter described; and
WHEREAS, the Company Pledge Agreement contemplates that Pledged Notes
(as therein defined, including the KT Note) may be amended, modified, or
supplemented from time to time; and
WHEREAS, the Ninth Amendment to Credit Agreement, dated as of May 19,
1993, among other things, amended Section 10.2.14 of the Credit Agreement,
dated as of December 13, 1989, among KAC, KACC, the financial institutions
that are parties thereto, Bank of America National Trust and Savings
Association, as Agent, and Mellon Bank, as Collateral Agent, as amended
(the "Credit Agreement"), in order to permit any amendment to the KT Note
that extends the maturity thereof or reduces the interest rate thereon; and
WHEREAS, Section 5.08(b)(vii) of the Indenture, dated as of February
1, 1993, as supplemented, among KACC, as Issuer, certain subsidiaries of
KACC, as Subsidiary Guarantors, and The First National Bank of Boston, as
Trustee (the "Indenture"), excludes from the provisions of Section 5.08(a)
of the Indenture any amendment to the KT Note that extends the maturity
thereof or reduces the interest rate thereon, or any other amendment
thereto that does not materially adversely affect the holders of the Notes
(as defined in the Indenture); and
WHEREAS, this Confirmation of Amendment of Non-Negotiable Intercompany
Note is made in order to memorialize the agreement between KAC and KACC
amending the KT Note, and to evidence the acknowledgment of the Collateral
Agent of such amendment of the KT Note;
NOW, THEREFORE, KAC and KACC confirm to each other and to the
Collateral Agent that the KT Note has been amended, as of July 1, 1993, in
the following respect only:
1. Clause (i) of Section 1 of the KT Note is amended by deleting the
words "thirteen percent (13%) per annum or", and by replacing
such words with the following: "six and five-eights percent (6
5/8%) per annum or".
IN WITNESS WHEREOF, KAC and KACC have executed this Confirmation of
Amendment of Non-Negotiable Intercompany Note as of October 6, 1993.
Kaiser Aluminum Corporation
By /S/ John T. La Duc
-----------------------------
Title Vice President
Kaiser Aluminum & Chemical
Corporation
By /S/ Kris S. Vasan
-----------------------------
Title Treasurer
Mellon Bank, N.A., as Collateral Agent under the Company Pledge
Agreement, hereby acknowledges that the KT Note has been amended as
hereinabove described.
Mellon Bank, N.A.,
as Collateral Agent
By [signature illegible]
-----------------------------
Title Vice President
DEFERRED FEE AGREEMENT
THIS AGREEMENT, dated as of ___________________________, is by and
between MAXXAM INC., a Delaware corporation (the "Company"), and
_________________ (the "Director"), currently residing at
________________________________________________________________.
WITNESSETH:
WHEREAS, the Director currently serves as a member of the Board of
Directors of the Company (the "Board") and receives remuneration
("Director's Fees") from the Company in that capacity; and
WHEREAS, the Director desires to enter into an arrangement providing
for the deferral of Director's Fees; and
WHEREAS, the Company is agreeable to such an arrangement;
NOW, THEREFORE, it is agreed as follows:
1. The Director irrevocably elects to defer receipt, subject to the
provisions of this Agreement, of _____ percent of any Director's Fees which
may otherwise become payable to the Director for the Calendar year 1994 and
which relate to services performed after the date hereof. Such election
shall continue in effect with respect to any Director's Fees which may
otherwise become payable to the Director for any calendar year subsequent
to 1994 unless, prior to January 1 of such year, the Director shall have
delivered to the Secretary of the Company a written revocation of such
election with respect to Director's Fees for services performed after the
date of such revocation. Until such time as the election made under this
paragraph is revoked, the percentage specified in the first sentence hereof
shall apply on each occasion on which Director's Fees would otherwise be
paid to the Director. Director's Fees with respect to which the Director
shall have elected to defer receipt are hereinafter referred to as
"Deferred Director's Fees."
2. The Company shall credit the amount of Deferred Director's Fees
to a book account (the "Deferred Fee Account") as of the date such fees
would have been paid to the Director had this Agreement not been in effect.
Director's Fees which would otherwise be payable for attending a meeting of
the Board or of a committee thereof shall be credited to the Deferred Fee
Account as of the first business day following such meeting; Director's
Fees which would otherwise be payable as a retainer shall be credited to
the Deferred Fee Account as of the first business day of the period to
which they relate.
3. Earnings shall be credited to the Deferred Fee Account as
follows:
(NOTE: (a) and (b) below must add up to 100%)
(a) ____ None ____ 25% ____ 50% ____ 75% ____ 100%
of the amount credited to the Deferred Fee Account pursuant to paragraph 2
shall be deemed invested in a number of phantom shares (including any
fractional share) of the Company's Common Stock equal to the quotient of
(a) such amount divided by (b) the closing market price (the "Closing
Price") of a share of Common Stock as reported for the date such amount is
credited to the Deferred Fee Account. Whenever a cash dividend is paid on
Common Stock, the Deferred Fee Account shall be credited as of the payment
date with a number of phantom shares (including any fractional share) equal
to the quotient of (y) an amount equal to the cash dividend payable on a
number of shares of Common Stock equal to the number of phantom shares
(excluding any fractional share) standing credited to such Account at the
record date divided by (z) the Closing Price on such payment date. In the
event of a stock dividend or distribution, stock split, recapitalization or
the like, the Deferred Fee Account shall be credited as of the payment date
with a number of phantom shares (including any fractional share) equal to
the number of shares (including any fractional share) of Company Stock
payable in respect of shares of Company Stock equal in number to the number
of phantom shares (excluding any fractional share) standing credited to
such Account at the record date. At the time any payment is to be made
from the Deferred Fee Account pursuant to paragraph 6, the number of
phantom shares then standing credited thereto shall be valued at the
Closing Price on the first business day of the month in which such payment
is to be made, and such payment shall be made in cash.
(b) ____ None ____ 25% ____ 50% ____ 75% ____ 100%
of the standing balance credited to the Deferred Fee Account as of the last
business day of each month shall be increased by an amount reflecting
interest on such balance for such month calculated using one-twelfth of the
Prime Rate plus 2% on the first day of such month. For this purpose the
"Prime Rate" shall mean the highest prime rate (or base rate) reported for
such date in the Money Rates column or section of The Wall Street Journal
as the rate in effect for corporate loans at large U.S. money center
commercial banks (whether or not such rate has actually been charged by
such bank) as of such date. In the event The Wall Street Journal ceases
publication of such rate, the "Prime Rate" shall mean the prime rate (or
base rate) reported for such date in such other publication that publishes
such prime rate information as the Company may choose to rely upon.
4. The Company shall provide an annual statement to the Director
showing such information as is appropriate, including the aggregate amount
standing credited to the Deferred Fee Account, as of a reasonably current
date.
5. The Company's obligation to make payments from the Deferred Fee
Account shall be a general obligation of the Company and such payments
shall be made from the Company's general assets. The Director's
relationship to the Company under this Agreement shall be only that of a
general unsecured creditor, and this Agreement (including any action taken
pursuant hereto) shall not, in and of itself, create or be construed to
create a trust or fiduciary relationship of any kind between the Company
and the Director, his or her designated beneficiary or any other person, or
a security interest of any kind in any property of the Company in favor of
the Director or any other person. The arrangement created by this
Agreement is intended to be unfunded and no trust, security, escrow, or
similar account shall be required to be established for the purposes of
payment hereunder. However, the Company may in its discretion establish a
"rabbi trust" (or other arrangement having equivalent taxation
characteristics under the Internal Revenue Code or applicable regulations
or rulings) to hold assets, subject to the claims of the Company's
creditors in the event of insolvency, for the purpose of making payments
hereunder. If the Company establishes such a trust, amounts paid therefrom
shall discharge the obligations of the Company hereunder to the extent of
the payments so made.
6. Deferred Director's Fees, including all earnings credited to the
Deferred Fee Account pursuant to paragraph 3, shall be paid in cash to the
Director or his or her designated beneficiary as soon as practicable
following the date the Director ceases for any reason to be a member of the
Board. Payments shall be made:
/ / in a lump sum; or
/ / in ____________________ annual installments (not to exceed
10).
Each annual installment payment shall be made as of January 31 and shall be
an amount equal to the balance standing credited to the Deferred Fee
Account as of that date divided by the number of installments (including
the one then due) remaining to be paid.
Amounts standing credited to the Deferred Fee Account during the period in
which installments are paid shall be adjusted to reflect the crediting of
earnings in accordance with paragraph 3.
7. Payments hereunder shall be made to the Director except that:
(a) in the event that the Director shall be determined by a
court of competent jurisdiction to be incapable of managing
his financial affairs, and if the Company has actual notice
of such determination, payment shall be made to the
Director's personal representative(s); and
(b) in the event of the Director's death, payment shall be made
to the last beneficiary designated by the Director for
purposes of receiving such payment in such event in a
written notice delivered to the Secretary of the Company;
provided, that if such beneficiary has not survived the
Director, or no valid beneficiary designation is in effect,
payment shall instead be made to the Director's estate.
The Company shall deduct from any payment hereunder any amounts required
for federal and/or State and/or local withholding tax purposes.
8. Any balance standing credited to the Deferred Fee Account shall
not in any way be subject to the debts or other obligations of the Director
and, except as provided in paragraph 7(b), shall not be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment, garnishment or other legal or equitable process.
9. This Agreement shall not be construed to confer on the Director
any right to be or remain a member of the Board or to receive any, or any
particular rate of, Director's Fees.
10. Interpretations of, and determinations related to, this
Agreement, including any determinations of the amount standing credited to
the Deferred Fee Account, shall be made by the Board and shall be
conclusive and binding upon all parties. The Company shall incur no
liability to the Director for any such interpretation or determination so
made or for any other action taken by it in connection with this Agreement
in good faith.
11. This Agreement contains the entire understanding and agreement
between the parties with respect to the subject matter hereof, and may not
be amended, modified or supplemented in any respect except by a subsequent
written agreement entered into by both parties.
12. This Agreement shall be binding upon, and shall inure to the
benefit of, the Company and its successors and assigns and the Director and
his or her heirs, executors, administrators and personal representatives.
13. This Agreement shall be governed and construed in accordance with
the laws of the State of Texas, without regard to principles of choice of
law.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officer, and the Director has
executed this Agreement, on the date first written above.
ATTEST: MAXXAM INC.
______________________________
Byron L. Wade, Secretary By:___________________________
______________________________
[Director]
EXHIBIT 11
MAXXAM INC.
COMPUTATION OF NET INCOME (LOSS)
PER COMMON AND COMMON EQUIVALENT SHARE
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Weighted average common and common
equivalent shares outstanding
during each year 9,369,125 9,376,703 9,376,703
Common equivalent shares attributable
to stock options and convertible
securities 92,072 82,590 71,175
------------- ------------- -------------
Total common and common
equivalent shares 9,461,197 9,459,293 9,447,878
============= ============= =============
Income (loss) before extraordinary
item $ 22.9 $ 57.5 $ (116.7)
Extraordinary item -- -- (5.4)
------------- ------------- -------------
Net income (loss) $ 22.9 $ 57.5 $ (122.1)
============= ============= =============
Per common and common equivalent
share:
Income (loss) before
extraordinary item $ 2.42 $ 6.08 $ (12.35)
Extraordinary item -- -- (.57)
------------- ------------- -------------
Net income (loss) $ 2.42 $ 6.08 $ (12.92)
============= ============= =============
</TABLE>
MAXXAM INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
The following summary of consolidated financial information for each of the five
years ended December 31, 1996 is not reported upon herein by independent public
accountants and should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto which are contained elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
(In millions of dollars, except share amounts) 1996 1995 1994 1993 1992
- -------------------------------------------------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Net sales $2,543.3 $2,565.2 $2,115.7 $2,031.1 $2,202.6
Operating income (loss) 131.3 257.6 7.3 (96.1) 130.8
Income (loss) before extraordinary item and
cumulative effect of changes in accounting
principles 22.9 57.5 (116.7) (131.9) (7.3)
Extraordinary item, net -- -- (5.4) (50.6) --
Cumulative effect of changes in accounting
principles, net -- -- -- (417.7) --
Net income (loss) 22.9 57.5 (122.1) (600.2) (7.3)
CONSOLIDATED BALANCE SHEET AT END OF PERIOD:
Total assets 4,115.7 3,832.3 3,690.8 3,572.0 3,198.8
Long-term debt, less current maturities 1,881.9 1,585.1 1,582.5 1,567.9 1,592.7
Stockholders' equity (deficit)(1) (50.8) (83.8) (275.3) (167.9) 443.9
PER COMMON AND COMMON EQUIVALENT SHARE:
Income (loss) before extraordinary item and
cumulative effect of changes in accounting
principles 2.42 6.08 (12.35) (13.95) (0.77)
Extraordinary item, net -- -- (.57) (5.35) --
Cumulative effect of changes in accounting
principles, net -- -- -- (44.17) --
Net income (loss) 2.42 6.08 (12.92) (63.47) (0.77)
Stockholders' equity (deficit) (5.44) (8.94) (29.36) (17.91) 47.34
<FN>
(1)MAXXAM Inc. has not declared or paid any cash dividends during the five
year period ended December 31, 1996.
</TABLE>
MAXXAM INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section contains statements which constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements appear in a number of places in this section (see "Results of
Operations-Aluminum Operations," "Results of Operations-Forest Products
Operations," "Financial Condition and Investing and Financing Activities" and
"Trends"). Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates," "will," "should,"
"plans" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. Readers are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve significant risks and uncertainties, and that actual
results may vary materially from those in the forward-looking statements as a
result of various factors. These factors include the effectiveness of
management's strategies and decisions, general economic and business conditions,
developments in technology, new or modified statutory or regulatory requirements
and changing prices and market conditions. This section and the Company's Annual
Report on Form 10-K each identify other factors that could cause such
differences. No assurance can be given that these are all of the factors that
could cause actual results to vary materially from the forward-looking
statements.
RESULTS OF OPERATIONS
The Company operates in three principal industries: aluminum, through its
majority owned subsidiary, Kaiser Aluminum Corporation ("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. ("Britt"); real estate
investment and development, managed through MAXXAM Property Company; and
other commercial operations through various other wholly owned subsidiaries.
MAXXAM Group Holdings Inc. ("MGHI") owns 100% of MGI and is a wholly owned
subsidiary of the Company. All references to the "Company," "Kaiser," "MGHI,"
"MGI" and "Pacific Lumber" refer to the respective companies and their
majority owned subsidiaries, unless otherwise indicated or the context
indicates otherwise. The following should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto which are
contained elsewhere herein.
ALUMINUM OPERATIONS
Aluminum operations account for the 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 (see Notes 1 and 10 to the Consolidated Financial
Statements). Kaiser, through its principal subsidiary, Kaiser Aluminum &
Chemical Corporation ("KACC"), operates in two business segments: bauxite and
alumina, and aluminum processing. As an integrated aluminum producer, Kaiser
uses a portion of its bauxite, alumina and primary aluminum production for
additional processing at certain of its facilities. Information concerning net
sales, operating income (loss) and assets attributable to certain industry
segments and geographic areas is set forth in Note 11 to the Consolidated
Financial Statements.
INDUSTRY OVERVIEW
Significant improvement in prices during 1994 and 1995 resulted from strong
growth in Western world consumption of aluminum and the curtailment of
production in response to lower prices in prior periods by many producers
worldwide. In 1995, production of primary aluminum increased and consumption of
aluminum continued to grow, but at a much lower rate than in 1994. In general,
the overall aluminum market was strongest in the first half of 1995. By the
second half of 1995, orders and shipments for certain products had softened and
the rate of decline in London Metal Exchange ("LME") inventories had leveled
off. By the end of 1995, some small increases in LME inventories occurred, and
prices of aluminum weakened from first-half levels. This trend continued
throughout most of 1996. Net reported primary aluminum inventories increased by
approximately 62,000 tons in 1996 based upon reports of the LME and the
International Primary Aluminium Institute, following substantial declines of
764,000 and 1,153,000 tons in 1994 and 1995, respectively.
Increased production of primary aluminum due to restarts of certain previously
idled capacity, the commissioning of a major new smelter in South Africa, and
the continued high level of exports from the Commonwealth of Independent States
("CIS") have contributed to increased supplies of primary aluminum to the
Western world in 1996. While the economies of the major aluminum consuming
regions-the United States, Japan, Western Europe, and Asia-are, in the
aggregate, performing relatively well, Kaiser believes that the reduction of
aluminum inventories by customers, as prices have continued to decline, has
mitigated the growth in primary aluminum demand that normally accompanies growth
in economic and industrial activity.
PROFIT ENHANCEMENT AND COST REDUCTION INITIATIVE
Kaiser has set a goal of achieving significant cost reduction and other profit
improvements during 1997, with the full effect planned to be realized in 1998.
The initiative is based on Kaiser's conclusion that the current level of
performance of its existing facilities and businesses will not achieve the level
of profits Kaiser considers satisfactory based upon historic long-term average
prices for primary aluminum and alumina. To achieve this goal, Kaiser plans
reductions in production costs, decreases in corporate selling, general and
administrative expenses, and enhancements to product mix. There can be no
assurance that the initiative will result in the desired cost reduction and
other profit improvements.
SUMMARY
The following table presents selected operational and financial information for
the years ended December 31, 1996, 1995 and 1994 for the Company's aluminum
operations.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
(In millions of dollars, except shipments and prices) 1996 1995 1994
- ----------------------------------------------------- --------------------------------
<S> <C> <C> <C>
Shipments:(1)
Alumina 2,073.7 2,040.1 2,086.7
Aluminum products:
Primary aluminum 355.6 271.7 224.0
Fabricated aluminum products 327.1 368.2 399.0
-------- -------- --------
Total aluminum products 682.7 639.9 623.0
======== ======== ========
Average realized sales price:
Alumina (per ton) $ 195 $ 208 $ 169
Primary aluminum (per pound) .69 .81 .59
Net sales:
Bauxite and alumina:
Alumina $ 404.1 $ 424.8 $ 352.8
Other(2)(3) 103.9 89.4 79.7
-------- -------- --------
Total bauxite and alumina 508.0 514.2 432.5
-------- -------- --------
Aluminum processing:
Primary aluminum 538.3 488.0 292.0
Fabricated aluminum products 1,130.4 1,218.6 1,043.0
Other(3) 13.8 17.0 14.0
-------- -------- --------
Total aluminum processing 1,682.5 1,723.6 1,349.0
-------- -------- --------
Total net sales $2,190.5 $2,237.8 $1,781.5
======== ======== ========
Operating income (loss) $ 103.7 $ 216.5 $ (50.3)
======== ======== ========
Income (loss) before income taxes, minority
interests and extraordinary item $ 7.6 $ 108.7 $ (145.8)
======== ======== ========
Capital expenditures $ 160.3 $ 79.4 $ 70.0
======== ======== ========
Investments in unconsolidated affiliates $ 1.2 $ 9.0 $ --
======== ======== ========
<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.
</TABLE>
Results for 1996 include an after tax benefit of approximately $17.0 million
resulting from settlements of certain tax matters in December 1996. Excluding
the impact of these non-recurring items, Kaiser would have reported a net loss
for the year ended December 31, 1996. Results for the year ended December 31,
1996 reflect the substantial reduction in market prices for primary aluminum
more fully discussed below. Alumina prices, which are significantly influenced
by changes in primary aluminum prices, also declined from period to period. The
decrease in product prices more than offset the positive impact of increases in
shipments in several segments of Kaiser's business, as more fully discussed
below. Results for 1996 also include approximately $20.5 million in research and
development expenses and other costs related to Kaiser's new micromill as well
as additional expenses related to other strategic initiatives.
Improved operating results for 1995 were partially offset by expenses related to
Kaiser's smelting joint venture in China (see "-Financial Condition and
Investing and Financing Activities-Aluminum Operations"), accelerated expenses
for Kaiser's micromill technology, maintenance expenses as a result of an
electrical lightning strike at Kaiser's Trentwood, Washington, facility, and a
work slowdown at Kaiser's 49%-owned Kaiser Jamaica Bauxite Company prior to the
signing of a new labor contract. The combined impact of these expenditures on
the results for 1995 was approximately $6.0 million (on a pre-tax basis).
Operating results for 1995 were further impacted by (i) an eight-day strike of
the United Steelworkers of America ("USWA") at Kaiser's five major domestic
locations, (ii) a six-day strike of the National Workers Union at Kaiser's
65%-owned Alumina Partners of Jamaica ("Alpart") bauxite mining and alumina
refinery, 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 1995
was approximately $17.0 million (on a pre-tax basis), principally from lower
production volume and other related costs.
Kaiser's corporate general and administrative expenses of $59.8 million, $82.3
million and $67.6 million in 1996, 1995 and 1994, 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.
NET SALES
Bauxite and alumina. Net sales to third parties for 1996 were basically
unchanged from 1995 as a nominal decline in the average realized price of
alumina was offset by a modest increase in alumina shipments. The reduction in
prices realized reflects the substantial decline in primary aluminum prices
experienced in 1996 discussed below. Net sales to third parties for the bauxite
and alumina segment increased in 1995 compared to 1994. Revenue from alumina
increased in 1995 compared to 1994 due to higher average realized prices,
partially offset by lower shipments. The remainder of the segment's sales
revenues was from sales of bauxite and the portion of sales of alumina
attributable to the minority interest in Alpart.
Aluminum processing. The increase in primary aluminum shipments in 1996 more
than offset the decline in the average realized price for primary aluminum from
year to year. The increase in shipments during the year ended December 31, 1996
was the result of increased shipments of primary aluminum to third parties as a
result of a decline in intracompany transfers.
Net sales of fabricated aluminum products were down for the year ended December
31, 1996 as compared to the prior year as a result of a decrease in shipments
(primarily related to can sheet activities) resulting from reduced growth in
demand and the reduction of customer inventories. The impact of reduced product
shipments was to a limited degree offset by an increase in the average realized
price from the sale of fabricated aluminum products, resulting primarily from a
shift in product mix to higher value added products. Net sales to third parties
for the aluminum processing segment increased in 1995 compared to 1994. The bulk
of this segment's sales represents Kaiser's primary aluminum and fabricated
aluminum products, with the remainder representing the portion of sales of
primary aluminum attributable to the minority interest in Kaiser's 90%-owned
Volta Aluminium Company Limited ("Valco") aluminum smelter in Ghana.
Revenue from primary aluminum increased in 1995 compared to 1994 due primarily
to higher average realized prices and higher shipments. The higher shipments of
primary aluminum were due to increased production at Kaiser's smelters in the
Pacific Northwest and Valco, and reduced intracompany consumption of primary
aluminum at Kaiser's fabricated products units. The increase in revenue for 1995
was partially offset by decreased shipments caused by a strike of the USWA
discussed above. In 1995, Kaiser's average realized price from sales of primary
aluminum was approximately $.81 per pound, as compared to the average Midwest
United States transaction price ("AMT Price") for primary aluminum of
approximately $.86 per pound.
Revenue from fabricated aluminum products increased in 1995 compared to 1994 due
to higher average realized prices, partially offset by lower shipments for most
of these products.
OPERATING INCOME (LOSS)
Bauxite and alumina. The bauxite and alumina segment had an operating loss of
$10.7 million in 1996, compared to operating income of $37.2 million in 1995 and
$5.6 million in 1994. Operating income for 1996 for this segment of Kaiser's
business declined significantly from the prior year as a result of reduced gross
margins from alumina sales resulting from the previously discussed price
declines and increased natural gas costs at Kaiser's Gramercy, Louisiana alumina
refinery. Operating income for the year ended December 31, 1996 was also
unfavorably impacted by high operating costs associated with disruptions in the
power supply at Kaiser's Alpart alumina refinery, higher manufacturing costs
resulting from higher market prices for fuel and caustic soda and a temporary
raw material quality problem experienced at Kaiser's Gramercy facility. In 1995
compared to 1994, operating income increased principally due to higher revenue,
partially offset by the effect of the strikes and boiler failure.
Aluminum processing. Operating income for the aluminum processing segment was
$114.4 million in 1996, compared to operating income of $179.3 million in 1995
and an operating loss of $55.9 million in 1994. Operating income for the
aluminum processing segment for 1996 was impacted by approximately $5.6 million
of scheduled non-recurring maintenance costs at Kaiser's Trentwood, Washington
rolling mill facility, offset by $11.5 million ($7.2 million on an after-tax
basis) of reduced operating costs resulting from the non-cash settlement in
December 1996 of certain tax matters. Operating results improved in 1995
compared to 1994, principally due to higher revenue, partially offset by the
effect of the USWA strike.
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTERESTS AND EXTRAORDINARY ITEM
Income before income taxes, minority interests and extraordinary item for 1996
declined as compared to 1995 as a result of lower operating income as previously
described and expenses associated with Kaiser's new micromill facility. Income
before income taxes, minority interests and extraordinary item for 1995, as
compared to the loss for 1994, resulted from the improvement in operating income
previously described, partially offset by other charges, principally related to
the establishment of additional litigati on reserves.
As described in Note 1 to the Consolidated Financial Statements, Kaiser's
cumulative losses in 1993, principally due to the implementation of the new
accounting standard for postretirement benefits other than pensions, eliminated
Kaiser's equity with respect to its common stock; accordingly, since 1993 the
Company has recorded 100% of Kaiser's earnings and losses, without regard to the
minority interests represented by Kaiser's other common stockholders (as
described in Note 7 to the Consolidated Financial Statements) and will continue
to do so until such time as the cumulative losses recorded by the Company with
respect to Kaiser's minority common stockholders are recovered.
FOREST PRODUCTS OPERATIONS
The Company's forest products operations are conducted by MGI. MGI conducts its
operations primarily through its subsidiaries, Pacific Lumber and Britt. 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. The following should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto.
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, Pacific Lumber's supply of
upper grade lumber has decreased in some premium product categories.
Furthermore, logging costs have increased primarily due to the harvest of
smaller diameter logs and, to a lesser extent, compliance with environmental
regulations relating to the harvesting of timber and litigation costs incurred
in connection with certain timber harvesting plans ("THPs") filed by Pacific
Lumber. Pacific Lumber has been able to lessen the impact of these factors by
augmenting its production facilities to increase its recovery of upper grade
lumber from smaller diameter logs and by increasing production capacity for
manufactured upper grade lumber products through its end and edge glue facility
(which was expanded during 1994). At this facility, knot-free pieces of lumber
are assembled into wider or longer pieces. This manufactured lumber results in a
significant increase in lumber recovery and produces a standard size upper grade
product which is sold at a premium price compared to common grade products of
similar dimensions. Pacific Lumber has also increased shipments of air seasoned,
primed and specialty cut lumber which are examples of value added products.
Additionally, Pacific Lumber has instituted a number of measures at its sawmills
during the past several years designed to enhance the efficiency of its
operations, such as expansion of its manufactured lumber facilities and other
improvements in lumber recovery, automated lumber handling and the modification
of its production scheduling to maximize cogeneration power revenues, and
installation of a lumber remanufacturing facility at its Fortuna lumber mill.
However, unless Pacific Lumber is able to sustain the harvest level of old
growth trees, Pacific Lumber expects that its production of premium upper grade
lumber products will decline and that its manufactured lumber products will
constitute a higher percentage of its shipments of upper grade lumber products.
See also "-Trends-Forest Products Operations."
The following table presents selected operational and financial information for
the years ended December 31, 1996, 1995 and 1994 for the Company's forest
products operations.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
(In millions of dollars, except shipments and prices) 1996 1995 1994
- ----------------------------------------------------- ---------------------------------
<S> <C> <C> <C>
Shipments:
Lumber:(1)
Redwood upper grades 49.7 46.5 52.9
Redwood common grades 229.6 216.7 218.4
Douglas-fir upper grades 10.6 7.4 8.6
Douglas-fir common grades 74.9 64.6 54.2
Other 17.2 11.4 12.1
------- ------- -------
Total lumber 382.0 346.6 346.2
======= ======= =======
Logs(2) 20.1 12.6 17.7
======= ======= =======
Wood chips(3) 208.9 214.0 210.3
======= ======= =======
Average sales price:
Lumber:(4)
Redwood upper grades $ 1,380 $ 1,495 $ 1,443
Redwood common grades 511 477 460
Douglas-fir upper grades 1,154 1,301 1,420
Douglas-fir common grades 439 392 444
Logs(4) 477 440 615
Wood chips(5) 76 102 83
Net sales:
Lumber, net of discount $ 234.1 $ 211.3 $ 216.5
Logs 9.6 5.6 10.9
Wood chips 15.8 21.7 17.4
Cogeneration power 3.3 2.5 3.5
Other 1.8 1.5 1.3
------- ------- -------
Total net sales $ 264.6 $ 242.6 $ 249.6
======= ======= =======
Operating income $ 73.0 $ 74.3 $ 79.1
======= ======= =======
Operating cash flow(6) $ 100.2 $ 99.6 $ 103.8
======= ======= =======
Income (loss) before income taxes and extraordinary item $ 6.3 $ 6.4 $ (5.2)
======= ======= =======
Capital expenditures $ 15.2 $ 9.9 $ 11.3
======= ======= =======
<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."
</TABLE>
NET SALES
Net sales for 1996 increased compared to 1995 principally due to higher lumber
shipments in all categories and higher average realized prices for common grade
lumber. Partially offsetting these improvements were 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.
Net sales for 1995 decreased compared to 1994. Decreased shipments of upper
grade redwood lumber, lower average realized prices for common grade Douglas-fir
lumber and logs, decreased shipments of logs and redwood common lumber and lower
sales of electrical power were largely offset by increased shipments of common
grade Douglas-fir lumber, increased sales of wood chips and higher average
realized prices for both common and upper grades of redwood lumber.
OPERATING INCOME
Operating income, after excluding from 1995 cost of sales a $1.5 million
settlement of business interruption insurance claims related to an April 1992
earthquake, increased in 1996 due to the increase in net sales discussed above.
Increases in costs of goods sold reflect both the impact of additional
manufacturing costs attributable to the increased shipments of manufactured
lumber products, higher shipments of lower margin lumber and the increasing cost
of regulatory compliance for the Company's timber harvesting operations.
Operating income for 1995 decreased compared to 1994. This decrease was
primarily due to the higher cost and lower sales of lumber, logs and electrical
power, partially offset by increased sales and margins on wood chips. Cost of
lumber sales for 1995 was unfavorably impacted by higher purchases of logs from
third parties, partially offset by improved sawmill productivity.
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM
Income before income taxes for 1996 was basically flat as compared to 1995.
Income (loss) before income taxes and extraordinary item increased for 1995
as compared to 1994 primarily due to higher investment, interest and other
income (expense). Investment, interest and other income (expense) for 1995
includes net gains on marketable securities of $4.9 million. Investment,
interest and other income (expense) for 1994 includes a loss of
$21.2 million for the settlement of litigation, partially offset by the
receipt of a franchise tax refund of $7.2 million (as described in Note 1
to the Consolidated Financial Statements) and net gains on marketable
securities of $2.0 million.
REAL ESTATE AND OTHER OPERATIONS
Years Ended December 31,
-------------------------------
(In millions of dollars) 1996 1995 1994
- --------------------------------------- -------------------------------
Net sales $ 88.2 $ 84.8 $ 84.6
Operating loss (12.0) (13.6) (10.0)
Income (loss) before income taxes, minority
interests and extraordinary item 13.2 (.8) (1.5)
NET SALES
Net sales include revenues from (i) sales of developed lots, bulk acreage and
real property associated with the Company's real estate developments, (ii)
resort and other commercial operations conducted at certain of the Company's
real estate developments, (iii) rental revenues associated with the real
properties purchased from the Resolution Trust Corporation in June 1991 (the
"RTC Portfolio"), and (iv) beginning in the fourth quarter of 1995, revenues
from Sam Houston Race Park, Ltd. ("SHRP, Ltd."), a Texas limited partnership
which owns and operates a Class 1 horse racing facility in Houston, Texas (see
"-Financial Condition and Investing and Financing Activities-Real Estate and
Other Operations"). Net sales do not include any amounts from the sale of income
producing properties, such as the hotel and other resort-related assets owned by
Palmas del Mar, and the RTC Portfolio properties and loans, which are recorded
net of costs as investment, interest and other income. As of December 31, 1996
the RTC Portfolio consisted of two loans and six properties which had an
aggregate net book value of $15.6 million.
Net sales for 1996 include $20.8 million of revenues attributable to a full year
of the operations of SHRP, Ltd. which more than offset lower real estate
revenues as compared to 1995. The Company began consolidating SHRP, Ltd.'s
results in October 1995. Net sales attributable to 1996 real estate operations
of $67.4 million decreased from $79.7 million in 1995 due to lower 1996 sales of
real property in the Fountain Hills, Arizona development and lower RTC Portfolio
revenues due to the sale of a substantial number of these properties during 1996
and prior periods.
Net sales for 1995 were essentially unchanged from 1994. The inclusion of
revenues in the fourth quarter of 1995 from SHRP, Ltd. and a bulk sale of Texas
acreage were offset by a decrease in rental revenues from the RTC Portfolio due
to the sale of some of those properties.
OPERATING LOSS
The operating loss for 1996 decreased as compared to 1995, principally due to
lower selling, general and administrative expenses offset in part by lower
margins on sales of real property and $1.9 million of operating losses in 1996
attributable to SHRP, Ltd. The operating loss for 1995 increased as compared to
1994, primarily due to a $4.0 million writedown of certain real property to its
estimated net realizable value, partially offset by a bulk sale of acreage in
Texas.
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTERESTS AND EXTRAORDINARY ITEM
Income before income taxes, minority interests and extraordinary item for 1996
improved compared to 1995 primarily due to 1996 gains of $19.9 million from the
sale of RTC properties and mortgage notes and $4.8 million from the sale of a
hotel and other resort-related assets at Palmas del Mar. Net proceeds from these
sales were $36.0 million and $7.5 million, respectively. Additionally,
investment income for 1996 includes income derived from lot sales and operations
at SunRidge Canyon, the Company's 50%-owned joint venture in Arizona. Interest
expense for 1996 includes interest on SHRP Ltd.'s Senior Secured Extendible
Notes (see Note 4 to the Consolidated Financial Statements).
The loss before income taxes, minority interests and extraordinary item for 1995
decreased as compared to 1994, primarily due to higher investment, interest and
other income and lower interest expense, partially offset by the increased
operating loss discussed above. Investment, interest and other income includes a
1995 pre-tax gain of $10.5 million resulting from the sale of five real
properties and one loan from the RTC Portfolio for $25.5 million, and 1994
pre-tax gains of $7.3 million resulting from the sale of two real properties and
one loan from the RTC Portfolio for $14.2 million.
OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS
Years Ended December 31,
-------------------------------
(In millions of dollars) 1996 1995 1994
- --------------------------------------- -------------------------------
Operating loss $ (33.4) $ (19.6) $ (11.5)
Loss before income taxes, minority
interests and extraordinary item (39.2) (19.8) (19.3)
OPERATING LOSS
The operating loss represents corporate general and administrative expenses that
are not attributable to the Company's industry segments. The operating loss for
1996 increased from 1995 principally due to accruals of $23.1 million for
certain legal contingencies (see Note 9 to the Consolidated Financial
Statements). The operating loss for 1995 increased compared to 1994 primarily
due to a $2.5 million increase in costs attributable to phantom share rights
previously granted to certain employees which were exercised in 1995 and a $6.1
million charge for the cost of certain litigation. See Note 8 to the
Consolidated Financial Statements.
LOSS BEFORE INCOME TAXES, MINORITY INTERESTS AND EXTRAORDINARY ITEM
The loss before income taxes, minority interests and extraordinary item
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 loss
for 1996 increased compared to 1995 primarily due to the increased
operating loss. The loss for 1995 increased compared to 1994 primarily due
to the increased operating loss, partially offset by higher investment,
interest and other income. Investment, interest and other income (expense)
for 1994 includes the equity in losses of affiliates attributable to the
Company's equity interest in SHRP, Ltd. offset by net gains on marketable
securities. Affiliates of the Company held an equity interest in SHRP, Ltd.
of approximately 29.7% until October 1994, when, as a result of an
additional capital contribution of $5.6 million, the Company's interest
increased to approximately 45%. The Company obtained a majority interest
in SHRP, Ltd. upon its emergence from Chapter 11 bankruptcy proceedings
on October 6, 1995 and currently owns an 88.5% interest. See "-Financial
Condition and Investing and Financing Activities-Real Estate and Other
Operations."
CREDIT (PROVISION) FOR INCOME TAXES
The Company's credit (provision) for income taxes differs from the federal
statutory rate due principally to (i) 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. The Company's credit (provision)
for income taxes for 1996, 1995 and 1994 reflect benefits of $40.8 million,
$20.0 million and $20.1 million, respectively, for such reversals of reserves.
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.
EXTRAORDINARY ITEM
The refinancing activities of Kaiser during the first quarter of 1994, as
described in Note 4 to the Consolidated Financial Statements, resulted in an
extraordinary loss of $5.4 million, net of benefits for income taxes of $2.9
million, consisting primarily of the write-off of unamortized deferred financing
costs on Kaiser's previous credit agreement.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
Since 1993, subsidiaries of the Company's aluminum operations and forest
products operations have completed a number of transactions designed to
enhance their liquidity, significantly extend their debt maturities and
lower their interest costs. Collectively, these transactions included public
offerings for approximately $1.8 billion of debt securities, approximately
$220.0 million of additional equity capital and the increase in borrowing
capacity of revolving credit facilities. The following should be read in
conjunction with the Company's Consolidated Financial Statements and the
Notes thereto.
PARENT COMPANY AND MGHI
FINANCING ACTIVITIES AND LIQUIDITY
The Company conducts its operations primarily through its subsidiaries.
Creditors of and holders of minority interests in subsidiaries of the Company
have priority with respect to the assets and earnings of such subsidiaries over
the claims of the creditors of the Company. As of December 31, 1996, the
indebtedness of the subsidiaries and the minority interests reflected on the
Company's Consolidated Balance Sheet were $1,908.9 million and $219.8 million,
respectively. Certain of the Company's subsidiaries, principally Kaiser and MGHI
(and in turn MGHI's subsidiaries), 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 most restrictive covenants governing debt of the
Company's real estate and other subsidiaries would not restrict payment to the
Company of all available cash and unused borrowing availability for such
subsidiaries which together were approximately $12.8 million as of December 31,
1996.
KACC's 1994 Credit Agreement (as amended, the "KACC Credit Agreement") contains
covenants which, among other things, preclude Kaiser from paying any dividends
with respect to its common stock and restrict transactions between Kaiser and
its affiliates. The indentures governing KACC's 9 7/8% Senior Notes due 2002
(the "KACC 9 7/8% Senior Notes"), KACC's 12 3/4% Senior Subordinated Notes due
2003 (the "KACC Senior Subordinated Notes") and KACC's 10 7/8% Senior Notes due
2006 (the "KACC 10 7/8% Senior Notes" and together with the KACC 9 7/8% Senior
Notes and KACC Senior Subordinated Notes, the "KACC Notes") contain covenants
which restrict, among other things, KACC's ability to incur debt and liens, make
investments, undertake transactions with affiliates and pay dividends.
MGHI was formed on November 4, 1996, to facilitate the offering of the $130.0
million aggregate principal amount of 12% Senior Secured Notes due 2003 (the
"MGHI Notes"). The Company has guaranteed the MGHI Notes on a senior, unsecured
basis. Subsequent to its formation, MGHI received, as a capital contribution
from the Company, 100% of the capital stock of MGI and 27,938,250 shares of
Kaiser common stock representing a 34.6% interest in Kaiser on a fully diluted
basis. As a result of these transactions, the Company's direct interest in
Kaiser became 27.3%. These shares of Kaiser common stock (the "Pledged Shares")
are pledged as security for MGI's 11 1/4% Senior Secured Notes due 2003 and 12
1/4% Senior Secured Discount Notes due 2003 (collectively, the "MGI Notes").
Furthermore, MGHI has agreed to pledge up to 16,055,000 of such Pledged Shares
as security for the MGHI Notes should they be released from the pledge for the
MGI Notes due to an early retirement (except by reason of a refinancing) of the
MGI Notes. MGHI has also pledged the capital stock of MGI as security for the
MGHI Notes. Net proceeds of $125.0 million received from the offering of the
MGHI Notes were loaned to the Company pursuant to an intercompany note (the
"Intercompany Note") which is pledged to secure the MGHI Notes. The Intercompany
Note bears interest at the rate of 11% per annum (payable semi-annually on the
interest payment dates applicable to the MGHI Notes) and matures in 2003. In
January 1997, the Company used the proceeds from the Intercompany Note to redeem
its 12 1/2% Subordinated Debentures and 14% Senior Subordinated Reset Notes
together with accrued interest thereon for $43.3 million. The Company expects to
use the remaining proceeds of the loan for general corporate purposes, including
possible repurchases of its common stock.
The indenture governing the MGHI Notes contains various covenants which, among
other things, limit the payment of dividends and restrict transactions between
MGHI and its affiliates. Except for a portion of possible proceeds from the
Headwaters Agreement (see "-Trends-Forest Products Operations-Headwaters
Agreement" below), the Company does not expect to receive dividends from MGHI
during the next several years.
The indenture governing the public indebtedness of MGI (the "MGI Indenture")
restricts the payment of dividends to MGHI. Except for a portion of possible
proceeds from the Headwaters Agreement, MGHI does not expect to receive a
significant amount of cash dividends from MGI for the next several years. The
Company therefore expects that MGHI will be primarily dependent upon cash
interest payments in respect of the Intercompany Note to service the MGHI Notes.
See "-Forest Products Operations-Financing Activities and Liquidity" for further
information concerning the MGI Indenture, dividends paid by MGI and related
information.
Although there are no restrictions on the Company's ability to pay dividends on
its capital stock, the Company has not paid any dividends for a number of years
and has no present intention to do so. The Company has stated that, from time to
time, it may purchase its common stock on national exchanges or in privately
negotiated transactions. During 1996, the Company purchased 44,600 shares of its
common stock for $1.8 million.
On June 28, 1996, the Company entered into an agreement with the Custodial Trust
Company providing for up to $25.0 million in borrowings ("the Custodial Trust
Agreement"). Any amounts drawn would be secured by Kaiser common stock owned
directly 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 this 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 June 28, 1997 convert into a term loan maturing on
June 28, 1998. No borrowings were outstanding as of December 31, 1996.
In March 1997, the Company applied to the Securities and Exchange Commission for
withdrawal of its outstanding shelf registration statement relating to $200.0
million of debt securities. Kaiser has an effective shelf registration statement
covering the offering of up to 10 million shares of Kaiser common stock owned by
the Company.
During the three years ended December 31, 1996, the Company's corporate general
and administrative expenses, net of cost reimbursements from its subsidiaries,
have ranged between $11.0 million and $33.0 million per year. The Company's
corporate general and administrative expenses for 1996 included a $23.1 million
charge for certain legal contingencies, of which a substantial portion related
to legal fees and expenses that the Company may incur in connection with the OTS
and FDIC matters described in Note 9 to the Consolidated Financial Statements.
The Company expects that its general and administrative costs, net of cost
reimbursements from subsidiaries and excluding expenses related to legal
contingencies, will range from $9 million to $12 million for the next year.
Although the Company cannot predict when or whether the expenses represented by
the 1996 accrual for legal contingencies will be incurred, there can be no
assurance that such accrual will be adequate or that the Company's cash
requirements for its corporate general and administrative expenses will not
increase.
The Company has realized a substantial portion of its cash flows during the past
several years from the sale of real property and loans from the RTC Portfolio.
From 1992 to 1996, an aggregate of approximately $41.7 million in loans (which
represented thirteen loans) were sold or paid off and thirty-six properties were
sold for aggregate consideration of approximately $182.4 million. These
transactions resulted in aggregate gains of $97.3 million. As of December 31,
1996, two loans resulting from property sales and six properties having an
aggregate net book value of $15.6 million, were held. These assets are being
managed and marketed for sale. The Company does not expect that real estate
operations will be able to generate distributable cash flows during the next
several years at or near recent historical levels.
As of December 31, 1996, the Company (excluding its subsidiaries) had cash and
marketable securities of approximately $188.4 million of which $43.3 million was
expended in January 1997 to retire all of the Company's outstanding public
indebtedness (see above). The Company believes that its existing resources,
together with the cash available from subsidiaries and other sources of
financing, will be sufficient to fund its working capital requirements for the
next year. With respect to its long-term liquidity, the Company believes that
its existing cash and cash resources, together with the cash proceeds from the
sale of assets and distributions from its subsidiaries should be sufficient to
meet its working capital requirements. However, there can be no assurance that
the Company's cash resources, together with the cash proceeds from the sale of
assets, distributions from its subsidiaries and other sources of financing, will
be sufficient for such purposes. Any adverse outcome of the litigation described
below could materially adversely affect the Company's consolidated financial
position, results of operations or liquidity.
INVESTING ACTIVITIES
During 1994, the Company sold 1,239,400 of Kaiser's Depositary Shares (as
defined in "-Aluminum Operations" below) for aggregate net proceeds of $10.3
million. The Company sold its remaining 893,550 of Depositary Shares during the
first six months of 1995 for aggregate net proceeds of $7.6 million. See Note 7
to the Consolidated Financial Statements.
On October 6, 1995, wholly owned subsidiaries of the Company made investments in
SHRP, Ltd. of approximately $8.7 million, consisting of land, cash ($5.8
million) and other assets. In an unrelated transaction, on October 20, 1995, the
Company purchased, for $7.3 million, $14.6 million aggregate initial principal
amount of SHRP, Ltd.'s 11% Senior Secured Extendible Notes (the "SHRP Notes").
On February 12, 1997, the Company purchased an additional $11.0 million
aggregate initial principal amount of SHRP Notes for $5.9 million. See "-Real
Estate and Other Operations."
CONTINGENCIES
On December 26, 1995, the United States Department of Treasury's Office of
Thrift Supervision ("OTS") initiated a formal administrative proceeding against
the Company and others by filing a Notice of Charges (the "Notice"). The Notice
alleges, among other things, misconduct by the Company, Federated Development
Company ("Federated"), Mr. Charles 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 OTS, among other things, seeks unspecified damages in excess of
$138.0 million from the Company and Federated as well as civil money penalties.
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-95-3956) (the "FDIC action")
in the U.S. District Court for the Southern District of Texas. The Court has
joined the OTS as a party to the FDIC action and granted the motions to
intervene filed by the Company and three other respondents in the OTS
administrative proceeding. The OTS is seeking to be dismissed from the FDIC
action. On January 15, 1997, the FDIC filed an amended complaint which seeks,
conditioned on the OTS prevailing in its administrative proceeding, unspecified
damages from Mr. Hurwitz relating to amounts the OTS does not collect from the
Company and Federated with respect to alleged obligations to maintain USAT's net
worth.
The Company's bylaws provide for indemnification of its officers and directors
to the fullest extent permitted by Delaware law. The Company is obligated to
advance defense costs to its officers and directors, subject to the individual's
obligation to repay such amount if it is ultimately determined that the
individual was not entitled to indemnification. In addition, the Company's
indemnity obligation can, under certain circumstances, include amounts other
than defense costs, including judgments and settlements. The Company has
concluded that it is unable to determine a reasonable estimate of the loss (or
range of loss), if any, that could result from the OTS and FDIC matters.
Accordingly, it is impossible to assess the ultimate outcome of the foregoing
matters or their potential impact on the Company's consolidated financial
position, results of operations or liquidity. See Note 9 to the Consolidated
Financial Statements for further discussion of these matters.
ALUMINUM OPERATIONS
FINANCING ACTIVITIES AND LIQUIDITY
Note 4 to the Consolidated Financial Statements contains a listing of Kaiser's
indebtedness and information concerning certain restrictive debt covenants. As
further described in Note 10 to the Consolidated Financial Statements, KACC from
time to time enters into primary aluminum and energy hedging transactions in the
ordinary course of business which are designed to mitigate Kaiser's exposure to
unfavorable price changes, while retaining some ability to participate in any
favorable pricing environments that may materialize.
During the fourth quarter of 1996 KACC sold a total $225.0 million principal
amount of KACC 10 7/8% Senior Notes. The KACC 10 7/8% Senior Notes rank pari
passu with the indebtedness under the KACC Credit Agreement and the KACC 9 7/8%
Senior Notes (each defined below) and are guaranteed on a senior, unsecured
basis by certain of KACC's subsidiaries.
On February 17, 1994, Kaiser and KACC entered into the KACC Credit Agreement: a
five year credit agreement under which KACC is able to borrow by means of
revolving credit advances and letters of credit (up to $125.0 million) in an
aggregate amount equal to the lesser of $325.0 million or a borrowing base
relating to eligible accounts receivable plus eligible inventory. As of February
14, 1997, $271.9 million (of which $71.9 million could have been used for
letters of credit) was available to KACC under the KACC Credit Agreement. The
KACC Credit Agreement is unconditionally guaranteed by Kaiser and by certain
significant subsidiaries of KACC. The KACC Credit Agreement requires KACC to
maintain certain financial covenants and places restrictions on Kaiser's and
KACC's ability to, among other things, incur debt and liens, make investments,
pay dividends, undertake transactions with affiliates, make capital
expenditures, and enter into unrelated lines of business.
The declaration and payment of dividends by KACC on shares of its common stock
is also subject to certain covenants contained in the indentures for the KACC 9
7/8% Senior Notes, the KACC 10 7/8% Senior Notes, and the KACC Senior
Subordinated Notes. These indentures also limit, among other things, the ability
of KACC to incur debt and liens, make investments and undertake transactions
with affiliates.
At December 31, 1996, Kaiser had working capital of $414.3 million, compared
with working capital of $331.7 million at December 31, 1995. The increase in
working capital was due primarily to an increase in cash and cash equivalents as
a result of the debt offerings discussed below. Kaiser believes that its
existing cash resources, together with cash flows from operations and borrowings
under the 1994 KACC Credit Agreement, will be sufficient to satisfy its working
capital and capital expenditure requirements for the next year. With respect to
long-term liquidity, Kaiser believes that operating cash flows, together with
the ability to obtain both short- and long-term financing, should provide
sufficient funds to meet its working capital and capital expenditure
requirements.
CAPITAL STRUCTURE
The Company owns approximately 61.9% of Kaiser's common stock, par value $.01
per share (the "Kaiser Common Stock"), assuming the conversion of each
outstanding share of Kaiser's 8.255% Preferred Redeemable Increased Dividend
Equity Securities (the "PRIDES") into one share of Kaiser Common Stock. The
remaining approximately 38% of Kaiser's Common Stock is publicly held.
In addition to the shelf registration covering 10 million shares of Kaiser
common stock owned by the Company discussed above, Kaiser has an effective shelf
registration statement covering the offering of up to $150.0 million of Kaiser
equity securities.
On December 31, 1997, unless either previously redeemed by Kaiser or converted
at the option of the holder, each of the outstanding shares of PRIDES will
mandatorily convert into one share of Kaiser's common stock, subject to
adjustment in certain events.
In February 1996, Kaiser proposed a recapitalization which would have provided
for two separate classes of common stock with different voting rights; however,
the proposed recapitalization was abandoned as a result of an unfavorable court
ruling in a suit that had challenged the proposal. See Note 7 to the
Consolidated Financial Statements.
INVESTING ACTIVITIES
Kaiser's capital expenditures of $319.9 million during the three years ended
December 31, 1996 (of which $23.2 million was funded by Kaiser's minority
partners in certain foreign joint ventures) were made primarily to construct new
facilities, improve production efficiency, reduce operating costs, and expand
capacity at existing facilities. Total consolidated capital expenditures were
$161.5 million in 1996, compared with $88.4 million in 1995 and $70.0 million in
1994 (of which $7.4 million, $8.3 million and $7.5 million were funded by the
minority partners in certain foreign joint ventures in 1996, 1995, and 1994,
respectively). A substantial portion of the increase in capital expenditures in
1996 over prior year's level is attributable to the development and construction
of Kaiser's proprietary micromill technology for the production of can sheet
from molten metal. The first micromill, which was constructed in Nevada during
1996 as a demonstration and production facility, achieved operational start-up
by year-end 1996. Kaiser expects that the Nevada micromill will be in a start-up
mode for the first half of 1997 and will be able to commence limited product
shipments to customers in the second half of 1997.
Kaiser's total capital expenditures are expected to be between $70.0 million and
$140.0 million per annum in each of 1997 through 1999 (of which approximately 7%
is expected to be funded by Kaiser's minority partners in certain foreign joint
ventures). Kaiser continues to evaluate numerous domestic and international
projects all of which require substantial capital.
ENVIRONMENTAL CONTINGENCIES
Kaiser and KACC are subject to a number of environmental laws and regulations,
to fines or penalties assessed for alleged breaches of the environmental laws
and regulations, and to claims and litigation based upon such laws. KACC
currently is 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
December 31, 1996, the balance of such accruals, which are primarily included in
other noncurrent liabilities, was $33.3 million. Further, Kaiser believes it is
reasonably possible that these costs could exceed the accrual by $24.0 million.
While uncertainties are inherent in the final outcome of these environmental
matters, and it is presently impossible to determine the actual costs that
ultimately may be incurred, management currently believes that the resolution of
such uncertainties should not have a material adverse effect on Kaiser's
consolidated financial position, results of operations, or liquidity. See Note 9
to Consolidated Financial Statements for further information regarding these
contingencies.
ASBESTOS CONTINGENCIES
KACC is a defendant in a number of lawsuits, some of which involve claims of
multiple persons, in which the plaintiffs allege that certain of their injuries
were caused by, among other things, exposure to asbestos during, and as a result
of, their employment or association with KACC or exposure to products containing
asbestos produced or sold by KACC. The lawsuits generally relate to products
KACC has not manufactured for at least 15 years. Based on past experience, and
reasonably anticipated future activity, and the advice of Wharton, Levin,
Ehrmantraut, Klein & Nash, P.A. with respect to the current state of the law
related to asbestos claims, at December 31, 1996 Kaiser has an accrual of $136.7
million, before consideration of insurance recoveries, for estimated
asbestos-related costs for claims filed and estimated to be filed and settled
through 2008. Claims for recovery from some of KACC's insurance carriers are
currently subject to pending litigation and other carriers have raised certain
defenses, which have resulted in delays in recovering costs from the insurance
carriers. The timing and amount of ultimate recoveries from these insurance
carriers are dependent upon the resolution of these disputes. Kaiser believes,
based on prior insurance-relate d recoveries in respect of asbestos-related
claims, existing insurance policies, and the advice of Thelen, Marrin, Johnson &
Bridges LLP with respect to applicable insurance coverage law relating to the
terms and conditions of those policies, that substantial recoveries from the
insurance carriers are probable. Accordingly, at December 31, 1996 an estimated
aggregate insurance recovery of $109.8 million, determined on the same basis as
the asbestos-related cost accrual, is recorded primarily in other assets. While
uncertainties are inherent in the final outcome of these asbestos matters and it
is presently impossible to determine the actual costs that ultimately may be
incurred and insurance recoveries that will be received, Kaiser believes that,
based on the factors discussed above and the information in Note 9 to the
Consolidated Financial Statements, the resolution of asbestos-related
uncertainties and the incurrence of asbestos-related costs net of related
insurance recoveries should not have a material adverse effect on its
consolidated financial position, results of operations, or liquidity.
FOREST PRODUCTS OPERATIONS
FINANCING ACTIVITIES AND LIQUIDITY
As of December 31, 1996, MGI and its subsidiaries had consolidated working
capital of $131.4 million and long-term debt of $729.8 million (net of current
maturities and restricted cash deposited in a liquidity account for the benefit
of the holders of the Timber Notes) as compared to $124.2 million and $732.9
million, respectively at December 31, 1995. The decrease in long-term debt was
primarily due to principal payments on the 7.95% Timber Collateralized Notes due
2015 (the "Timber Notes"). MGI and its subsidiaries anticipate that cash from
operations, together with existing cash, marketable securities and available
sources of financing, will be sufficient to fund their working capital and
capital expenditure requirements for the next year. With respect to their
long-term liquidity, MGI and its subsidiaries believe that their existing cash
and cash equivalents, together with their ability to generate sufficient levels
of cash from operations and their ability to obtain both short- and long-term
financing, should provide sufficient funds to meet their working capital and
capital expenditure requirements. However, due to their highly leveraged
condition, MGI and its subsidiaries (and in turn MGHI) are more sensitive
than less leveraged companies to factors affecting their operations,
including governmental regulation affecting their timber harvesting
practices (see "-Trends" below), increased competition from other lumber
producers or alternative building products and general economic conditions.
MGI. Creditors of MGI's subsidiaries have priority with respect to the assets,
cash flows and earnings of such subsidiaries over the claims of the creditors of
MGI, including the holders of the MGI Notes. The MGI Notes are senior
indebtedness of MGI; however, they are effectively subordinate to the
liabilities of MGI's subsidiaries, which include the Timber Notes and the 10
1/2% Pacific Lumber Senior Notes due 2003 (the "Pacific Lumber Senior Notes").
As of December 31, 1996, the indebtedness of the subsidiaries of MGI was $571.9
million, of which $235.0 million was attributable to the Pacific Lumber Senior
Notes and $336.1 million was attributable to the Timber Notes. The MGI Indenture
contains various covenants which, among other things, limit the ability to incur
additional indebtedness and liens, to engage in transactions with affiliates, to
pay dividends and to make investments. MGI paid dividends of $4.8 million during
1995 and $3.9 million during 1996. MGI did not pay any dividends in 1994. As of
December 31, 1996, $0.5 million of dividends could be paid by MGI.
Substantially all of MGI's consolidated assets are owned by Pacific Lumber and a
significant portion of Pacific Lumber's consolidated assets are owned by Scotia
Pacific Holding Company ("Scotia Pacific"). Moreover, Pacific Lumber is
dependent upon Scotia Pacific for a substantial portion of its log requirements.
The holders of the Timber Notes have priority over the claims of creditors of
Pacific Lumber with respect to the assets and cash flows of Scotia Pacific, and
the holders of the Pacific Lumber Senior Notes have priority over the claims of
creditors of MGI with respect to the assets and cash flows of Pacific Lumber. In
the event Scotia Pacific's cash flows are not sufficient to generate
distributable funds to Pacific Lumber, Pacific Lumber would effectively be
precluded from distributing funds to MGI, and MGI's ability to pay interest on
the MGI Notes and its other indebtedness would also be materially impaired. MGI
is dependent upon its existing cash resources and dividends from Pacific Lumber
and Britt to meet its financial and debt service obligations as they become due.
MGI expects that Pacific Lumber will provide a major portion of its future
operating cash flow.
The indentures governing the Pacific Lumber Senior Notes, the Timber Notes (the
"Timber Note Indenture") and Pacific Lumber's revolving credit agreement (as
amended and restated, the "Pacific Lumber Credit Agreement") contain various
covenants which, among other things, limit the ability to incur additional
indebtedness and liens, to engage in transactions with affiliates, to pay
dividends and to make investments. Pacific Lumber can pay dividends in an amount
that is generally equal to 50% of Pacific Lumber's consolidated net income plus
depletion and cash dividends received from Scotia Pacific, exclusive of the net
income and depletion of Scotia Pacific as long as any Timber Notes are
outstanding. During the years ended December 31, 1996, 1995 and 1994, Pacific
Lumber paid an aggregate of $20.5 million, $22.0 million and $24.5 million of
dividends, respectively. As of December 31, 1996, under the most restrictive of
these covenants, approximately $17.2 million of dividends could be paid by
Pacific Lumber. Additionally, Britt paid dividends of $6.0 million, $6.0 million
and $1.8 million, for the years ended December 31, 1996, 1995 and 1994,
respectively, and as of December 31, 1996, Britt could pay approximately $4.1
million of dividends.
As of December 31, 1996, MGI (excluding Pacific Lumber and its subsidiary
companies) had cash and marketable securities of approximately $77.8 million.
MGI believes, although there can be no assurance, that the aggregate dividends
which will be available to it from Pacific Lumber and Britt, during the period
in which cash interest will not be payable on the MGI Discount Notes, will
exceed MGI's cash interest payments on the MGI Senior Notes. When cash interest
payments on the MGI Discount Notes commence on February 1, 1999, MGI believes
that it should be able to make such cash interest payments out of its then
existing cash resources and from cash expected to be available to it from
Pacific Lumber and Britt.
Pacific Lumber. During the years ended December 31, 1996, 1995 and 1994, Pacific
Lumber's operating income before depletion and depreciation ("operating cash
flow") amounted to $93.9 million, $90.5 million and $95.9 million, respectively,
which exceeded interest expense in respect of all of its indebtedness in those
years by $39.5 million, $35.0 million and $39.8 million, respectively. Pacific
Lumber is dependent upon Scotia Pacific for the logs from which it generates a
substantial portion of its operating cash flow. Pacific Lumber believes that its
level of operating cash flow and available sources of financing will enable it
to meet its working capital and capital expenditure requirements for the next
year. With respect to long-term liquidity, Pacific Lumber believes that its
ability to generate sufficient levels of cash from operations, and its
ability to obtain both short and long-term financing should provide
sufficient funds to meet its working capital and capital expenditure
requirements.
Under the terms of the Timber Note Indenture, Scotia Pacific will not have
available cash for distribution to Pacific Lumber unless Scotia Pacific's cash
flow from operations exceeds the amounts required by the Timber Note Indenture
to be reserved for the payment of current debt service (including interest,
principal and premiums) on the Timber Notes, capital expenditures and certain
other operating expenses. Once appropriate provision is made for current debt
service on the Timber Notes and expenditures for operating and capital costs,
and in the absence of certain Trapping Events (as defined in the Timber Note
Indenture) or outstanding judgments, the Timber Note Indenture does not limit
monthly distributions of available cash from Scotia Pacific to Pacific Lumber.
Accordingly, Pacific Lumber expects that once Scotia Pacific's debt service,
operating and capital expenditure requirements have been met, substantially all
of Scotia Pacific's available cash will be periodically distributed to Pacific
Lumber. Scotia Pacific paid $76.9 million, $59.0 million and $88.9 million of
dividends to Pacific Lumber during the years ended December 31, 1996, 1995 and
1994, respectively.
Borrowings under the Pacific Lumber Credit Agreement, which expires on May 31,
1999, are secured by Pacific Lumber's trade receivables and inventories, with
interest currently computed at the bank's reference rate plus 1 1/4% or the
bank's offshore rate plus 2 1/4%. The Pacific Lumber Credit Agreement provides
for borrowings of up to $60.0 million, of which $15.0 million may be used for
standby letters of credit and $30.0 million is restricted to acquisition of
timberlands. Borrowings made pursuant to the portion of the credit facility
restricted to timberland acquisitions would also be secured by the purchased
timberlands. As of December 31, 1996, $47.0 million of borrowings was available
under the Pacific Lumber Credit Agreement, of which $4.7 million was available
for letters of credit and $30.0 million was restricted to timberland
acquisitions. No borrowings were outstanding as of December 31, 1996, and
letters of credit outstanding amounted to $10.3 million. The Pacific Lumber
Credit Agreement con tains covenants substantially similar to those contained in
the indenture governing the Pacific Lumber Senior Notes.
INVESTING
Capital expenditures during 1994-1996 were made to improve production
efficiency, reduce operating costs and, to a lesser degree, acquire additional
timberlands. MGI's consolidated capital expenditures were $15.2 million, $9.9
million and $11.3 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Capital expenditures, excluding expenditures for timberlands, are
expected to be $12.0 million in 1997 and are estimated to be between $10.0
million and $15.0 million per year for the 1998-1999 period. Pacific Lumber may
purchase additional timberlands from time to time as appropriate opportunities
arise, and such purchases could exceed the historically modest levels of such
acquisitions.
REAL ESTATE AND OTHER OPERATIONS
FINANCING ACTIVITIES AND LIQUIDITY
As of December 31, 1996, the Company's real estate and other subsidiaries had
approximately $11.1 million available for use under the MCOP Credit Agreement
(defined below), all of which could be borrowed and distributed to the Company.
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.
On July 15, 1995, a real estate subsidiary of the Company, MCO Properties Inc.
("MCOP"), amended and restated its revolving credit agreement with a bank which
will expire on May 15, 1998 (the "MCOP Credit Agreement"). Borrowings under the
MCOP Credit Agreement are secured primarily by (i) MCOP's eligible receivables
and real estate held for investment or development and sale, (ii) MCOP's pledge
of the common stock of certain of its subsidiaries, and (iii) the guarantee of
certain of MCOP's subsidiaries an d the Company. Further, the Company has
pledged MCOP's common stock as additional security. Interest is computed at the
bank's prime rate plus 1/2% or the bank's Eurodollar rate plus 2 3/4%. The MCOP
Credit Agreement contains various covenants including a minimum net worth
requirement and limitations on the payment of dividends (neither of which the
Company believes is material), investments and the incurrence of indebtedness.
The MCOP Credit Agreement provides for borrowings of up to $14.0 million, of
which $8.5 million may be used for standby letters of credit. The available
credit is subject to borrowing base limitation calculations. As of December 31,
1996, $11.1 million of borrowings was available under the MCOP Credit Agreement;
there were no outstanding borrowings, and letters of credit outstanding amounted
to $1.1 million.
INVESTING
In July 1993, the Company, through various subsidiaries, acquired various
interests (which totaled approximately 29.7%) in SHRP, Ltd. for $9.1 million.
The Company increased its equity interest in SHRP, Ltd. to 45.0% as a result of
a $5.6 million capital contribution in October 1994. On April 17, 1995, SHRP,
Ltd. and certain affiliates (collectively, the "Debtors"), filed voluntary
petitions seeking to reorganize under the provisions of Chapter 11 of the United
States Bankruptcy Code. On September 22, 1995, the bankruptcy plan of the
Debtors (the "Plan") was confirmed and on October 6, 1995, the transactions
called for by the Plan were completed.
A new investor group (the "New SHRP Investor Group") made a capital contribution
of cash in the aggregate amount of $5.9 million (wholly owned subsidiaries of
the Company contributed $5.8 million) to SHRP, Ltd. Additionally, a wholly owned
subsidiary of the Company contributed an adjoining approximately 87-acre tract
of land (with a fair market value of $2.3 million). The new managing general
partner of the reorganized SHRP, Ltd. is SHRP General Partner, Inc., a wholly
owned subsidiary of the Company (the "SHRP Managing General Partner"). In an
unrelated transaction, on October 20, 1995, the Company purchased for $7.3
million certain of the 11% Senior Secured Extendible Notes due 2001 of SHRP (the
"SHRP Notes") and the corresponding shares of common stock of SHRP Equity, Inc.
(an additional general partner of the reorganized SHRP, Ltd.) to which the
selling noteholder was entitled. On February 12, 1997, the Company purchased an
additional amount of the SHRP Notes and the corresponding shares of common stock
of SHRP Equity, Inc. for $5.9 million. After giving effect to these
transactions, wholly owned subsidiaries of the Company hold, directly or
indirectly, approximately 88.5% of the equity in the reorganized SHRP, Ltd.
SHRP, Ltd. has sustained substantial operating losses since it began operations
in April 1994. At December 31, 1996, SHRP, Ltd. had cash and cash equivalents of
$2.6 million and a line of credit from its partners of $1.7 million,
substantially all of which is the Company's portion. SHRP, Ltd. projects a loss
from operations for the next two years. In the event that the existing cash
resources of SHRP, Ltd. and the line of credit are inadequate to support the
cash flow requirements of SHRP, Ltd., alternative sources of funding will be
necessary.
TRENDS
ALUMINUM OPERATIONS
PRICES
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 on the volume and mix of all products sold and on KACC'S
hedging strategies. See Notes 1 and 10 to the Consolidated Financial Statements
for a discussion of KACC's hedging activities. Primary aluminum prices have
historically been subject to significant cyclical price fluctuations. During the
first half of 1996 the AMT Price remained relatively stable in the $.75 per
pound range. However, during the second half of the year the AMT price fell,
reaching a low of $.65 per pound for October 1996, before recovering late in the
year. During 1995, the AMT Price for primary aluminum was approximately $.86 per
pound compared to $.72 and $.54 per pound in 1994 and 1993, respectively. The
AMT Price for primary aluminum for the week ended February 14, 1997, was
approximately $.75 per pound.
FOREST PRODUCTS OPERATIONS
REGULATORY AND ENVIRONMENTAL MATTERS
Pacific Lumber's operations 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. Moreover, these laws and
regulations relating to Pacific Lumber's operations are modified from time to
time and are subject to judicial and administrative interpretation. Compliance
with such laws, regulations and judicial and administrative interpretations,
together with the cost of litigation incurred in connection with certain timber
harvesting operations of Pacific Lumber, have increased the cost of logging
operations. Pacific Lumber is subject to certain pending matters described
below, including the resolution of issues relating to the final designation
of critical habitat for the marbled murrelet, which could have a material
adverse effect on the consolidated financial position, results of
operations or liquidity of Pacific Lumber, and in turn MGI and MGHI. There can
be no assurance that certain pending or future governmental regulations,
legislation or judicial or administrative decisions will not materially and
adversely affect Pacific Lumber.
In May 1996, the U.S. Fish and Wildlife Service ("USFWS") published the final
designation of critical habitat for the marbled murrelet (the "Final
Designation"), which designated 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 Pacific Lumber's timberlands are included in
the Final Designation, the substantial portion of such acreage being young
growth timber. In order to mitigate the impact of the Final Designation,
particularly with respect to timberlands occupied by the marbled murrelet,
Pacific Lumber over the last few years has attempted to develop a habitat
conservation plan for the marbled murrelet (the "Murrelet HCP"). Due to, among
other things, the unfavorable response of the USFWS to Pacific Lumber's initial
Murrelet HCP efforts, Pacific Lumber and its subsidiaries filed two actions (the
"Takings Litigation") alleging that certain portions of its timberlands have
been "taken" and seeking just compensation. Pursuant to an agreement entered
into by Pacific Lumber, the Company, the United States and California on
September 28, 1996 (the "Headwaters Agreement") described below, the Takings
Litigation has been stayed by the Court at the request of the parties.
It is impossible for Pacific Lumber to determine the potential adverse effect of
the Final Designation on its consolidated financial position, results of
operations or liquidity until such time as various regulatory and legal issues
are resolved; however, if Pacific Lumber is unable to harvest, or is severely
limited in harvesting, on timberlands designated as critical habitat for the
marbled murrelet, such effect could be materially adverse to Pacific Lumber. 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. There
continue to be other regulatory actions and lawsuits seeking to have other
species listed as threatened or endangered under the federal Endangered Species
Act ("ESA") and/or the California Endangered Species Act ("CESA") and to
designate critical habitat for such species. For example, the National Marine
Fisheries Service ("NMFS") recently announced that by April 25, 1997, it would
make a final determination concerning whether to list the coho salmon under the
ESA in northern California, including, potentially, lands owned by Pacific
Lumber. It is uncertain what impact, if any, such listings and/or designations
of critical habitat would have on the consolidated financial position, results
of operations or liquidity of Pacific Lumber, and in turn MGI and MGHI. See
"-Headwaters Agreement" below for a description of certain terms of the
Headwaters Agreement relating to processing and approval of a habitat
conservation plan with respect to Pacific Lumber covering multiple species
("Multi-Species HCP").
In 1994, the California Board of Forestry ("BOF") adopted certain regulations
regarding compliance with long-term sustained yield ("LTSY") objectives. These
regulations require that timber companies project timber growth and harvest on
their timberlands over a 100-year planning period and establish a LTSY harvest
level that takes into account environmental and economic considerations. The
sustained yield plan ("SYP") must demonstrate that the average annual harvest
over any rolling ten-year period will not exceed the LTSY harvest level and that
Pacific Lumber's projected timber inventory is capable of sustaining the LTSY
harvest level in the last decade of the 100-year planning period. On December
17, 1996, Pacific Lumber submitted a proposed SYP to the California Department
of Forestry ("CDF"). The proposed SYP sets forth an LTSY harvest level
substantially the same as Pacific Lumber's average annual timber harvest over
the last six years. The proposed SYP also indicates that Pacific Lumber's
average annual timber harvest during the first decade of the SYP would
approximate the LTSY harvest level. During the second decade of the proposed
SYP, Pacific Lumber's average annual timber harvest would be approximately 8%
less than that proposed for the first decade. The SYP, when approved, will be
valid for ten years. Thereafter, revised SYPs will be prepared every decade that
will address the LTSY harvest level based upon reassessment of changes in the
resource base and protection of public resources.
The proposed SYP assumes that the transactions contemplated by the Headwaters
Agreement will be consummated and that the Multi-Species HCP will permit Pacific
Lumber to harvest its timberlands (including over the next two decades a
substantial portion of its old growth timberlands not transferred pursuant to
the Headwaters Agreement) to achieve maximum sustained yield. The SYP is subject
to review and approval by the CDF, and there can be no assurance that the SYP
will be approved in its proposed form. Until the SYP is reviewed and approved,
Pacific Lumber is unable to predict the impact that these regulations will have
on its future timber harvesting practices. It is possible that the results of
the review and approval process could require Pacific Lumber to reduce its
timber harvest in future years from the harvest levels set forth in the proposed
SYP. Pacific Lumber believes it would be able to mitigate the effect of any
required reduction in harvest level by acquisitions of additional timberlands
and making corresponding amendments to its SYP; however, there can be no
assurance that it would be able to do so and the amount of such acquisitions
would be limited by Pacific Lumber's available financial resources. Pacific
Lumber is unable to predict the ultimate impact the sustained yield
regulations will have on its future financial position, results of operations
or liquidity. See "-Headwaters Agreement" below for a description of certain
items of the Headwaters Agreement relating to the SYP.
Various groups and individuals have filed objections with the CDF and the BOF
regarding the CDF's and the BOF's actions and rulings with respect to certain of
Pacific Lumber's THPs and other timber harvesting operations, and Pacific Lumber
expects that such groups and individuals will continue to file such objections.
In addition, lawsuits are pending or threatened which seek to prevent Pacific
Lumber from implementing certain of its approved THPs or which challenge other
forestry operations by Pacific Lumber. These challenges have severely restricted
Pacific Lumber's ability to harvest old growth timber on its property. To date,
challenges with respect to Pacific Lumber's THPs relating to young growth timber
and to its other forestry operations have been limited; however, no assurance
can be given as to the extent of such challenges in the future. Pacific Lumber
believes that environmentally focused challenges to its timber harvesting and
other operations are likely to occur in the future, particularly with respect to
virgin and residual old growth timber. Although such challenges have delayed or
prevented Pacific Lumber from conducting a portion of its operations, they have
not had a material adverse effect on Pacific Lumber's consolidated financial
position, results of operations or liquidity. Nevertheless, it is impossible to
predict the future nature or degree of such challenges or their ultimate impact
on the consolidated financial position, results of operations or liquidity of
Pacific Lumber, and in turn MGI and MGHI.
HEADWATERS AGREEMENT
On September 28, 1996, Pacific Lumber (on behalf of itself, its subsidiaries and
affiliates) and the Company (collectively, the "Pacific Lumber Parties") entered
into the Headwaters Agreement with the United States and California. The
Headwaters Agreement provides the framework for the acquisition by the United
States and California of the approximately 5,600 acres of Pacific Lumber's
timberlands commonly referred to as the Headwaters Forest and the Elk Head
Springs Forest ("Headwaters Timberlands"). A substantial portion of the
Headwaters Timberlands consist of virgin old growth timberlands. The Headwaters
Timberlands would be transferred in exchange for (a) property and other
consideration (possibly including cash) from the United States and California
having an aggregate fair market value of $300 million and (b) approximately
7,775 acres of adjacent timberlands to be acquired by the United States and
California ("Elk River Timberlands") from a third party. The United States and
California would also acquire and retain an additional 1,900 acres of
timberlands from such third party.
The Headwaters Agreement also provides, among other things, for expedited
processing by the United States of an incidental take permit ("Permit") to be
based upon the Multi-Species HCP covering (a) the timberlands and timber
harvesting rights which Pacific Lumber will own after consumation of the
Headwaters Agreement (the "Resulting Pacific Lumber Timber Property") and (b)
the Headwaters Timberlands and the 1,900 acres of Elk River Timberlands retained
by the United States and California (both as conserved habitat). The agreement
also requires expedited processing by California of an SYP covering the
Resulting Pacific Lumber Timber Property.
On December 5, 1996, the United States and California each furnished a list of
properties consisting of oil and gas interests, timberlands and a variety of
other real estate properties for Pacific Lumber's review and approval. In
February 1997, after full and careful consideration, Pacific Lumber notified
California that its presented properties were not acceptable due to, among other
things, various physical problems and encumbrances on the properties, certain
properties having been withdrawn by the state and public opposition to the
transfer of some of the properties. Pacific Lumber also advised California that
it should proceed with the steps necessary to assure that California can provide
cash for its portion of the consideration to be paid to Pacific Lumber. There
have been ongoing discussions between the Pacific Lumber Parties and the United
States regarding the properties or other consideration to be furnished by the
United States.
As part of the Headwaters Agreement, the Pacific Lumber Parties agreed to a
moratorium on certain logging operations, including salvage logging (the
"Moratorium"). The Moratorium was to terminate if by July 28, 1997, various
closing conditions had not been met. On March 11, 1997, the Pacific Lumber
Parties agreed to amend the Headwaters Agreement to extend the period of time
during which these closing conditions must be met to February 17, 1998. The
extension is, however, subject to the achievement of certain milestones
toward completion of the Headwaters Agreement. The parties have agreed to
execute an amendment to the Headwaters Agreement evidencing these
modifications.
Closing of the Headwaters Agreement is subject to various conditions, including
(a) acquisition by the government of the Elk River Timberlands from a third
party, (b) approval of an SYP and a Multi-Species HCP and issuance of a Permit,
each in form and substance satisfactory to Pacific Lumber, (c) the issuance by
the Internal Revenue Service and the California Franchise Tax Board of closing
agreements in form and substance sought by and satisfactory to the Pacific
Lumber Parties, (d) the absence of a judicial decision in any litigation brought
by third parties that any party reasonably believes will significantly delay or
impair the transactions described in the Headwaters Agreement, and (e) the
dismissal with prejudice at closing of the Takings Litigation. The parties to
the Headwaters Agreement are working to satisfy these conditions; however, there
can be no assurance that the Headwaters Agreement will be consummated.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1996 the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position No. 96-1 ("SOP 96-1") which provides authoritative
guidance intended to improve and narrow the manner in which existing accounting
literature is applied to the recognition, measurement, display, and disclosure
of environmental remediation liabilities arising pursuant to existing federal,
state and local laws and regulations. SOP 96-1 addresses the nature of items
that are to be included in the measurement of a company's liability related to
any environmental remediation efforts it is currently undertaking or required to
complete in the future. In this regard, SOP 96-1 requires that all incremental
direct third party costs, as well as any internal compensation costs (including
benefits) for employees expected to devote a significant amount of time directly
to remediation efforts, should be included in the determination of the estimated
liability. The term "remediation effort" is defined in SOP 96-1 to include such
things as remedial risk assessment, feasibility studies and operations and
maintenance associated with corrective actions. SOP 96-1 must be adopted in the
first quarter of 1997. The adoption of SOP 96-1 is not expected to have a
material impact on the Company's financial position, results of operations or
liquidity.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of MAXXAM Inc.:
We have audited the accompanying consolidated balance sheets of MAXXAM Inc. (a
Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, cash flows and stockholders'
equity (deficit) for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MAXXAM Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 14, 1997
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-----------------------
(In millions of dollars, except share amounts) 1996 1995
- --------------------------------------------------------------------------------------------------- -----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 336.6 $ 104.2
Marketable securities 50.3 45.9
Receivables:
Trade, net of allowance for doubtful accounts of $5.2 and $5.5, respectively 200.7 246.2
Other 85.9 98.9
Inventories 634.8 606.8
Prepaid expenses and other current assets 169.1 129.7
-------- --------
Total current assets 1,477.4 1,231.7
Property, plant and equipment, net of accumulated depreciation of $769.5 and $678.1, respectively 1,297.9 1,231.9
Timber and timberlands, net of accumulated depletion of $154.6 and $139.6, respectively 301.8 313.0
Investments in and advances to unconsolidated affiliates 179.5 189.1
Deferred income taxes 419.7 414.0
Long-term receivables and other assets 439.4 452.6
-------- --------
$4,115.7 $3,832.3
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 201.5 $ 196.7
Accrued interest 61.5 58.0
Accrued compensation and related benefits 158.7 166.5
Other accrued liabilities 154.1 148.4
Payable to affiliates 98.1 90.2
Long-term debt, current maturities 69.6 25.1
-------- --------
Total current liabilities 743.5 684.9
Long-term debt, less current maturities 1,881.9 1,585.1
Accrued postretirement medical benefits 731.9 742.6
Other noncurrent liabilities 589.4 680.3
-------- --------
Total liabilities 3,946.7 3,692.9
Commitments and contingencies
Minority interests 219.8 223.2
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, $0.50 par value; 28,000,000 shares authorized; shares issued: 10,063,885 and
10,063,359, respectively 5.0 5.0
Additional capital 155.9 155.0
Accumulated deficit (185.6) (208.5)
Pension liability adjustment (5.1) (16.1)
Treasury stock, at cost (shares held: preferred-845; common: 1,400,112 and 1,355,512,
respectively) (21.3) (19.5)
-------- --------
Total stockholders' deficit (50.8) (83.8)
-------- --------
$4,115.7 $3,832.3
======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
(In millions of dollars, except share amounts) 1996 1995 1994
- ----------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C>
Net sales:
Aluminum operations $2,190.5 $2,237.8 $1,781.5
Forest products operations 264.6 242.6 249.6
Real estate and other operations 88.2 84.8 84.6
-------- -------- --------
2,543.3 2,565.2 2,115.7
-------- -------- --------
Costs and expenses:
Costs of sales and operations (exclusive of depreciation and depletion):
Aluminum operations 1,869.1 1,798.4 1,625.5
Forest products operations 148.5 127.1 129.6
Real estate and other operations 67.4 65.4 62.8
Selling, general and administrative expenses 203.5 195.8 169.4
Depreciation and depletion 123.5 120.9 121.1
-------- -------- --------
2,412.0 2,307.6 2,108.4
-------- -------- --------
Operating income 131.3 257.6 7.3
Other income (expense):
Investment, interest and other income (expense) 41.1 18.2 (2.2)
Interest expense (175.5) (172.7) (167.3)
Amortization of deferred financing costs (9.0) (8.6) (9.6)
-------- -------- --------
Income (loss) before income taxes, minority interests and extraordinary item (12.1) 94.5 (171.8)
Credit (provision) for income taxes 44.9 (14.8) 77.1
Minority interests (9.9) (22.2) (22.0)
-------- -------- --------
Income (loss) before extraordinary item 22.9 57.5 (116.7)
Extraordinary item:
Loss on early extinguishment of debt, net of related benefits for minority
interests and income taxes of $2.9 million -- -- (5.4)
-------- -------- --------
Net income (loss) $ 22.9 $ 57.5 $ (122.1)
======== ======== ========
Per common and common equivalent share:
Income (loss) before extraordinary item $ 2.42 $ 6.08 $ (12.35)
Extraordinary item -- -- (.57)
-------- -------- --------
Net income (loss) $ 2.42 $ 6.08 $ (12.92)
======== ======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
(In millions of dollars) 1996 1995 1994
- -------------------------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 22.9 $ 57.5 $ (122.1)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and depletion 123.5 120.9 121.1
Minority interests 9.9 22.2 22.0
Amortization of deferred financing costs and discounts on long-term debt 21.5 19.5 19.3
Amortization of excess investment over equity in net assets of
unconsolidated affiliates 11.6 11.4 11.6
Equity in (earnings) loss of unconsolidated affiliates, net of dividends received 3.0 (19.1) 15.0
Net gain on sales of real estate, mortgage loans and other assets (23.7) (9.7) (6.5)
Net gains on marketable securities (7.8) (8.6) (4.2)
Net sales (purchases) of marketable securities 3.4 (4.0) 12.9
Extraordinary loss on early extinguishment of debt, net -- -- 5.4
Increase (decrease) in cash resulting from changes in:
Prepaid expenses and other assets (33.3) 84.5 (47.9)
Accounts payable 4.8 34.7 26.3
Receivables 60.4 (103.6) 24.5
Inventories (30.6) (65.3) (37.5)
Accrued and deferred income taxes (46.0) (13.1) (77.2)
Payable to affiliates and other liabilities (74.0) (1.2) 37.5
Accrued interest 6.2 (1.0) 8.3
Other 4.2 12.8 (4.0)
-------- -------- --------
Net cash provided by operating activities 56.0 137.9 4.5
-------- -------- --------
Cash flows from investing activities:
Net proceeds from disposition of property and investments 51.8 39.3 30.0
Capital expenditures (173.1) (97.7) (89.3)
Investment in subsidiaries and joint ventures (2.4) (15.9) (7.4)
Other (1.4) (1.1) (1.2)
-------- -------- --------
Net cash used for investing activities (125.1) (75.4) (67.9)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 371.8 5.7 229.7
Net borrowings (payments) under revolving credit agreements
and short-term borrowings (payments) (13.8) 4.4 (191.8)
Proceeds from issuance of Kaiser capital stock .1 1.2 100.1
Restricted cash withdrawals .4 1.0 1.2
Redemptions, repurchase of and principal payments on long-term debt (32.8) (40.9) (39.1)
Dividends paid to Kaiser's minority preferred stockholders (10.5) (20.5) (13.7)
Redemption of preference stock (5.2) (8.8) (8.5)
Incurrence of financing costs (12.1) (1.8) (19.7)
Other 3.6 16.8 5.9
-------- -------- --------
Net cash provided by (used for) financing activities 301.5 (42.9) 64.1
-------- -------- --------
Net increase in cash and cash equivalents 232.4 19.6 .7
Cash and cash equivalents at beginning of year 104.2 84.6 83.9
-------- -------- --------
Cash and cash equivalents at end of year $ 336.6 $ 104.2 $ 84.6
======== ======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Common Stock Pension
Stock ------------------ Additional Accumulated Liability Treasury
(In millions of dollars and shares) ($.50 Par) Shares ($.50 Par) Capital Deficit Adjustment Stock Total
- ----------------------------------- ---------- ------------------ ---------- ----------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ .3 8.7 $ 5.0 $ 51.2 $(180.8) $ (23.9) $ (19.7) $(167.9)
Net loss -- -- -- -- (122.1) -- -- (122.1)
Gain from issuance of
Kaiser Aluminum
Corporation common
stock -- -- -- 2.2 -- -- -- 2.2
Conversions of preferred
stock to common stock -- -- -- (.2) -- -- .2 --
Reduction of pension
liability -- -- -- -- -- 12.5 -- 12.5
---------- -------- -------- ---------- ----------- ---------- ------- -------
Balance, December 31, 1994 .3 8.7 5.0 53.2 (302.9) (11.4) (19.5) (275.3)
Net income -- -- -- -- 57.5 -- -- 57.5
Gain from issuance of
Kaiser Aluminum
Corporation common
stock -- -- -- 2.5 -- -- -- 2.5
Redemption of Kaiser
Aluminum Corporation
preferred stock -- -- -- 99.3 36.9 -- -- 136.2
Additional pension liability -- -- -- -- -- (4.7) -- (4.7)
---------- -------- -------- ---------- ----------- ---------- ------- -------
Balance, December 31, 1995 .3 8.7 5.0 155.0 (208.5) (16.1) (19.5) (83.8)
Net income -- -- -- -- 22.9 -- -- 22.9
Gain from issuance of
Kaiser Aluminum
Corporation common
stock -- -- -- .9 -- -- -- .9
Treasury stock
repurchases -- -- -- -- -- -- (1.8) (1.8)
Reduction of pension liability -- -- -- -- -- 11.0 -- 11.0
---------- -------- -------- ---------- ----------- ---------- ------- -------
Balance, December 31, 1996 $ .3 8.7 $ 5.0 $155.9 $(185.6) $ (5.1) $ (21.3) $ (50.8)
========== ======== ======== ========== =========== ========== ======= =======
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share amounts)
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
THE COMPANY
The consolidated financial statements include the accounts of MAXXAM Inc. and
its majority and wholly owned subsidiaries. All references to the "Company"
include MAXXAM Inc. and its majority owned and wholly owned subsidiaries, unless
otherwise indicated or the context indicates otherwise. Intercompany balances
and transactions have been eliminated. Investments in affiliates (20% to
50%-owned) are accounted for utilizing the equity method of accounting. Certain
reclassifications have been made to prior years' financial statements to be
consistent with the current year's presentation.
The Company is a holding company and, as such, conducts substantially all of its
operations through its subsidiaries. The Company operates in three principal
industries: aluminum, through its majority owned subsidiary, Kaiser Aluminum
Corporation ("Kaiser"), a fully integrated aluminum producer; forest products,
through MAXXAM Group Inc. ("MGI") and MGI's wholly owned subsidiaries,
principally the Pacific Lumber Company ("Pacific Lumber") and Britt Lumber Co.,
Inc. ("Britt"); real estate investment and development, managed through its
wholly owned subsidiary, MAXXAM Property Company; and other commercial
operations through various other wholly owned subsidiaries. MAXXAM Group
Holdings Inc. ("MGHI") owns 100% of MGI and is a wholly owned subsidiary of the
Company.
The cumulative losses of Kaiser in 1993, principally due to the implementation
of the new accounting standard for postretirement benefits other than pensions,
eliminated Kaiser's equity with respect to its common stock; accordingly, since
1993 the Company has recorded 100% of Kaiser's earnings and losses, without
regard to the minority interests represented by Kaiser's other common
stockholders (as described in Note 7) and will continue to do so until such time
as the cumulative losses recorded by the Company with respect to Kaiser's
minority common stockholders are recovered.
DESCRIPTION OF THE COMPANY'S OPERATIONS
Kaiser operates in the aluminum industry through its wholly owned principal
operating subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). KACC
operates in several principal aspects of the aluminum industry--the mining of
bauxite (the major aluminum-bearing ore), the refining of bauxite into alumina
(the intermediate material), the production of aluminum and the manufacture of
fabricated and semi-fabricated aluminum products. KACC's production levels of
alumina and primary aluminum exceed its internal processing needs, which allows
it to be a major seller of alumina and primary aluminum in domestic and
international markets. A substantial portion of the Company's consolidated
assets, liabilities, revenues, results of operations and cash flows are
attributable to Kaiser (see Note 11).
Pacific Lumber operates in several principal aspects of the lumber industry--the
growing and harvesting of redwood and Douglas-fir timber, the milling of logs
into lumber and the manufacture of lumber into a variety of finished products.
Britt manufactures redwood and cedar fencing and decking products from small
diameter logs, a substantial portion of which are obtained from Pacific Lumber.
Housing, construction and remodeling markets are the principal markets for the
Company's lumber products. Export sales generally constitute less than 6% of
forest products sales. A significant portion of forest products sales are made
to third parties located west of the Mississippi River.
The Company, principally through its wholly owned subsidiaries, is engaged in
the business of residential and commercial real estate investment and
development, primarily in California, Arizona, Texas and Puerto Rico. With
respect to periods after October 6, 1995, other commercial operations include
the results of Sam Houston Race Park, Ltd. ("SHRP, Ltd."), a Texas limited
partnership which owns and operates a Class 1 horse racing facility in the
greater Houston metropolitan area.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with generally accepted
accounting principles requires the use of estimates and assumptions that affect
(i) the reported amounts of assets and liabilities, (ii) disclosure of
contingent assets and liabilities known to exist as of the date the financial
statements are published and (iii) the reported amount of revenues and expenses
recognized during each period presented. The Company reviews all significant
estimates affecting its consolidated financial statements on a recurring
basis and records the effect of any necessary adjustments prior to their
publication. Adjustments made with respect to the use of estimates often
relate to improved information not previously available. Uncertainties with
respect to such estimates and assumptions are inherent in the preparation of
the Company's consolidated financial statements; accordingly, it is possible
that the subsequent resolution of any one of the contingent matters described
in Note 9 could differ materially from current estimates. The results of an
adverse resolution of such uncertainties could have a material effect on
the Company's consolidated financial position, results of operations or
liquidity.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents consist of highly liquid money market instruments with original
maturities of three months or less.
MARKETABLE SECURITIES
Marketable securities are carried at fair value. The cost of the securities sold
is determined using the first-in, first-out method. Included in investment,
interest and other income (expense) for each of the three years ended December
31, 1996 were: 1996-net unrealized holding losses of $.8 and net realized gains
of $8.1; 1995-net unrealized holding gains of $1.9 and net realized gains of
$6.8; and 1994-net unrealized holding losses of $1.0 and net realized gains of
$5.2.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost for the aluminum and
forest products operations inventories is primarily determined using the
last-in, first-out ("LIFO") method. Other inventories of the aluminum
operations, principally operating supplies and repair and maintenance parts, are
stated at the lower of average cost or market. Inventory costs consist of
material, labor and manufacturing overhead, including depreciation and
depletion.
Inventories consist of the following:
December 31,
-------------------
1996 1995
-------------------
Aluminum Operations:
Finished fabricated products $ 113.5 $ 91.5
Primary aluminum and work in process 200.3 195.9
Bauxite and alumina 110.2 119.6
Operating supplies and repair and maintenance parts 138.2 118.7
------- -------
562.2 525.7
------- -------
Forest Products Operations:
Lumber 55.8 65.5
Logs 16.8 15.6
------- -------
72.6 81.1
------- -------
$ 634.8 $ 606.8
======= =======
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost, net of accumulated
depreciation. Depreciation is computed principally utilizing the straight-line
method at rates based upon the estimated useful lives of the various classes of
assets.
TIMBER AND TIMBERLANDS
Timber and timberlands are stated at cost, net of accumulated depletion.
Depletion is computed utilizing the unit-of-production method based upon
estimates of timber values and quantities.
DEFERRED FINANCING COSTS
Costs incurred to obtain financing are deferred and amortized over the estimated
term of the related borrowing.
RESTRICTED CASH AND CONCENTRATIONS OF CREDIT RISK
At December 31, 1996 and 1995, cash and cash equivalents includes $17.6 and
$19.7, respectively, which is reserved for debt service payments on the
Company's 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes"). At
December 31, 1996 and 1995, long-term receivables and other assets includes
$30.0 and $31.4, respectively, of restricted cash deposits held for the benefit
of the Timber Note holders (the "Liquidity Account") as described in Note 4.
Each of these deposits is held by a different financial institution. In the
event of nonperformance by such financial institutions, the Company's exposure
to credit loss is represented by the amounts deposited plus any unpaid accrued
interest thereon. The Company mitigates its concentrations of credit risk with
respect to these restricted cash deposits by maintaining them at high credit
quality financial institutions and monitoring the credit ratings of these
institutions.
INVESTMENT, INTEREST AND OTHER INCOME (EXPENSE)
During 1994, the Company, Pacific Lumber and others agreed to a settlement,
subsequently approved by the court, of 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. Of the $52.0 settlement, $33.0 was paid by
insurance carriers of the Company and Pacific Lumber, $14.8 was paid by Pacific
Lumber, and the balance was paid by other defendants and through the assignment
of certain claims. In 1994, the Company recorded a pre-tax loss of $21.2 which
consists of Pacific Lumber's $14.8 cash payment to the settlement fund, a $2.0
accrual for certain contingent claims, and $4.4 of related legal fees. Insofar
as these matters do not originate from, or relate in any manner to, its ongoing
operations, the Company recorded the settlement as a charge to investment,
interest and other income (expense). Additionally, 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. The net effect of these transactions are included in investment,
interest and other income (expense) for the year ended December 31, 1994.
Investment, interest and other income (expense) for the years ended December 31,
1996, 1995 and 1994 includes $3.1, $17.8 and $16.5, respectively, of pre-tax
charges related principally to establishing additional litigation reserves for
asbestos claims and environmental reserves for potential soil and ground water
remediation matters, each pertaining to operations which were discontinued prior
to the acquisition of Kaiser by the Company in 1988. Also included in
investment, interest and other income (expense) are net gains from sales of real
estate of $25.4, $11.1 and $7.1 for the years ended December 31, 1996, 1995 and
1994, respectively.
FOREIGN CURRENCY TRANSLATION
The Company uses the United States dollar as the functional currency for its
foreign operations.
DERIVATIVE FINANCIAL INSTRUMENTS
Hedging transactions using derivative financial instruments are primarily
designed to mitigate KACC's exposure to changes in prices for certain of the
products which KACC sells and consumes and, to a lesser extent, to mitigate
KACC's exposure to changes in foreign currency exchange rates. KACC does not
utilize derivative financial instruments for trading or other speculative
purposes. KACC's derivative activities are initiated within guidelines
established by Kaiser's management and approved by KACC's and Kaiser's boards of
directors. Hedging transactions are executed centrally on behalf of all of
KACC's business segments to minimize transaction costs, monitor consolidated net
exposures and to allow for increased responsiveness to changes in market
factors.
Most of KACC's hedging activities involve the use of option contracts (which
establish a maximum and/or minimum amount to be paid or received) and forward
sales contracts (which effectively fix or lock-in the amount KACC will pay or
receive). Option contracts typically require the payment of an up-front premium
in return for the right to receive the amount (if any) by which the price at the
settlement date exceeds the strike price. Any interim fluctuations in prices
prior to the settlement date are deferred until the settlement date of the
underlying hedged transaction, at which point they are reflected in net sales or
cost of sales and operations (as applicable) together with the related premium
cost. Forward sales contracts do not require an up-front payment and are settled
by the receipt or payment of the amount by which the price at the settlement
date varies from the contract price. No accounting recognition is accorded to
interim fluctuations in prices of forward sales contracts.
KACC has established margin accounts and credit limits with certain
counterparties related to open forward sales and option contracts. When
unrealized gains or losses are in excess of such credit limits, KACC is entitled
to receive advances from the counterparties on open positions or is required to
make margin deposits to counterparties as the case may be. At December 31, 1996,
KACC had received $13.0 of margin advances from counterparties. At December 31,
1995, KACC had neither received nor made any m argin deposits. Kaiser considers
credit risk related to possible failure of the counterparties to perform their
obligations pursuant to the derivative contracts to be minimal. Deferred gains
or losses are included in prepaid expenses and other current assets and other
accrued liabilities. See Note 10.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash equivalents and restricted cash approximate fair
value. Marketable securities are carried at fair value which is determined based
on quoted market prices. As of December 31, 1996 and 1995, the estimated fair
value of long-term debt was $1,972.2 and $1,672.0, respectively. The estimated
fair value of long-term debt is determined based on the quoted market prices for
the publicly traded issues and on the current rates offered for borrowings
similar to the other debt. Some of the Company's publicly traded debt issues are
thinly traded financial instruments; accordingly, their market prices at any
balance sheet date may not be representative of the prices which would be
derived from a more active market. The fair value of foreign currency contracts
generally reflects the estimated amounts that Kaiser would receive to enter into
similar contracts at the balance sheet date, thereby taking into account
unrealized gains or losses on open contracts (see Note 10). As of December 31,
1996 and 1995, the difference between the carrying amount and fair value of
foreign currency contracts was not significant.
STOCK-BASED COMPENSATION
The Company applies the "intrinsic value based" method for accounting for stock
or stock-based compensation awards described by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations (see Note 8). Had the Company applied the alternative "fair
value based" method as described in Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, the Company's pro forma net
income and earnings per share would have been $22.3 and $2.36 per share,
respectively, for the year ended December 31, 1996 and $57.1 and $6.03 per
share, respectively, for the year ended December 31, 1995.
PER SHARE INFORMATION
Per share calculations are based on the weighted average number of common shares
outstanding in each year and, if dilutive, weighted average common equivalent
shares and common stock options based upon the average price of the Company's
common stock during the year. The weighted average number of common and common
equivalent shares was 9,461,197 shares, 9,459,293 shares and 9,447,878 shares
for the years ended December 31, 1996, 1995 and 1994, respectively.
2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Kaiser's investments in unconsolidated affiliates are held by KACC. KACC holds a
28.3% interest in Queensland Alumina Limited ("QAL"), a leading producer of
alumina, and a 49% interest in both Kaiser Jamaica Bauxite Company, a bauxite
supplier, and Anglesey Aluminium Limited ("Anglesey"), which produces primary
aluminum. KACC provides some of its affiliates with services such as financing,
management and engineering. Purchases from these affiliates for the acquisition
and processing of bauxite, alumina and primary aluminum aggregated $281.6,
$284.4 and $219.7 for the years ended December 31, 1996, 1995 and 1994,
respectively. KACC's equity in earnings (loss) before income taxes of such
operations is treated as a reduction (increase) in cost of sales. At December
31, 1996 and 1995, KACC's net receivables from these affiliates were not
material.
Kaiser, principally through KACC, has a variety of financial commitments,
including purchase agreements, tolling arrangements, forward foreign exchange
and forward sales contracts (see Note 10), letters of credit and guarantees.
Such purchase agreements and tolling arrangements include long-term agreements
for the purchase and tolling of bauxite into alumina in Australia by QAL. These
obligations expire in 2008. Under the agreements, KACC is unconditionally
obligated to pay its proportional share of debt, operating costs and certain
other costs of this joint venture. The aggregate minimum amount of required
future principal payments at December 31, 1996 is $94.4, of which approximately
$12.0 is due in each of 2000 and 2001 with the balance being due thereafter.
KACC's share of payments, including operating costs and certain other expenses
under the agreements, has ranged between $110.0 and $120.0 over the past
three years. KACC also has agreements to supply alumina to and to purchase
aluminum from Anglesey.
Summarized combined financial information for KACC's investees is as follows:
December 31,
--------------------
1996 1995
--------- ---------
Current assets $ 450.3 $ 429.0
Property, plant and equipment, net and other assets 364.7 370.1
--------- ---------
Total assets $ 815.0 $ 799.1
========= =========
Current liabilities $ 116.9 $ 125.4
Long-term debt and other liabilities 386.7 367.4
Stockholders' equity 311.4 306.3
--------- ---------
Total liabilities and stockholders' equity $ 815.0 $ 799.1
========= =========
Years Ended December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Net sales $ 660.5 $ 685.9 $ 489.8
Costs and expenses (631.5) (618.7) (494.8)
Provision for income taxes (8.7) (18.7) (6.3)
--------- --------- ---------
Net income (loss) $ 20.3 $ 48.5 $ (11.3)
========= ========= =========
KACC's equity in earnings (loss) of affiliates $ 8.8 $ 19.2 $ (1.9)
========= ========= =========
Dividends received from affiliates $ 11.8 $ -- $ --
========= ========= =========
KACC's equity in earnings (loss) differs from the summary net income (loss) for
unconsolidated affiliates due to various percentage ownerships in the
constituent entities and the amortization of the excess of KACC's investment in
the affiliates over its equity in their net assets. At December 31, 1996, KACC's
investment in these affiliates exceeded its equity in their net assets by
approximately $42.0 which amount will be fully amortized over the next four
years.
OTHER INVESTEES
In 1995, pursuant to a joint venture agreement with SunCor Development Company
("SunCor") for the purpose of developing and managing a real estate project, the
Company, through a wholly owned real estate subsidiary, contributed 950 acres of
undeveloped land valued at $10.0 and cash of $1.0 in exchange for a 50% interest
in the joint venture. SunCor, the managing partner, contributed $11.0 in cash in
exchange for its 50% interest. A subsidiary of the Company and SunCor are each
guarantors of 50% of $4.6 aggreg ate principal amount of the joint venture's
debt. At December 31, 1996, the joint venture had assets of $33.5, liabilities
of $11.1 and equity of $22.4. At December 31, 1995, the joint venture had assets
of $32.8, liabilities of $10.7 and equity of $22.1. For the years ended December
31, 1996 and 1995, the joint venture incurred income of $2.3 and $.2,
respectively.
On July 8, 1993, the Company, through various subsidiaries, acquired control of
the general partner and became responsible for the management of SHRP, Ltd. for
an investment of $9.1. The Company's subsidiaries held an initial equity
interest in SHRP, Ltd. of 29.7%. The Company increased its equity interest in
SHRP, Ltd. to 45.0% as a result of a $5.6 capital contribution in October 1994.
SHRP, Ltd. incurred net losses for the year ended December 31, 1994 of
approximately $20.0. Included in investment, interest and other income (expense)
for the year ended December 31, 1994 are losses of $13.1 with respect to the
Company's investment in SHRP, Ltd.
On April 17, 1995, SHRP, Ltd. and its wholly owned subsidiary, together with
SHRP, Ltd.'s largest limited partner (a wholly owned subsidiary of the Company),
filed voluntary petitions seeking to reorganize under the provisions of Chapter
11 of the United States Bankruptcy Code. The bankruptcy plan (the "Plan") was
confirmed on September 22, 1995, and the transactions called for by the Plan
were completed on October 6, 1995. Such transactions included cash contributions
to SHRP, Ltd. from a new investor group totaling $5.9 (of which wholly owned
subsidiaries of the Company contributed $5.8) and the contribution by a wholly
owned subsidiary of the Company of a tract of land with a fair market value of
$2.3. The new managing general partner of the reorganized SHRP, Ltd. is a wholly
owned subsidiary of the Company. In an unrelated transaction, on October 20,
1995, the Company purchased for $7.3 certain of the 11% Senior Secured
Extendible Notes due September 1, 2001 of SHRP, Ltd. (the "SHRP Notes") and the
corresponding equity interest in SHRP Equity, Inc. (an additional general
partner of the reorganized SHRP, Ltd.) to which the selling noteholder was
entitled. After giving effect to the previously described transactions, wholly
owned subsidiaries of the Company held, directly or indirectly, approximately
78.8% of the equity in the reorganized SHRP, Ltd. Supplemental cash flows
disclosure related to the acquisition of SHRP, Ltd. in October 1995 is as
follows: assets acquired of $29.3, assumed liabilities of $20.7, and additional
minority interest of $2.8. On February 12, 1997, the Company purchased an
additional amount of the SHRP Notes and the corresponding equity interest in
SHRP Equity Inc. for $5.9, thereby increasing the Company's ownership in SHRP,
Ltd. to 88.5%.
The assets and liabilities of SHRP, Ltd. are included in the accompanying
Consolidated Balance Sheet as of December 31, 1996 and 1995, and the results of
SHRP, Ltd.'s operations and cash flows for the period from October 6, 1995 to
December 31, 1995 and for the year ended December 31, 1996 are included in the
accompanying Consolidated Statements of Operations and Cash Flows. The carrying
value of SHRP, Ltd.'s assets and liabilities following its emergence from the
Chapter 11 proceedings differs in material amounts from those of the predecessor
entity.
3. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows:
December 31,
Estimated Useful --------------------
Lives 1996 1995
- --------------------------------------------------------------------------
Land and improvements 5-30 years $ 194.6 $ 185.8
Buildings 5-45 years 304.6 272.4
Machinery and equipment 3-22 years 1,479.1 1,388.5
Construction in progress 89.1 63.3
--------- ---------
2,067.4 1,910.0
Less: accumulated depreciation (769.5) (678.1)
--------- ---------
$1,297.9 $1,231.9
========= =========
Depreciation expense for the years ended December 31, 1996, 1995 and 1994 was
$105.9, $105.4 and $105.7, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
------------------------
<S> <C> <C>
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 17.6 16.5
12% MGHI Senior Secured Notes due August 1, 2003 130.0 --
11 1/4% MGI Senior Secured Notes due August 1, 2003 100.0 100.0
12 1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount 104.2 92.5
10 1/2% Pacific Lumber Senior Notes due March 1, 2003 235.0 235.0
7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015 336.1 350.2
1994 KACC Credit Agreement -- 13.1
10 7/8% KACC Senior Notes due October 15, 2006, including premium 225.9 --
9 7/8% KACC Senior Notes due February 15, 2002, net of discount 224.0 223.8
12 3/4% KACC Senior Subordinated Notes due February 1, 2003 400.0 400.0
Alpart CARIFA Loans 60.0 60.0
Other aluminum operations debt 52.0 61.2
Other notes and contracts, primarily secured by receivables, buildings, real estate and equipment 41.7 32.9
--------- ---------
1,951.5 1,610.2
Less: current maturities (69.6) (25.1)
--------- ---------
$1,881.9 $1,585.1
========= =========
</TABLE>
14% MAXXAM SENIOR SUBORDINATED RESET NOTES DUE 2000 (THE "RESET NOTES") AND
12 1/2% MAXXAM SUBORDINATED DEBENTURES DUE 1999 (THE "12 1/2% DEBENTURES")
The Company redeemed the Reset Notes and 12 1/2% Debentures at par on January
7, 1997 and January 22, 1997, respectively, using proceeds from the
Intercompany Note (defined below).
MAXXAM LOAN AGREEMENT (THE "CUSTODIAL TRUST AGREEMENT")
On June 28, 1996, the Company entered into a loan and pledge agreement with
the Custodial Trust Company providing for up to $25.0 in borrowings. Any
amounts drawn 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 June 28, 1997 convert into a term
loan maturing on June 28, 1998. No borrowings were outstanding as of December
31, 1996.
12% MGHI SENIOR SECURED NOTES DUE 2003 (THE "MGHI NOTES")
On December 23, 1996, MGHI issued $130.0 principal amount of 12% Senior
Secured Notes due August 1, 2003. Interest is payable semi-annually on
February 1 and August 1 of each year beginning February 1, 1997. The MGHI
Notes are guaranteed on a senior, unsecured basis by the Company. MGHI has
agreed to pledge up to 16,055,000 of the 27,938,250 shares of Kaiser common
stock it owns if and when such shares are released from the pledge securing
the MGI Notes (as defined below). The MGHI Notes are effectively subordinated
to liabilities of MGHI's subsidiaries, including trade payables.
The net proceeds from the offering after estimated expenses were approximately
$125.0, all of which was loaned to the Company pursuant to an intercompany note
(the "Intercompany Note") which is pledged to secure the MGHI Notes. The
Intercompany Note bears interest at the rate of 11% per annum (payable
semi-annually on the interest payment dates applicable to the MGHI Notes) and
matures on August 1, 2003. The Company will be entitled to defer the payment of
interest on the Intercompany Note on any interest payment date to the extent
that MGHI has sufficient available funds to satisfy its obligations on
the MGHI Notes on such date. Any such deferred interest will be added to the
principal amount of the Intercompany Note and will be payable at maturity.
11 1/4% MGI SENIOR SECURED NOTES DUE 2003 (THE "MGI SENIOR NOTES") AND
12 1/4% MGI SENIOR SECURED DISCOUNT NOTES DUE 2003 (THE "MGI DISCOUNT NOTES")
On August 4, 1993, MGI issued $100.0 aggregate principal amount of the MGI
Senior Notes and $126.7 aggregate principal amount (approximately $70.0 net of
original issue discount) of the MGI Discount Notes (together, the "MGI
Notes"). The MGI Notes are secured by MGI's pledge of 100% of the common
stock of Pacific Lumber, Britt and MAXXAM Properties Inc. (a wholly owned
subsidiary of MGI) and by MGHI's pledge of 27,983,250 shares of Kaiser's
common stock. The indenture governing the MGI Notes, among other things,
restricts the ability of MGI to incur additional indebtedness, to engage in
transactions with affiliates, to pay dividends and to make investments. As of
December 31, 1996, under the most restrictive of these covenants,
approximately $0.5 of dividends could be paid by MGI. The MGI Notes are
senior indebtedness of MGI; however, they are effectively subordinated to the
liabilities of MGI's subsidiaries, which include the Timber Notes and the
Pacific Lumber Senior Notes. The MGI Discount Notes are net of discount of
$21.5 and $33.2 at December 31, 1996 and 1995, respectively.
The MGI Senior Notes pay interest semi-annually on February 1 and August 1 of
each year. The MGI Discount Notes will not pay any interest until February 1,
1999, at which time semi-annual interest payments will become due on each
February 1 and August 1 thereafter.
10 1/2% PACIFIC LUMBER SENIOR NOTES DUE 2003 (THE "PACIFIC LUMBER SENIOR NOTES")
Interest on the Pacific Lumber Senior Notes is payable semi-annually on March 1
and September 1. The Pacific Lumber Senior Notes are redeemable at the option of
Pacific Lumber, in whole or in part, on or after March 1, 1998 at a price of
103% of the principal amount plus accrued interest. The redemption price is
reduced annually until March 1, 2000, after which time the Pacific Lumber Senior
Notes are redeemable at par. The Pacific Lumber Senior Notes are unsecured and
are senior indebtedness of Pacific Lumber; however, they are effectively
subordinated to the Timber Notes. The indenture governing the Pacific Lumber
Senior Notes contains various covenants which, among other things, limit Pacific
Lumber's ability to incur additional indebtedness and liens, to engage in
transactions with affiliates, to pay dividends and to make investments.
PACIFIC LUMBER REVOLVING CREDIT AGREEMENT (AS AMENDED AND RESTATED, THE "PACIFIC
LUMBER CREDIT AGREEMENT")
Borrowings under the Pacific Lumber Credit Agreement, which expires on May
31, 1999, are secured by Pacific Lumber's trade receivables and inventories,
with interest currently computed at the bank's reference rate plus 1 1/4% or
the bank's offshore rate plus 2 1/4%. The Pacific Lumber Credit Agreement
provides for borrowings of up to $60.0, of which $15.0 may be used for
standby letters of credit and $30.0 is restricted to timberland acquisitions.
Borrowings made pursuant to the portion of the credit facility restricted to
timberland acquisitions would also be secured by the purchased timberlands. As
of December 31, 1996, $47.0 of borrowings was available under the Pacific Lumber
Credit Agreement, of which $4.7 was available for letters of credit and $30.0
was restricted to timberland acquisitions. No borrowings were outstanding as of
December 31, 1996, and letters of credit outstanding amounted to $10.3. The
Pacific Lumber Credit Agreement contains covenants substantially similar to
those contained in the indenture governing the Pacific Lumber Senior Notes.
SCOTIA PACIFIC TIMBER NOTES
The indenture governing the Timber Notes (the "Timber Note Indenture") prohibits
Scotia Pacific from incurring any additional indebtedness for borrowed money and
limits the business activities of Scotia Pacific to the ownership and operation
of its timber and timberlands. The Timber Notes are senior secured obligations
of Scotia Pacific and are not obligations of, or guaranteed by, Pacific Lumber
or any other person. The Timber Notes are secured by a lien on (i) Scotia
Pacific's timber and timberlands (representing $166.0 of the Company's
consolidated balance at December 31, 1996), (ii) substantially all of Scotia
Pacific's property and equipment, and (iii) other property including cash
equivalents reserved for debt service payments and the funds deposited in
the Liquidity Account.
The Timber Notes are structured to link, to the extent of available cash, the
deemed depletion of Scotia Pacific's timber (through the harvest and sale of
logs) to required amortization of the Timber Notes. The required amount of
amortization due on any Timber Note payment date is determined by various
mathematical formulas set forth in the Timber Note Indenture. The minimum
amount of principal which Scotia Pacific must pay (on a cumulative basis)
through any Timber Note payment date in order to avoid an Event of Default
(as defined in the Timber Note Indenture) is referred to as rated
amortization ("Rated Amortization"). If all payments of principal are made
in accordance with Rated Amortization, the payment date on which Scotia
Pacific will pay the final installment of principal is July 20, 2015. The
amount of principal which Scotia Pacific must pay through each Timber Note
payment date in order to avoid payment of prepayment or deficiency premiums
is referred to as scheduled amortization ("Scheduled Amortization"). If all
payments of principal are made in accordance with Scheduled Amortization, the
payment date on which Scotia Pacific will pay the final installment of
principal is July 20, 2009.
Principal and interest on the Timber Notes are payable semi-annually on January
20 and July 20. The Timber Notes are redeemable at the option of Scotia Pacific,
in whole but not in part, at any time. The redemption price of the Timber Notes
is equal to the sum of the principal amount, accrued interest and a prepayment
premium calculated based upon the yield of like-term Treasury securities plus 50
basis points.
1994 KACC CREDIT AGREEMENT (AS AMENDED, THE "KACC CREDIT AGREEMENT")
In February 1994, Kaiser and KACC entered into the KACC Credit Agreement
which provides a $325.0 five-year secured, revolving line of credit. KACC 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 $325.0 or a borrowing base relating to eligible accounts receivable plus
eligible inventory. As of December 31, 1996, no borrowings were outstanding
and $269.7 (of which $71.9 could have been used for letters of credit) was
available to KACC under the KACC Credit Agreement. The KACC Credit Agreement
is unconditionally guaranteed by Kaiser and by certain significant
subsidiaries of KACC. Interest on outstanding balances will bear a premium
(which varies based on the results of a financial test) over either a base
rate or LIBOR at Kaiser's option.
The KACC Credit Agreement requires KACC to comply with certain financial
covenants and places restrictions on Kaiser's and KACC's ability to, among other
things, incur debt and liens, make investments, pay dividends, undertake
transactions with affiliates, make capital expenditures and enter into unrelated
lines of business. Neither Kaiser nor KACC currently is permitted to pay
dividends on its common stock. The KACC Credit Agreement is secured by, among
other things, (i) mortgages on KACC's major domestic plants (excluding KACC's
Gramercy alumina plant and Nevada micromill), (ii) subject to certain
exceptions, liens on the accounts receivable, inventory, equipment, domestic
patents and trademarks and substantially all other personal property of KACC and
certain of its subsidiaries, (iii) a pledge of all of the stock of KACC owned by
Kaiser, and (iv) pledges of all of the stock of a number of KACC's wholly owned
domestic subsidiaries, pledges of a portion of the stock of certain foreign
subsidiaries and pledges of a portion of the stock of certain partially owned
foreign affiliates. Substantially all of the identifiable assets of the bauxite
and alumina and aluminum processing segments (see Note 11) are attributable to
KACC and collateralize the KACC Credit Agreement indebtedness.
10 7/8% KACC SENIOR NOTES DUE 2006 (THE "KACC 10 7/8% SENIOR NOTES"),
9 7/8% KACC SENIOR NOTES DUE 2002 (THE "KACC 9 7/8% SENIOR NOTES") AND
12 3/4% KACC SENIOR SUBORDINATED NOTES DUE 2003 (THE "KACC SENIOR
SUBORDINATED NOTES")
During the fourth quarter of 1996, KACC sold a total of $225.0 principal
amount of KACC 10 7/8% Senior Notes in two separate transactions. A net
premium of $0.9 was realized from the issuance of the KACC 10 7/8% Senior
Notes. The KACC 10 7/8% Senior Notes rank pari passu in right and priority of
payment with the indebtedness under the KACC Credit Agreement and the KACC 9
7/8% Senior Notes (defined below).
Concurrent with the offering by Kaiser of the 8.255% Preferred Redeemable
Increased Dividend Equity Securities (the "PRIDES") (see Note 7), KACC issued
$225.0 of the KACC 9 7/8% Senior Notes. The net proceeds from the offering of
the KACC 9 7/8% Senior Notes were used to reduce outstanding borrowings under
the revolving credit facility of the 1989 KACC Credit Agreement immediately
prior to the effectiveness of the KACC Credit Agreement and for working capital
and general corporate purposes. The KACC 9 7/8% Senior Notes are net of discount
of $1.0 and $1.2 at December 31, 1996 and 1995, respectively.
The obligations of KACC with respect to the KACC 9 7/8% Senior Notes, the KACC
10 7/8% Senior Notes and the KACC Senior Subordinated Notes are guaranteed,
jointly and severally, by certain subsidiaries of KACC. The indentures governing
the KACC 9 7/8% Senior Notes, the KACC 10 7/8% Senior Notes and the KACC Senior
Subordinated Notes restrict, among other things, KACC's ability to incur debt,
undertake transactions with affiliates, and pay dividends. Under the most
restrictive of the covenants in the indentures and the KACC Credit Agreement,
neither Kaiser nor KACC currently is permitted to pay dividends on their common
stock. Further, the indentures governing the KACC 9 7/8% Senior Notes, the KACC
10 7/8% Senior Notes and the KACC Senior Subordinated Notes provide that KACC
must offer to purchase such notes upon the occurrence of a Change of Control (as
defined therein), and the KACC Credit Agreement provides that the occurrence of
a Change in Control (as defined therein) shall constitute an Event of Default
thereunder.
ALPART CARIFA LOANS
In December 1991, Alumina Partners of Jamaica ("Alpart," a majority owned
subsidiary of KACC) entered into a loan agreement with the Caribbean Basin
Projects Financing Authority ("CARIFA"). Pursuant to the loan agreement, Alpart
must remain a qualified recipient for Caribbean Basin Initiative funds as
defined in applicable laws. Alpart has also agreed to indemnify bondholders of
CARIFA for certain tax payments that could result from events, as defined, that
adversely affect the tax treatment of the interest income on the bonds. Alpart's
obligations under the loan agreement are secured by a $64.2 letter of credit
guaranteed by the partners in Alpart (of which $22.5 is guaranteed by Kaiser's
minority partner in Alpart).
THE MCOP CREDIT AGREEMENT (AS AMENDED, THE "MCOP CREDIT AGREEMENT")
On July 15, 1995, a real estate subsidiary of the Company, MCO Properties
Inc. ("MCOP"), amended and restated its revolving credit agreement with a
bank which will expire on May 15, 1998. Borrowings under the MCOP Credit
Agreement are secured primarily by (i) MCOP's eligible receivables and real
estate held for investment or development and sale, (ii) MCOP's pledge of the
common stock of certain of its subsidiaries, and (iii) the guarantee of certain
of MCOP's subsidiaries and the Company. Further, the Company has pledged
MCOP's common stock as additional security. Interest is computed at the
bank's prime rate plus 1/2% or the bank's Eurodollar rate plus 2 3/4%.
The MCOP Credit Agreement contains various covenants including a minimum
net worth requirement and limitations on the payment of dividends,
investments and the incurrence of indebtedness. The MCOP Credit Agreement
provides for borrowings of up to $14.0, of which $8.5 may be used for
standby letters of credit. The available credit is subject to borrowing
base limitation calculations. As of December 31, 1996, $11.1 of additional
borrowings was available under the MCOP Credit Agreement and outstanding
letters of credit amounted to $1.1.
MATURITIES
Scheduled maturities and redemptions of long-term debt outstanding at December
31, 1996 are as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
---------------------------------------------------------------------
1997 1998 1999 2000 2001 Thereafter
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
14% MAXXAM Senior Subordinated Reset Notes $ 25.0 $ -- $ -- $ -- $ -- $ --
12 1/2% MAXXAM Subordinated Debentures 17.6 -- -- -- -- --
12% MGHI Senior Secured Notes -- -- -- -- -- 130.0
11 1/4% MGI Senior Secured Notes -- -- -- -- -- 100.0
12 1/4% MGI Senior Secured Discount Notes -- -- -- -- -- 125.7
10 1/2% Pacific Lumber Senior Notes -- -- -- -- -- 235.0
7.95% Scotia Pacific Timber Collateralized Notes 16.2 19.3 21.6 24.0 24.7 230.3
10 7/8% KACC Senior Notes -- -- -- -- -- 225.0
9 7/8% KACC Senior Notes -- -- -- -- -- 225.0
12 3/4% KACC Senior Subordinated Notes -- -- -- -- -- 400.0
Alpart CARIFA Loans -- -- -- -- -- 60.0
Other aluminum operations debt 8.9 9.1 0.4 0.4 0.4 32.8
Other 1.9 1.9 10.2 2.5 46.5 5.7
------- ------- ------- ------- ------- --------
$ 69.6 $ 30.3 $ 32.2 $ 26.9 $ 71.6 $1,769.5
======= ======= ======= ======= ======= ========
</TABLE>
CAPITALIZED INTEREST
Interest capitalized during the years ended December 31, 1996, 1995 and 1994 was
$5.0, $2.8 and $3.0, respectively.
RESTRICTED NET ASSETS OF SUBSIDIARIES
Certain debt instruments restrict the ability of the Company's subsidiaries to
transfer assets, make loans and advances and pay dividends to the Company. As of
December 31, 1996, all of the assets relating to the Company's aluminum, forest
products, real estate and other operations are subject to such restrictions. The
Company could eliminate all of such restrictions with respect to approximately
$173.7 of the Company's real estate assets with the extinguishment of $24.1 of
debt.
5. INCOME TAXES
Income taxes are determined using an asset and liability approach which requires
the recognition of deferred income tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Deferred income tax assets and liabilities
are determined based on the temporary differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates.
Income (loss) before income taxes, minority interests and extraordinary item by
geographic area is as follows:
Years Ended December 31,
---------------------------------
1996 1995 1994
---------------------------------
Domestic $ (55.0) $ (49.4) $ (177.9)
Foreign 42.9 143.9 6.1
--------- --------- ---------
$ (12.1) $ 94.5 $ (171.8)
========= ========= =========
Income taxes are classified as either domestic or foreign based on whether
payment is made or due to the United States or a foreign country. Certain income
classified as foreign is subject to domestic income taxes.
The credit (provision) for income taxes on income (loss) before income taxes,
minority interests and extraordinary item consists of the following:
Years Ended December 31,
---------------------------------
1996 1995 1994
---------------------------------
Current:
Federal $ (1.5) $ (4.3) $ --
State and local (.5) (.4) (.2)
Foreign (21.8) (40.2) (18.0)
--------- --------- ---------
(23.8) (44.9) (18.2)
--------- --------- ---------
Deferred:
Federal 42.6 35.4 94.3
State and local 18.5 (.4) .4
Foreign 7.6 (4.9) .6
--------- --------- ---------
68.7 30.1 95.3
--------- --------- ---------
$ 44.9 $ (14.8) $ 77.1
========= ========= =========
The 1996 federal deferred credit for income taxes of $42.6 includes $8.8 for the
benefit of operating loss carryforwards generated in 1996. The 1994 federal
deferred credit for income taxes of $94.3 includes $36.0 for the benefit of
operating loss carryforwards generated in 1994.
A reconciliation between the credit (provision) for income taxes and the amount
computed by applying the federal statutory income tax rate to income (loss)
before income taxes, minority interests and extraordinary item is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes, minority interests and extraordinary item $ (12.1) $ 94.5 $ (171.8)
========== ======== ========
Amount of federal income tax based upon the statutory rate $ 4.2 $ (33.1) $ 60.1
Revision of prior years' tax estimates and other changes in valuation allowances 41.2 24.2 16.7
Percentage depletion 3.9 4.2 5.6
State and local taxes, net of federal tax benefit 1.1 (2.4) .1
Foreign taxes, net of federal tax benefit (5.5) (6.9) (5.3)
Other -- (.8) (.1)
---------- -------- --------
$ 44.9 $ (14.8) $ 77.1
========== ======== ========
</TABLE>
The caption entitled "Revision of prior years' tax estimates and other changes
in valuation allowances," as shown in the preceding table, includes amounts for
the reversal of reserves which the Company no longer believes are necessary,
other changes in prior year tax estimates and changes in valuation allowances
with respect to deferred income tax assets. Generally, the reversal of reserves
relates 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. For the years ended December 31, 1996, 1995
and 1994, the reversal of reserves which the Company believes are no longer
necessary resulted in a credit to the income tax provision of $40.8, $20.0 and
$20.1, respectively.
As shown in the Consolidated Statement of Operations for the year ended December
31, 1994, the Company reported an extraordinary loss on the early extinguishment
of debt. The Company reported the loss net of related deferred federal income
taxes of $2.9 which approximated the federal statutory income tax rate.
The components of the Company's net deferred income tax assets (liabilities) are
as follows:
December 31,
-------------------
1996 1995
------- --------
Deferred income tax assets:
Postretirement benefits other than pensions $ 294.7 $ 293.6
Other liabilities 203.4 195.0
Loss and credit carryforwards 179.0 190.5
Real estate 47.3 58.1
Timber and timberlands 37.8 41.9
Other 113.0 86.6
Valuation allowances (141.2) (141.5)
-------- --------
Total deferred income tax assets, net 734.0 724.2
-------- --------
Deferred income tax liabilities:
Property, plant and equipment (163.7) (177.9)
Other (101.4) (104.7)
-------- --------
Total deferred income tax liabilities (265.1) (282.6)
-------- --------
Net deferred income tax assets $ 468.9 $ 441.6
======== ========
As of December 31, 1996, approximately $309.2 of the net deferred income tax
assets listed above are attributable to Kaiser. A principal component of this
amount is the $259.1 tax benefit, net of certain valuation allowances,
associated with the accrual for postretirement benefits other than pensions. The
future tax deductions with respect to the turnaround of this accrual will
occur over a thirty to forty-year period. If such deductions create or increase
a net operating loss in any one year, Kaiser has the ability to carry forward
such loss for fifteen taxable years. For these reasons, the Company believes a
long-term view of profitability is appropriate and has concluded that this net
deferred income tax asset will more likely than not be realized. Included in the
remaining $50.1 of Kaiser's net deferred income tax assets is approximately
$82.4 attributable to the tax benefit of loss and credit carryforwards, net of
valuation allowances. A substantial portion of the valuation allowances for
Kaiser relate to loss and credit carryforwards. The Company evaluated all
appropriate factors to determine the proper valuation allowances for these
carryforwards, including any limitations concerning their use, the year the
carryforwards expire and the levels of taxable income necessary for utilization.
For example, full valuation allowances were provided for certain credit
carryforwards that expire in the near term. With regard to future levels of
income, the Company believes that Kaiser, based on the cyclical nature of its
business, its history of operating earnings and its expectations for future
years, will more likely than not generate sufficient taxable income to realize
the benefit attributable to the loss and credit carryforwards for which
valuation allowanc es were not provided. The net deferred income tax assets
listed above which are not attributable to Kaiser are approximately $159.7 as of
December 31, 1996. This amount includes approximately $76.3 which relates to the
excess of the tax basis over financial statement basis with respect to timber
and timberlands and real estate. The Company has concluded that it is more
likely than not that these net deferred income tax assets will be realized based
in part upon the estimated values of the underlying assets which are in excess
of their tax basis.
As of December 31, 1996 and 1995, $76.6 and $58.5, respectively, of the net
deferred income tax assets listed above are included in prepaid expenses and
other current assets. Certain other portions of the deferred income tax
liabilities listed above are included in other accrued liabilities and other
noncurrent liabilities.
The Company files consolidated federal income tax returns together with its
domestic subsidiaries, other than Kaiser and its subsidiaries. Kaiser and its
domestic subsidiaries are members of a separate consolidated return group which
files its own consolidated federal income tax returns.
The following table presents the tax attributes for federal income tax purposes
at December 31, 1996 attributable to the Company and Kaiser. The utilization of
certain of these tax attributes is subject to limitations.
<TABLE>
<CAPTION>
The Company Kaiser
------------------ -------------------
Expiring Expiring
Through Through
------------------ -------------------
<S> <C> <C> <C> <C>
Regular Tax Attribute Carryforwards:
Current year net operating loss $ 28.5 2011 $ -- --
Prior year net operating losses 77.7 2010 36.0 2010
General business tax credits .8 2002 23.1 2010
Foreign tax credits -- -- 68.5 2001
Alternative minimum tax credits 1.2 Indefinite 19.9 Indefinite
Alternative Minimum Tax Attribute Carryforwards:
Current year net operating loss $ 24.7 2011 $ -- --
Prior year net operating losses 64.2 2010 26.6 2010
Foreign tax credits -- -- 72.2 2001
</TABLE>
6. EMPLOYEE BENEFIT AND INCENTIVE PLANS
POSTRETIREMENT MEDICAL BENEFITS
The Company has unfunded defined postretirement medical benefit plans which
cover most of its employees. Under the plans, employees are eligible for health
care benefits (and life insurance benefits for Kaiser employees) upon
retirement. Retirees from companies other than Kaiser make contributions for a
portion of the cost of their health care benefits. The expected costs of
postretirement medical benefits are accrued over the period the employees
provide services to the date of their full eligibility for such benefits.
In 1995, Kaiser adopted the Kaiser Aluminum Medicare Program ("KAMP"). KAMP is
mandatory for all salaried retirees over 65 and for the United Steelworkers of
America ("USWA") retirees who retire after December 31, 1995, when they become
65. KAMP is voluntary for other hourly retirees of Kaiser's operations in
California, Louisiana, Pennsylvania, Rhode Island and
Washington.
Postretirement medical benefits are generally provided through contracts with
various insurance carriers. The Company has not funded the liability for these
benefits, which are expected to be paid out of cash generated by operations. A
summary of the components of net periodic postretirement medical benefit cost is
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost--medical benefits earned during the year $ 4.3 $ 4.9 $ 8.8
Interest cost on accumulated postretirement medical benefit obligation 47.5 52.7 57.5
Net amortization and deferral (12.5) (9.1) (3.2)
------- ------- -------
Net periodic postretirement medical benefit cost $ 39.3 $ 48.5 $ 63.1
======= ======= =======
</TABLE>
Included in the net periodic postretirement medical benefit cost is $38.3, $47.9
and $61.9 for the years ended December 31, 1996, 1995 and 1994, respectively,
attributable to Kaiser's plans.
The postretirement medical benefit liability recognized in the Company's
Consolidated Balance Sheet is as follows:
December 31,
-------------------
1996 1995
------- -------
Retirees $ 500.9 $ 558.9
Actives eligible for benefits 37.7 31.5
Actives not eligible for benefits 72.3 65.5
------- -------
Accumulated postretirement medical benefit obligation 610.9 655.9
Unrecognized prior service cost 98.6 111.1
Unrecognized net gain 72.4 22.4
------- -------
Postretirement medical benefit liability $ 781.9 $ 789.4
======= =======
The accumulated postretirement medical benefit obligation attributable to
Kaiser's plans was $602.8 and $649.4 as of December 31, 1996 and 1995,
respectively. The postretirement medical benefit liability recognized in the
Company's Consolidated Balance Sheet attributable to Kaiser's plans was $772.6
and $780.8 as of December 31, 1996 and 1995, respectively.
The annual assumed rates of increase in the per capita cost of covered benefits
(i.e., health care cost trend rates) are approximately 8.0% and 6.0% for
retirees under age 65 and over age 65, respectively, and are assumed to decrease
gradually to approximately 5.5% in 2004 and remain at that level thereafter.
Each one percentage point increase in the assumed health care cost trend rate
would increase the accumulated postretirement medical benefit obligation as of
December 31, 1996 by approximately $61.6 and the aggregate of the service and
interest cost components of net periodic postretirement medical benefit cost by
approximately $6.3.
The discount rates and rates of compensation increase used in determining the
accumulated postretirement medical benefit obligation were 7.8% and 5.0% at
December 31, 1996, respectively, and 7.5% and 5.0% at December 31, 1995,
respectively.
RETIREMENT PLANS
The Company has various retirement plans which cover essentially all employees.
Most of the Company's employees are covered by defined benefit plans. The
benefits are determined under formulas based on years of service and the
employee's compensation. The Company's funding policy is to contribute annually
an amount at least equal to the minimum cash contribution required by ERISA.
The Company has various defined contribution savings plans designed to enhance
the existing retirement programs of participating employees. Under the MAXXAM
Inc. Savings Plan (the "MAXXAM Savings Plan"), employees may elect to contribute
up to 16% of their compensation to the plan. For those participants who have
elected to make voluntary contributions to the MAXXAM Savings Plan, the
Company's contributions consist of a matching contribution of up to 4% of the
compensation of participants for each calendar quarter. Under the Kaiser
Aluminum Savings and Retirement Plan, salaried employees may elect to contribute
from 2% to 18% of their compensation to the plan. For those eligible
participants who have elected to make contributions to the plan, Kaiser's
contributions are determined based on earnings and net worth formulas. In 1995,
Kaiser adopted the Kaiser Aluminum Total Compensation System, an unfunded
incentive compensation program, which provides incentive pay based upon
performance against annual plans and over a three-year period.
A summary of the components of net periodic pension costs for the defined
benefit plans and total pension costs for the defined contribution plans and
non-qualified retirement and incentive plans is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Defined benefit plans:
Service cost--benefits earned during the year $ 15.7 $ 12.1 $ 13.6
Interest cost on projected benefit obligations 62.8 62.5 59.5
Return on assets:
Actual gain (94.4) (118.7) (.8)
Deferred gain (loss) 34.8 64.6 (53.0)
Net amortization and deferral 8.0 8.7 2.8
Curtailment gain (.6) -- --
-------- -------- --------
Net periodic pension cost 26.3 29.2 22.1
Defined contribution plans 3.1 5.4 2.8
Non-qualified retirement and incentive plans (3.2) 8.2 5.0
-------- -------- --------
$ 26.2 $ 42.8 $ 29.9
======== ======== ========
</TABLE>
The total pension costs attributable to Kaiser's plans was $21.3, $38.3 and
$24.9 for the years ended December 31, 1996, 1995 and 1994, respectively.
The following table sets forth the funded status and amounts recognized for the
defined benefit plans in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
-------------------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation $ 768.9 $ 781.7
Non-vested benefit obligation 40.9 31.1
------- -------
Total accumulated benefit obligation $ 809.8 $ 812.8
======= =======
Projected benefit obligation $ 854.7 $ 853.1
Plan assets at fair value, primarily common stocks and fixed income obligations (698.1) (623.1)
------- -------
Projected benefit obligation in excess of plan assets 156.6 230.0
Unrecognized net transition obligation (.5) (.6)
Unrecognized net loss (9.0) (54.9)
Unrecognized prior service cost (27.3) (29.1)
Adjustment required to recognize minimum liability 13.7 49.8
------- -------
Accrued pension cost $ 133.5 $ 195.2
======= =======
</TABLE>
With respect to Kaiser's defined benefit plans, the projected benefit obligation
was $816.2 and $815.9 as of December 31, 1996 and 1995, respectively. This
obligation exceeded Kaiser's fair value of plan assets by $154.2 and $223.6 as
of December 31, 1996 and 1995, respectively.
The assumptions used in accounting for the defined benefit plans were as
follows:
December 31,
-------------------------------
1996 1995 1994
-------------------------------
Rate of increase in compensation levels 5.0% 5.0% 5.0%
Discount rate 7.8% 7.5% 8.5%
Expected long-term rate of return on assets 9.5% 9.5% 9.5%
The Company has recorded an additional pension liability equal to the excess of
the accumulated benefit obligation over the fair value of plan assets. The
amount of the additional pension liability in excess of unrecognized prior
service cost is recorded as a reduction to stockholders' equity. In 1996 and
1995, the pension liability adjustment decreased by $11.0 and increased by $4.7,
respectively. These adjustments were recorded net of a related deferred federal
and state income tax credit (provision) of $(6.5) and $2.8, respectively, which
approximated the federal and state statutory rates.
7. MINORITY INTERESTS
Minority interests represent the following:
December 31,
-------------------
1996 1995
-------------------
Kaiser Aluminum Corporation:
Common stock, par $.01 $ -- $ --
8.255% PRIDES 98.1 98.1
Minority interests attributable to Kaiser's subsidiaries 121.7 122.7
Sam Houston Race Park, Ltd. -- 2.4
------- -------
$ 219.8 $ 223.2
======= =======
As a result of Kaiser's issuance of preferred stock in 1993 and 1994 and
Kaiser's redemption of the Depositary Shares in 1995 (each as described below),
the Company's equity interest in Kaiser has decreased to approximately 61.9%, on
a fully diluted basis, as of December 31, 1996.
The Company has recorded 100% of the losses attributable to Kaiser's common
stock since July 1993, as Kaiser's cumulative losses through that date had
eliminated Kaiser's equity with respect to its common stock. The redemption of
Kaiser's Series A Shares, together with the voluntary redemption of 181,700
shares of PRIDES in 1995, decreased Kaiser's preferred equity, and reduced
Kaiser's deficit in common equity, by $136.2. Accordingly, in 1995 the Company
recorded an adjustment to reduce the minority interests reflected on its
Consolidated Balance Sheet for that same amount, with an offsetting decrease in
the Company's stockholders' deficit.
KAISER PROPOSED RECAPITALIZATION
In February 1996, Kaiser proposed a recapitalization. Under the terms of the
proposed recapitalization, the relative ownership interest and voting power of
stockholders would be unchanged as a result of the recapitalization (except as a
result of the treatment of fractional shares). The proposed recapitalization
would have (i) provided for two classes of common stock: Class A Common Shares,
$.01 par value, with one vote per share and a new lesser-voting class designated
as Common Stock, $.01 par value, with 1\10 vote per share, (ii) redesignated as
Class A Common Shares the 100 million currently authorized shares of existing
common stock and authorized 250 million shares to be designated as Common Stock,
and (iii) changed 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 Common Stock. However,
the proposed recapitalization was ultimately abandoned as a result of an
unfavorable court ruling in a suit that had challenged the plan. The decision to
abandon the proposed recapitalization does not preclude a recapitalization from
being proposed to Kaiser's stockholders in the future.
$.65 DEPOSITARY SHARES (THE "DEPOSITARY SHARES")
On June 30, 1993, Kaiser issued 19,382,950 of its Depositary Shares, each
representing one-tenth of a share of Series A Mandatory Conversion Premium
Dividend Preferred Stock (the "Series A Shares"). MGI acquired 2,132,950 of the
Depository Shares in exchange for a $15.0 promissory note issued by KACC which
evidenced a $15.0 cash loan made by MGI to KACC in January 1993. The Depositary
Shares called for the payment of quarterly dividends (when and as declared by
Kaiser's Board of Directors) of approximately $3.2 ($.1625 per share). The
Company accounted for Kaiser's issuance of the Depositary Shares as additional
minority interest.
During 1994, the Company sold 1,239,400 of the Depositary Shares for aggregate
net proceeds of $10.3, resulting in pre-tax gains of $1.6. From January through
May of 1995, the Company sold the remaining Depositary Shares that it owned for
aggregate net proceeds of $7.6, resulting in pre-tax gains of $1.3. Then, on
September 19, 1995, Kaiser redeemed all 1,938,295 of its Series A Shares, which
resulted in the simultaneous redemption of all 19,382,950 Depositary Shares in
exchange for (i) 13,126,521 shares of Kaiser's common stock, (ii) cash equal to
all accrued and unpaid dividends up to and including the day immediately prior
to the redemption date of $2.8, and (iii) cash in lieu of any fractional shares
of common stock that would have otherwise been issuable. As a result of the
Company's sale of its Depository Shares prior to September 19, 1995, the shares
of Kaiser's common stock which were issued upon redemption of the Series A
Shares are all held by minority stockholders.
PRIDES
During the first quarter of 1994, Kaiser consummated a public offering for the
sale of 8,855,550 shares of its PRIDES. The net proceeds from the sale of the
PRIDES were approximately $100.1. Kaiser used $33.2 of such net proceeds to make
non- interest bearing loans to KACC (evidenced by notes) which are designed to
provide sufficient funds to make the required dividend payments on the PRIDES
until December 31, 1997 (the "PRIDES Mandatory Conversion Date") and $66.9 of
such net proceeds to make capital con tributions to KACC. Holders of shares of
PRIDES have a 4/5 vote for each share held of record and, except as required by
law, are entitled to vote together with the holders of Kaiser's common stock and
together with the holders of any other classes or series of Kaiser's stock who
are entitled to vote in such manner on all matters submitted to a vote of common
stockholders. On December 31, 1997, unless either previously redeemed by Kaiser
or converted at the option of the holder, each outstanding share of PRIDES will
mandatorily convert into one share of Kaiser's common stock, subject to
adjustment in certain events, and the right to receive an amount in cash equal
to all accrued and unpaid dividends thereon. At any time and from time to
time on or after December 31, 1996, Kaiser may redeem any or all of the
outstanding shares of PRIDES. The number of shares of Kaiser's common stock
a holder will receive upon redemption will vary depending on a formula and
the market price of the common stock from time to time, but in no
event will be less than .8333 of a share of common stock, subject to adjustment
in certain events. At any time prior to December 31, 1997, each share of PRIDES
is convertible at the option of the holder thereof into .8333 of a share of
common stock (equivalent to a conversion price of $14.10 per share of common
stock), subject to adjustment in certain events. The PRIDES call for the payment
of quarterly dividends of approximately $2.1 ($.2425 per share). The Company
accounted for Kaiser's issuance of the PRIDES as additional minority interest.
SUBSIDIARY REDEEMABLE PREFERENCE STOCK
In 1985, KACC issued its Cumulative (1985 Series A) Preference Stock and its
Cumulative (1985 Series B) Preference Stock (together, the "Redeemable
Preference Stock") each of which has a par value of $1 per share and a
liquidation and redemption value of $50 per share plus accrued dividends, if
any, and have a total redemption value of $31.7 as of December 31, 1996. No
additional Redeemable Preference Stock is expected to be issued. Holders of the
Redeemable Preference Stock are entitled to an annual cash dividend of $5 per
share, or an amount based on a formula tied to KACC's pre-tax income from
aluminum operations when and as declared by KACC's board of directors.
Changes in Series A and B Stock are as follows:
Years Ended December 31,
--------------------------------
1996 1995 1994
--------------------------------
Shares:
Beginning of year 737,363 912,167 1,081,548
Redeemed (102,679) (174,804) (169,381)
--------- --------- ---------
End of year 634,684 737,363 912,167
========= ========= =========
Redemption fund agreements require KACC to make annual payments by March 31 of
the subsequent year based on a formula tied to KACC's consolidated net income
until the redemption funds are sufficient to redeem all of the Redeemable
Preference Stock. On an annual basis, the minimum payment is $4.3 and the
maximum payment is $7.3. KACC also has certain additional repurchase
requirements which are based, among other things, upon profitability tests.
The Redeemable Preference Stock is entitled to the same voting rights as KACC
common stock and to certain additional voting rights under certain
circumstances, including the right to elect, along with other KACC preference
stockholders, two directors whenever accrued dividends have not been paid on two
annual dividend payment dates or when accrued dividends in an amount equivalent
to six full quarterly dividends are in arrears. The Redeemable Preference Stock
restricts the ability of KACC to redeem or pay dividends on common stock if KACC
is in default on any dividends payable on Redeemable Preference Stock.
KAISER STOCK INCENTIVE PLANS
In 1993, Kaiser adopted the Kaiser 1993 Omnibus Stock Incentive Plan. A total of
2,500,000 shares of Kaiser common stock were reserved for awards or for payment
of rights granted under the plan, of which 572,254 shares were available to be
awarded at December 31, 1996. During 1994, 102,564 restricted shares, which are
now fully vested, were distributed to two Kaiser executives. Compensation
expense recognized during 1996, 1995 and 1994 associated with the 1993 Incentive
Plan and a prior long-term incentive plan (the "LTIP") was approximately $0.7,
$1.4 and $2.2, respectively.
In 1994, the Compensation Committee of Kaiser's Board of Directors approved the
award of "nonqualified stock options" to certain members of management. These
options generally will vest at the rate of 25% per year. Information relating to
nonqualified stock options is shown below. The prices shown in the table below
are the weighted average price per share for the respective number of underlying
shares.
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ------------------ -------------------
Shares Price Shares Price Shares Price
----------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 926,085 $ 10.32 1,119,680 $ 9.85 664,400 $ 7.55
Granted -- -- -- -- 494,800 12.75
Exercised (8,275) 8.99 (155,500) 7.32 (6,920) 7.25
Expired or forfeited (27,415) 10.45 (38,095) 8.88 (32,600) 7.46
-------- ---------- ---------
Outstanding at end of year 890,395 10.33 926,085 10.32 1,119,680 9.85
======== ========== =========
Exercisable at end of year 436,195 $ 10.47 211,755 $ 10.73 120,180 $ 7.57
======== ========== =========
</TABLE>
8. STOCKHOLDERS' DEFICIT
PREFERRED STOCK
The holders of the Company's Class A $.05 Non-Cumulative Participating
Convertible Preferred Stock (the "Class A Preferred Stock") are entitled to
receive, if and when declared, preferential cash dividends at the rate of $.05
per share per annum and will participate thereafter on a share for share basis
with the holders of common stock in all cash dividends, other than cash
dividends on the common stock in any fiscal year to the extent not exceeding
$.05 per share. Stock dividends declared on the common stock will result in the
holders of the Class A Preferred Stock receiving an identical stock dividend
payable in shares of Class A Preferred Stock. At the option of the holder, the
Class A Preferred Stock is convertible at any time into shares of common stock
at the rate of one share of common stock for each share of Class A Preferred
Stock. Each holder of Class A Preferred Stock is generally entitled to ten votes
per share on all matters presented to a vote of the Company's stockholders.
STOCK OPTION PLANS
In 1994, the Company adopted the MAXXAM 1994 Omnibus Employee Incentive Plan
(the "1994 Omnibus Plan"). Up to 1,000,000 shares of common stock and 1,000,000
shares of Class A Preferred Stock were reserved for awards or for payment of
rights granted under the 1994 Omnibus Plan of which 940,000 and 910,000 shares,
respectively, were available to be awarded at December 31, 1996. The 1994
Omnibus Plan replaced the Company's 1984 Phantom Share Plan (the "1984 Plan")
which expired in June 1994, although previous grants thereunder remain
outstanding. The options (or rights, as applicable) granted in 1995 and 1996
vest at the rate of 20% per year commencing one year from the date of grant. The
Company paid $2.7 in respect of awards issued pursuant to the 1984 Plan for the
year ended December 31, 1995. Amounts paid in respect of awards issued pursuant
to the 1984 Plan for the years ended December 31, 1996 and 1994 were not
significant. The following table summarizes the options or rights outstanding
and exercisable relating to the 1984 Plan and the 1994 Omnibus Plan. The prices
shown are the weighted average price per share for the respective number of
underlying shares.
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ------------------ -------------------
Shares Price Shares Price Shares Price
----------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 207,900 $ 31.59 238,000 $ 26.74 267,800 $ 26.96
Granted 45,000 48.84 36,000 45.15 70,000 30.38
Exercised (1,800) 15.31 (66,100) 21.52 (37,050) 18.93
Expired or forfeited (1,000) 45.15 -- -- (62,750) 36.37
-------- -------- --------
Outstanding at end of year 250,100 34.75 207,900 31.59 238,000 26.74
======== ======== ========
Exercisable at end of year 122,100 $ 29.40 93,900 $ 27.95 124,100 $ 23.83
======== ======== ========
</TABLE>
Concurrent with the adoption of the 1994 Omnibus Plan, the Company adopted the
MAXXAM 1994 Non-Employee Director Plan (the "1994 Director Plan"). Up to 35,000
shares of common stock are reserved for awards under the 1994 Director Plan. In
May 1996, 1995 and 1994, options to purchase 900 shares, 900 shares and 1,500
shares of common stock, respectively, were granted to three non-employee
directors. The exercise prices of these options are $43.88, $31.63 and $36.50
per share, respectively, based on the quoted market price at the date of grant.
The options vest at the rate of 25% per year commencing one year from the date
of grant. At December 31, 1996, options for 975 shares were exercisable.
SHARES RESERVED FOR ISSUANCE
At December 31, 1996, the Company had 2,703,856 common shares and 1,000,000
Class A Preferred shares reserved for future issuances in connection with
various options, convertible securities and other rights as described in this
Note 8.
RIGHTS
On November 29, 1989, the Board of Directors of the Company declared a dividend
to its stockholders consisting of (i) one Series A Preferred Stock Purchase
Right (the "Series A Right") for each outstanding share of the Company's Class A
Preferred Stock and (ii) one Series B Preferred Stock Purchase Right (the
"Series B Right") for each outstanding share of the Company's common stock. The
Series A Right and the Series B Right are collectively referred to herein as the
"Rights." The Rights are exercisable only if a person or group of affiliated or
associated persons (an "Acquiring Person") acquires beneficial ownership, or the
right to acquire beneficial ownership, of 15% or more of the Company's common
stock, or announces a tender offer that would result in beneficial ownership of
15% or more of the outstanding common stock. Any person or group of affiliated
or associated persons who, as of November 29, 1989, was the beneficial owner of
at least 15% of the outstanding common stock will not be deemed to be an
Acquiring Person unless such person or group acquires beneficial ownership of
additional shares of common stock (subject to certain exceptions). Each Series A
Right, when exercisable, entitles the registered holder to purchase from the
Company one share of Class A Preferred Stock at an exercise price of $165.00,
subject to adjustment. Each Series B Right, when exercisable, entitles the
registered holder to purchase from the Company one one-hundredth of a share of
the Company's new Class B Junior Participating Preferred Stock, with a par value
of $.50 per share (the "Junior Preferred Stock"), at an exercise price of
$165.00, subject to adjustment.
Under certain circumstances, including if any person becomes an Acquiring Person
other than through certain offers for all outstanding shares of stock of the
Company, or if an Acquiring Person engages in certain "self-dealing"
transactions, each Series A Right would enable its holder to buy Class A
Preferred Stock (or, under certain circumstances, preferred stock of an
acquiring company) having a value equal to two times the exercise price of the
Series A Right, and each Series B Right shall enable its holder to buy common
stock of the Company (or, under certain circumstances, common stock of an
acquiring company) having a value equal to two times the exercise price of the
Series B Right. Under certain circumstances, Rights held by an Acquiring Person
will be null and void. In addition, under certain circumstances, the Board is
authorized to exchange all outstanding and exercisable Rights for stock, in the
ratio of one share of Class A Preferred Stock per Series A Right and one share
of common stock of the Company per Series B Right. The Rights, which do not have
voting privileges, expire in 1999, but may be redeemed by action of the Board
prior to that time for $.01 per right, subject to certain restrictions.
VOTING CONTROL
Federated Development Inc., a wholly owned subsidiary of Federated Development
Company ("Federated"), and Mr. Charles E. Hurwitz collectively own 99.1% of the
Company's Class A Preferred Stock and 31.3% of the Company's common stock
(resulting in combined voting control of approximately 61.1% of the Company).
Mr. Hurwitz is the Chairman of the Board, President and Chief Executive Officer
of the Company and Chairman and Chief Executive Officer of Federated. Federated
is wholly owned by Mr. Hurwitz, members of his immediate family and trusts for
the benefit thereof.
9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Minimum rental commitments under operating leases at December 31, 1996 are as
follows: years ending December 31, 1997-$28.2; 1998-$30.5; 1999-$35.1;
2000-$31.1; 2001-$28.4; thereafter-$160.8. Rental expense for operating leases
was $34.2, $31.4 and $29.2 for the years ended December 31, 1996, 1995 and 1994,
respectively. The minimum future rentals receivable under noncancelable
subleases at December 31, 1996 were $46.7.
ENVIRONMENTAL CONTINGENCIES
Kaiser and KACC are subject to a number of environmental laws and regulations,
to fines or penalties assessed for alleged breaches of the environmental laws
and regulations, and to claims and litigation based upon such laws. KACC is
currently subject to a number of lawsuits under 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 potentia lly 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. The following table
presents the changes in such accruals, which are primarily included in other
noncurrent liabilities:
Years Ended December 31,
------------------------------
1996 1995 1994
------------------------------
Balance at beginning of year $ 38.9 $ 40.1 $ 40.9
Additional amounts 3.2 3.3 2.8
Less expenditures (8.8) (4.5) (3.6)
------- ------- -------
Balance at end of year $ 33.3 $ 38.9 $ 40.1
======= ======= =======
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 $9.0 for the years 1997 through 2001 and an aggregate of approximately
$6.0 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 $24.0 and that, subject to further
regulatory review and approval, the factors upon which a substantial portion of
this estimate is based are expected to be resolved over the next twelve months.
While uncertainties are inherent in the final outcome of these environmental
matters, and it is impossible to determine the actual costs that ultimately may
be incurred, management believes that the resolution of such uncertainties
should not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
ASBESTOS CONTINGENCIES
KACC is a defendant in a number of lawsuits, some of which involve claims of
multiple persons, in which the plaintiffs allege that certain of their injuries
were caused by, among other things, exposure to asbestos during, and as a result
of, their employment or association with KACC or exposure to products containing
asbestos produced or sold by KACC. The lawsuits generally relate to products
KACC has not manufactured for at least 15 years. At December 31, 1996, the
number of claims pending was approximately 71,100, compared to 59,700 at
December 31, 1995. During 1996, approximately 21,100 claims were received and
approximately 9,700 were settled or dismissed. A substantial portion of the
asbestos-related claims that were filed and served on KACC during 1995 and
1996 were filed in Texas. KACC has been advised by its 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 exempt from certain aspects of the
Texas tort reform legislation, KACC 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 in 1996, albeit at a somewhat reduced rate.
Based on past experience and reasonably anticipated future activity, KACC has
established an accrual for estimated asbestos-related costs for claims filed and
estimated to be filed through 2008. There are inherent uncertainties involved in
estimating asbestos-related costs and KACC's actual costs could exceed these
estimates. KACC'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 $136.7, before
consideration of insurance recoveries, is included primarily in other noncurrent
liabilities at December 31, 1996. While KACC does not presently believe there is
a reasonable basis for estimating such costs beyond 2008 and, accordingly, no
accrual has been recorded for such costs which may be incurred beyond 2008,
there is a reasonable possibility that such costs may continue beyond 2008, and
such costs may be substantial. KACC estimates that annual future cash payments
in connection with such litigation will be approximately $8.0 to $17.0 for each
of the years 1997 through 2001, and an aggregate of approximately $80.0
thereafter.
KACC believes that it 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 LLP with respect to applicable insurance
coverage law relating to the terms and conditions of these policies, that
substantial recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $109.8 determined on the same basis as
the asbestos-related cost accrual, is recorded primarily in long-term
receivables and other assets at December 31, 1996.
KACC continues to monitor claims activity, the status of lawsuits (including
settlement initiatives), legislative progress, and costs incurred in order to
ascertain whether an adjustment to the existing accruals should be made to the
extent that historical experience may differ significantly from KACC's
underlying assumptions. While uncertainties are inherent in the final outcome of
these asbestos matters and it is presently impossible to determine the actual
costs that ultimately may be incurred and insurance recoveries that will be
received, KACC currently believes that, based on the factors discussed in the
preceding paragraphs, the resolution of asbestos-related uncertainties and the
incurrence of asbestos-related costs net of related insurance recoveries should
not have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
OTS CONTINGENCY AND RELATED MATTERS
On December 26, 1995, the United States Department of Treasury's Office of
Thrift Supervision ("OTS") initiated a formal administrative proceeding against
the Company and others by filing a Notice of Charges (the "Notice"). The Notice
alleges, among other things, misconduct by the Company, Federated Development
Company ("Federated"), Mr. Charles 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 and Federated, 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-95-3956) (the "FDIC action")
in the U.S. District Court for the Southern District of Texas (the "Court"). The
original complaint 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 original complaint further alleges,
among other things, that Mr. Hurwitz was obligated to ensure that UFG, Federated
and MAXXAM maintained the net worth of USAT. The Court has joined the OTS as a
party to the FDIC action and granted the motions to intervene filed by the
Company and three other respondents in the OTS administrative proceeding. The
OTS is seeking to be dismissed from the FDIC action. On January 15, 1997, the
FDIC filed an amended complaint which seeks, conditioned on the OTS prevailing
in its administrative proceeding, unspecified damages from Mr. Hurwitz relating
to amounts the OTS does not collect from the Company and Federated with respect
to alleged obligations to maintain USAT's net worth.
The Company's bylaws provide for indemnification of its officers and directors
to the fullest extent permitted by Delaware law. The Company is obligated to
advance defense costs to its officers and directors, subject to the individual's
obligation to repay such amount if it is ultimately determined that the
individual was not entitled to indemnification. In addition, the Company's
indemnity obligation can, under certain circumstances, include amounts other
than defense costs, including judgments and settlements. The Company has
concluded that it is unable to determine a reasonable estimate of the loss (or
range of loss), if any, that could result from this contingency. Accordingly, it
is impossible to assess the ultimate outcome of the foregoing matters or its
potential impact on the Company's consolidated financial position, results of
operations or liquidity.
OTHER MATTERS
The Company is involved in various other claims, lawsuits and other proceedings
relating to a wide variety of matters. While uncertainties are inherent in the
final outcome of such matters and it is presently impossible to determine the
actual costs that ultimately may be incurred, management believes that the
resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
10. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
At December 31, 1996, the net unrealized gain on KACC's position in aluminum
forward sales and option contracts, (based on an average price of $1,610 per ton
($.73 per pound) of primary aluminum), natural gas and fuel oil forward purchase
and option contracts, and forward foreign exchange contracts, was approximately
$10.5. However, increases in the price of primary aluminum during January 1997
caused KACC's net hedging position at January 31, 1997 to change to an
unrealized loss of approximately $2.2. Any gains or losses on the derivative
contracts utilized in KACC's hedging activities are offset by losses or gains,
respectively, on the transactions being hedged.
ALUMINA AND ALUMINUM
Kaiser's earnings are sensitive to changes in the prices of alumina, primary
aluminum and fabricated aluminum products, and also depend to a significant
degree upon the volume and mix of all products sold. Primary aluminum prices
have historically been subject to significant cyclical price fluctuations.
Alumina prices as well as fabricated aluminum product prices (which vary
considerably among products) are significantly influenced by changes in the
price of primary aluminum but generally lag behind primary aluminum price
changes by up to three months. During the period January 1, 1993 through
December 31, 1996, the average Midwest United States transaction price for
primary aluminum has ranged from approximately $.50 to $1.00 per pound.
From time to time in the ordinary course of business, KACC enters into hedging
transactions to provide price risk management in respect of the net exposure of
earnings resulting from (i) anticipated sales of alumina, primary aluminum and
fabricated aluminum products, less (ii) expected purchases of certain items,
such as aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with
the market price of primary aluminum. Forward sales contracts are used by KACC
to effectively lock-in or fix the price that KACC will receive for its
shipments. KACC also uses option contracts (i) to establish a minimum price for
its product shipments, (ii) to establish a "collar" or range of price for KACC's
anticipated sales and/or (iii) to permit KACC to realize possible upside
price movements. As of December 31, 1996, KACC had sold forward, at fixed
prices, approximately 70,000 and 93,600 tons of primary aluminum with respect
to 1997 and 1998, respectively. As of December 31, 1996, KACC had also
purchased put options to establish a minimum price for approximately 202,700
and 52,000 tons with respect to 1997 and 1998, respectively, and had entered
into option contracts that established a price range for an additional
165,600 tons with respect to 1998. During January 1997, KACC entered into
additional option contracts that establish a price range for
51,500, 60,000 and 51,000 tons with respect to 1997, 1998 and 1999,
respectively. During January 1997 KACC also sold forward, at fixed prices, an
additional 24,000 tons with respect to 1999.
As of December 31, 1996, KACC had sold forward approximately 90% of the alumina
available to it in excess of its projected internal smelting requirements for
1997 and 1998. Virtually all of such 1997 and 1998 sales were made at prices
indexed to future prices of primary aluminum.
ENERGY
KACC is exposed to energy price risk from fluctuating prices for fuel oil and
natural gas consumed in the production process. Accordingly, KACC from time to
time in the ordinary course of business enters into hedging transactions with
major suppliers of energy and energy related financial instruments. As of
December 31, 1996, KACC had a combination of fixed price purchase and option
contracts for the purchase of approximately 40,000 MMBtu of natural gas per day
during the first and second quarter of 1997, and for 25,000 MMBtu of natural gas
per day for the period July 1997 through December 1998. At December 31, 1996,
KACC also held option contracts for an average of 152,000 barrels of fuel oil
per month for 1997 and 174,000 barrels of fuel oil per month for 1998.
FOREIGN CURRENCY
KACC enters into forward foreign exchange contracts to hedge material cash
commitments to foreign subsidiaries or affiliates. At December 31, 1996, KACC
had net forward foreign exchange contracts totaling approximately $81.6 for the
purchase of 110.0 Australian dollars from January 1997 through June 1998, in
respect of its commitments for 1997 and 1998 expenditures denominated in
Australian dollars.
11. SEGMENT INFORMATION
The following tables present financial information by industry segment and by
geographic area at December 31, 1996 and 1995 and for the three years ended
December 31, 1996, 1995 and 1994.
INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
Real
Bauxite Forest Estate
Years and Aluminum Products and Other
Ended Alumina Processing Operations Operations Corporate Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers 1996 $ 508.0 $1,682.5 $ 264.6 $ 88.2 $ -- $2,543.3
1995 514.2 1,723.6 242.6 84.8 -- 2,565.2
1994 432.5 1,349.0 249.6 84.6 -- 2,115.7
Operating income (loss) 1996 (10.7) 114.4 73.0 (12.0) (33.4) 131.3
1995 37.2 179.3 74.3 (13.6) (19.6) 257.6
1994 5.6 (55.9) 79.1 (10.0) (11.5) 7.3
Equity in earnings (loss) of
unconsolidated affiliates 1996 1.8 7.0 -- 2.3 -- 11.1
1995 3.5 15.7 -- (.1) -- 19.1
1994 (4.6) 2.7 -- -- (13.1) (15.0)
Depreciation and depletion 1996 30.2 59.9 27.2 5.7 .5 123.5
1995 30.0 58.4 25.3 6.2 1.0 120.9
1994 32.3 57.2 24.7 5.9 1.0 121.1
Capital expenditures 1996 31.6 128.7 15.2 10.7 .4 186.6
1995 30.2 49.2 9.9 8.2 .2 97.7
1994 29.4 40.6 11.3 7.6 .4 89.3
Investments in and advances to
unconsolidated affiliates 1996 121.5 46.9 -- 11.1 -- 179.5
1995 130.3 47.9 -- 10.9 -- 189.1
Identifiable assets 1996 1,032.1 1,852.8 681.2 207.1 342.5 4,115.7
1995 981.0 1,763.8 678.1 236.4 173.0 3,832.3
</TABLE>
Sales to unaffiliated customers exclude intersegment sales between bauxite and
alumina and aluminum processing of $181.6, $159.7 and $146.8 for the years ended
December 31, 1996, 1995 and 1994, respectively. Intersegment sales are made on a
basis intended to reflect the market value of the products.
Operating losses for Corporate represent general and administrative expenses of
MAXXAM Inc. that are not attributable to the Company's industry segments.
General and administrative expenses of Kaiser are allocated in the Company's
industry segment presentation based upon those segments' ratio of sales to
unaffiliated customers.
GEOGRAPHICAL INFORMATION
The Company's operations are located in many foreign countries, including
Australia, Canada, the Peoples Republic of China, Ghana, Jamaica, and the United
Kingdom. Foreign operations in general may be more vulnerable than domestic
operations due to a variety of political and other risks. Sales and transfers
among geographic areas are made on a basis intended to reflect the market value
of products. Geographical area information relative to operations is summarized
as follows:
<TABLE>
<CAPTION>
Years Other
Ended Domestic Caribbean Africa Foreign Eliminations Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers 1996 $1,962.8 $ 201.8 $ 198.3 $ 180.4 $ -- $2,543.3
1995 1,916.9 191.7 239.4 217.2 -- 2,565.2
1994 1,597.4 169.9 180.0 168.4 -- 2,115.7
Sales and transfers among geographic areas 1996 -- 116.9 -- 206.0 (322.9) --
1995 -- 79.6 -- 191.5 (271.1) --
1994 -- 98.7 -- 139.4 (238.1) --
Operating income (loss) 1996 37.9 1.6 27.8 64.0 -- 131.3
1995 79.0 9.8 83.5 85.3 -- 257.6
1994 (65.3) 9.9 18.3 44.4 -- 7.3
Equity in earnings (loss) of
unconsolidated affiliates 1996 2.6 -- -- 8.5 -- 11.1
1995 (.3) -- -- 19.4 -- 19.1
1994 (12.9) -- -- (2.1) -- (15.0)
Investments in and advances to
unconsolidated affiliates 1996 11.6 25.3 -- 142.6 -- 179.5
1995 12.1 27.1 -- 149.9 -- 189.1
Identifiable assets 1996 3,318.4 391.2 194.7 211.4 -- 4,115.7
1995 3,037.0 381.9 196.5 216.9 -- 3,832.3
</TABLE>
Included in results of operations are aggregate foreign currency translation and
transaction gains of $5.3 for the year ended December 31, 1995. Foreign currency
translation and transaction gains were immaterial in 1996 and 1994.
Export sales were less than 10% of total revenues during the years ended
December 31, 1996, 1995 and 1994. For the years ended December 31, 1996 and
1995, sales to any one customer did not exceed 10% of consolidated revenues. For
the year ended December 31, 1994, the Company had bauxite and alumina sales of
$58.2 and aluminum processing sales of $147.7 to one customer.
12. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1996 1995 1994
---------------------------------
<S> <C> <C> <C>
Supplemental information on non-cash investing and financing activities:
Capital spending accrual excluded from investing activities $ 13.5 $ -- $ --
Contribution of property in exchange for joint venture interest, net of
deferred gain of $8.6 -- 1.3 --
Net margin borrowings (repayments) for marketable securities -- (6.9) 5.9
Reduction of stockholders' deficit due to redemption of Kaiser preferred stock -- 136.2 --
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 156.8 $ 162.8 $ 149.3
Income taxes paid, net 21.5 30.3 18.3
</TABLE>
QUARTERLY FINANCIAL INFORMATION (UNAUDITED), MARKET FOR COMMON EQUITY
AND RELATED MATTERS
(In millions of dollars, except share amounts)
- -------------------------------------------------------------------------------
Summary quarterly financial information for the years ended December 31, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------
March 31 June 30 September 30 December 31
---------------------------------------------------
<S> <C> <C> <C> <C>
1996:
Net sales $ 612.2 $ 667.7 $ 641.2 $ 622.2
Operating income 53.2 46.0 9.6 22.5
Net income (loss) 5.8 16.9 5.3 (5.1)
Per common and common equivalent share:
Net income (loss) .61 1.78 .56 (.54)
Common stock market price(1):
High 48 7/8 50 7/8 45 47 3/4
Low 35 3/8 39 1/4 35 3/4 37 1/8
1995:
Net sales $ 581.3 $ 673.3 $ 638.0 $ 672.6
Operating income 40.6 81.9 64.4 70.7
Net income (loss) (1.0) 25.4 10.7 22.4
Per common and common equivalent share:
Net income (loss) (.11) 2.69 1.13 2.37
Common stock market price(1):
High 33 1/8 36 1/8 67 5/8 48 5/8
Low 27 1/4 28 3/4 35 5/8 30 3/4
<FN>
(1)The Company's common stock is traded on the American, Pacific and
Philadelphia Stock Exchanges. The stock symbol is MXM. This table sets forth for
the calendar periods indicated the high and low sales prices per share of the
Company's common stock as reported on the American Stock Exchange Consolidated
Composite Tape.
</TABLE>
EXHIBIT 21
MAXXAM INC.
PRINCIPAL SUBSIDIARIES OF THE REGISTRANT
Listed below are MAXXAM Inc.'s principal subsidiaries and the
jurisdiction of their incorporation or organization. Certain subsidiaries
are omitted which, considered in the aggregate as a single subsidiary,
would not constitute a significant subsidiary.
<TABLE>
<CAPTION>
State or Province
of Incorporation
Name or Organization
- ----------------------------------------------- -----------------------
<S> <C>
ALUMINUM OPERATIONS
Alpart Jamaica Inc. Delaware
Alumina Partners of Jamaica (partnership) Delaware
Anglesey Aluminium Limited United Kingdom
Kaiser Alumina Australia Corporation Delaware
Kaiser Aluminum Corporation Delaware
Kaiser Aluminium International, Inc. Delaware
Kaiser Aluminum & Chemical Corporation Delaware
Kaiser Aluminum & Chemical of Canada Limited Ontario
Kaiser Bauxite Company Nevada
Kaiser Finance Corporation Delaware
Kaiser Jamaica Bauxite Company (partnership) Jamaica
Kaiser Jamaica Corporation Delaware
Queensland Alumina Limited Queensland
Volta Aluminium Company Limited Ghana
FOREST PRODUCTS OPERATIONS
Britt Lumber Co., Inc. California
MAXXAM Group Inc. Delaware
MAXXAM Properties Inc. Delaware
Salmon Creek Corporation Delaware
Scotia Pacific Holding Company Delaware
The Pacific Lumber Company Delaware
REAL ESTATE OPERATIONS
Horizon Corporation Delaware
MAXXAM Property Company Delaware
MCO Properties Inc. Delaware
MCO Properties L.P. (limited partnership) Delaware
MXM General Partner, Inc. Delaware
MXM Mortgage L.P. (limited partnership) Delaware
Palmas del Mar Properties, Inc. Delaware
RACE PARK OPERATIONS
New SHRP Acquisition, Inc. Delaware
SHRP General Partner, Inc. Texas
Sam Houston Entertainment Corp. Texas
Sam Houston Race Park, Ltd. (limited Texas
partnership)
OTHER
MAXXAM Group Holdings Inc. Delaware
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included or incorporated by reference in this
Form 10-K, into the Company's previously filed Registration Statement File
No. 33-54479.
ARTHUR ANDERSEN LLP
Houston, Texas
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet and consolidated statement of operations
and is qualified in its entirety by reference to such consolidated financial
statements together with the related footnotes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 336,600
<SECURITIES> 50,300
<RECEIVABLES> 205,900
<ALLOWANCES> 5,200
<INVENTORY> 634,800
<CURRENT-ASSETS> 1,477,400
<PP&E> 2,067,400
<DEPRECIATION> 769,500
<TOTAL-ASSETS> 4,115,700
<CURRENT-LIABILITIES> 743,500
<BONDS> 1,951,500
0
300
<COMMON> 5,000
<OTHER-SE> (56,100)
<TOTAL-LIABILITY-AND-EQUITY> 4,115,700
<SALES> 2,543,300
<TOTAL-REVENUES> 2,543,300
<CGS> 2,085,000
<TOTAL-COSTS> 2,085,000
<OTHER-EXPENSES> 327,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 184,500
<INCOME-PRETAX> (12,100)
<INCOME-TAX> (44,900)
<INCOME-CONTINUING> 22,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,900
<EPS-PRIMARY> 2.42
<EPS-DILUTED> 2.42
</TABLE>
