UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Commission File Number 1-3924
MAXXAM INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-2078752
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
5847 SAN FELIPE, SUITE 2600 77057
HOUSTON, TEXAS (Zip Code)
(Address of Principal
Executive Offices)
Registrant's telephone number, including area code: (713) 975-7600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /X/ No / /
Number of shares of common stock outstanding at November 13, 1998:
7,000,597
<PAGE>
TABLE OF CONTENTS
PAGE
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet at September 30, 1998
and December 31, 1997 3
Consolidated Statement of Operations for the three
and nine months ended September 30, 1998 and 1997 4
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1998 and 1997 5
Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 6. Exhibits and Reports on Form 8-K 30
Signatures S-1
Appendix A - Glossary of Defined Terms A-1
<PAGE>
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 253.9 $ 164.6
Marketable securities 27.0 84.6
Receivables:
Trade, net of allowance for doubtful
accounts of $6.4 and $5.9,
respectively 214.0 255.9
Other 109.3 126.3
Inventories 573.6 629.6
Prepaid expenses and other current assets 162.8 175.1
------------ ------------
Total current assets 1,340.6 1,436.1
Property, plant and equipment, net of
accumulated depreciation of $902.6 and
$845.6, respectively 1,319.6 1,320.9
Timber and timberlands, net of accumulated
depletion of $177.0 and $169.2,
respectively 296.3 299.1
Investments in and advances to unconsolidated
affiliates 142.1 159.5
Deferred income taxes 511.5 479.9
Long-term receivables and other assets 436.5 418.7
------------ ------------
$ 4,046.6 $ 4,114.2
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 181.6 $ 187.3
Accrued interest 40.1 68.7
Accrued compensation and related benefits 136.0 159.3
Other accrued liabilities 178.6 174.9
Payable to affiliates 80.2 82.9
Short-term borrowings and current
maturities of long-term debt 16.7 69.0
------------ ------------
Total current liabilities 633.2 742.1
Long-term debt, less current maturities 1,976.7 1,888.0
Accrued postretirement medical benefits 714.4 730.1
Other noncurrent liabilities 574.7 586.3
------------ ------------
Total liabilities 3,899.0 3,946.5
------------ ------------
Commitments and contingencies
Minority interests 180.7 170.6
Stockholders' deficit:
Preferred stock, $.50 par value;
12,500,000 shares authorized; Class
A $.05 Non-Cumulative Participating
Convertible Preferred Stock; 669,701
shares issued .3 .3
Common stock, $.50 par value; 28,000,000
shares authorized; 10,063,359
shares issued 5.0 5.0
Additional capital 222.8 222.8
Accumulated deficit (148.7) (118.5)
Pension liability adjustment (3.3) (3.3)
Treasury stock, at cost (shares held:
preferred - 845; common - 3,062,762) (109.2) (109.2)
------------ ------------
Total stockholders' deficit (33.1) (2.9)
------------ ------------
$ 4,046.6 $ 4,114.2
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales:
Aluminum operations $ 541.6 $ 634.1 $ 1,753.4 $ 1,778.6
Forest products operations 65.9 72.8 181.3 216.5
Real estate and other operations 21.3 19.1 57.7 51.6
------------ ------------ ------------ ------------
628.8 726.0 1,992.4 2,046.7
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales and operations:
Aluminum operations 460.6 523.7 1,466.3 1,473.7
Forest products operations 43.7 39.8 116.3 119.9
Real estate and other
operations 13.9 12.5 35.3 31.4
Selling, general and
administrative expenses 42.6 47.3 128.6 139.0
Depreciation and depletion 27.6 28.8 83.2 87.4
Restructuring of aluminum
operations - - - 19.7
------------ ------------ ------------ ------------
588.4 652.1 1,829.7 1,871.1
------------ ------------ ------------ ------------
Operating income 40.4 73.9 162.7 175.6
Other income (expense):
Investment, interest and other
income 2.8 14.3 24.6 30.5
Interest expense (52.3) (52.3) (158.7) (158.3)
------------ ------------ ------------ ------------
Income (loss) before income taxes and
minority interests (9.1) 35.9 28.6 47.8
Credit (provision) for income taxes 11.5 (13.9) (1.9) 13.6
Minority interests (4.4) (4.0) (14.4) (10.8)
------------ ------------ ------------ ------------
Income (loss) before extraordinary
item (2.0) 18.0 12.3 50.6
Extraordinary item:
Loss on early extinguishment of
debt, net of income
tax benefit of $22.9 (42.5) - (42.5) -
------------ ------------ ------------ ------------
Net income (loss) $ (44.5) $ 18.0 $ (30.2) $ 50.6
============ ============ ============ ============
Basic earnings per common share:
Income (loss) before
extraordinary item $ (0.28) $ 2.17 $ 1.76 $ 5.96
Extraordinary item (6.07) - (6.07) -
------------ ------------ ------------ ------------
Net income (loss) $ (6.35) $ 2.17 $ (4.31) $ 5.96
============ ============ ============ ============
Diluted earnings per common and
common equivalent share:
Income (loss) before
extraordinary item $ (0.28) $ 1.98 $ 1.58 $ 5.46
Extraordinary item (6.07) - (5.44) -
------------ ------------ ------------ ------------
Net income (loss) $ (6.35) $ 1.98 $ (3.86) $ 5.46
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (30.2) $ 50.6
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and depletion 83.2 87.4
Extraordinary loss on early extinguishment
of debt, net 42.5 -
Restructuring of aluminum operations - 19.7
Non-cash benefit for income taxes (8.3) (12.5)
Net sales of marketable securities 62.2 1.2
Net gains on marketable securities (4.6) (10.1)
Minority interests 14.4 10.8
Amortization of deferred financing costs
and discounts on long-term debt 15.7 18.5
Amortization of excess of investment over
equity in net assets of unconsolidated
affiliates 7.5 8.7
Equity in loss (gain) of unconsolidated
affiliates, net of dividends received (.5) 14.6
Net gain on sale of real estate, mortgage
loans and other assets (3.2) (5.0)
Increase (decrease) in cash resulting from
changes in:
Receivables 35.3 (50.9)
Payable to affiliates and other
liabilities (77.7) (55.2)
Inventories 53.8 5.9
Accrued interest (28.4) (23.9)
Prepaid expenses and other assets 29.1 (7.7)
Accounts payable (6.6) (30.3)
Accrued and deferred income taxes 1.6 11.4
Other 3.1 7.0
------------ ------------
Net cash provided by operating
activities 188.9 40.2
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (80.0) (120.1)
Net proceeds from sale of assets 18.2 34.4
Investment in subsidiaries and joint ventures (10.6) (7.1)
Restricted cash withdrawals used to acquire
timberlands 1.8 -
Other 3.0 (2.6)
------------ ------------
Net cash used for investing activities (67.6) (95.4)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 873.7 19.7
Premium for early retirement of debt (45.5) -
Redemptions, repurchases and principal payments
on long-term debt (800.8) (76.6)
Dividends paid to Kaiser's minority preferred
stockholders - (4.2)
Redemption of preference stock (8.6) (2.0)
Restricted cash withdrawals (deposits), net 6.4 (6.5)
Treasury stock repurchases (35.1) (17.7)
Incurrence of deferred financing costs (22.0) -
Other (.1) 3.5
------------ ------------
Net cash used for financing activities (32.0) (83.8)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 89.3 (139.0)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 164.6 336.6
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 253.9 $ 197.6
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The information contained in the following Condensed Notes to the
Consolidated Financial Statements is condensed from that which would appear
in the annual consolidated financial statements; accordingly, the
consolidated financial statements included herein should be reviewed in
conjunction with the consolidated financial statements and related notes
thereto contained in the Form 10-K. Any capitalized terms used but not
defined in these Condensed Notes to Consolidated Financial Statements are
defined in the "Glossary of Defined Terms" contained in Appendix A. All
references to the "Company" include MAXXAM Inc. and its subsidiary
companies unless otherwise indicated or the context indicates otherwise.
See Note 4 below regarding the formation of Scotia LLC and the merger of
Scotia Pacific into Scotia LLC. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year end. The
results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the entire year.
The consolidated financial statements included herein are
unaudited; however, they include all adjustments of a normal recurring
nature which, in the opinion of management, are necessary to present fairly
the consolidated financial position of the Company at September 30, 1998,
the consolidated results of operations for the three and nine months ended
September 30, 1998 and 1997 and consolidated cash flows for the nine months
ended September 30, 1998 and 1997. Certain reclassifications of prior
period information have been made to conform to the current presentation.
SFAS No. 130 was issued in June 1997 and was adopted by the
Company as of January 1, 1998. SFAS No. 130 requires the presentation of
an additional income measure (termed "comprehensive income") which adjusts
traditional net income for certain items that previously were only
reflected as direct charges to equity (such as minimum pension
liabilities). SFAS No. 133, issued in June 1998, requires companies to
recognize all derivative instruments as assets or liabilities in the
balance sheet and to measure those instruments at fair value. SFAS No. 133
must be adopted by the Company no later than January 1, 2000, although
earlier application is permitted. The Company is currently evaluating how
and when to implement SFAS No. 133.
The amount of the Company's comprehensive income adjustments is
not significant so there is not a significant difference between
"traditional" net income and comprehensive income for the three and nine
month periods ended September 30, 1998 and 1997. However, differences
between comprehensive income and traditional net income may become
significant in future periods as a result of SFAS No. 133. As discussed
more fully in Note 7, the intent of Kaiser's hedging programs is to "lock-
in" a price (or range of prices) for products sold or used so that earnings
and cash flows are subject to reduced risk of volatility. Under SFAS No.
133, the Company will be required to "mark-to-market" its hedging positions
at the end of each period in advance of the period of recognition for the
transaction to which the hedge relates. Pursuant to SFAS No. 130, the
Company will reflect changes in the fair value of its open hedging
positions as an increase or reduction in stockholders' equity through
comprehensive income. Under SFAS No. 130, the impact of the changes in the
fair value of financial instruments will be reversed from comprehensive
income (net of any fluctuations in other "open" positions) and will be
reflected in traditional net income upon occurrence of the transaction to
which the hedge relates.
The combined impact of implementing SFAS No. 130 and SFAS No. 133
will result in fluctuations in comprehensive income and stockholders'
equity in periods of price volatility, despite the fact that the Company's
cash flow and earnings will be "fixed" to the extent hedged. The amount of
such fluctuations could be significant.
2. INVENTORIES
Inventories consist of the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Aluminum Operations:
Finished fabricated aluminum products $ 109.9 $ 103.9
Primary aluminum and work in process 187.3 226.6
Bauxite and alumina 101.0 108.4
Operating supplies and repair and
maintenance parts 121.5 129.4
------------ ------------
519.7 568.3
------------ ------------
Forest Products Operations:
Lumber 41.2 49.7
Logs 12.7 11.6
------------ ------------
53.9 61.3
------------ ------------
$ 573.6 $ 629.6
============ ============
</TABLE>
3. RESTRICTED CASH
Long-term receivables and other assets include restricted cash in
the amount of $25.6 million and $33.7 million at September 30, 1998 and
December 31, 1997, respectively. The restricted cash at December 31, 1997
primarily represents the amount held by the trustee in the Liquidity
Account for the benefit of holders of the Old Timber Notes under the
indenture governing the Old Timber Notes. The restricted cash at September
30, 1998 primarily represents the amount held by the trustee under the
Timber Notes Indenture governing the Timber Notes to enable Scotia LLC to
acquire timberlands.
4. LONG-TERM DEBT
Long-term debt consists of the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
12% MGHI Senior Secured Notes due August 1, 2003 $ 130.0 $ 130.0
11-1/4% MGI Senior Secured Notes due August 1,
2003 - 100.0
12-1/4% MGI Senior Secured Discount Notes due
August 1, 2003, net of discount - 117.3
10-1/2% Pacific Lumber Senior Notes due March 1,
2003 - 235.0
Pacific Lumber Credit Agreement - 9.4
7.95% Scotia Pacific Timber Collateralized Notes
due July 20, 2015 - 320.0
7.43% Scotia LLC Timber Collateralized Notes due
July 20, 2028 867.2 -
KACC Credit Agreement - -
10-7/8% KACC Senior Notes due October 15, 2006,
including premium 225.7 225.8
9-7/8% KACC Senior Notes due February 15, 2002,
net of discount 224.4 224.2
12-3/4% KACC Senior Subordinated Notes due
February 1, 2003 400.0 400.0
Alpart CARIFA Loans 60.0 60.0
Other aluminum operations debt 54.4 61.6
Other notes and contracts, primarily secured by
receivables, buildings, real estate and
equipment 31.7 36.1
------------ ------------
1,993.4 1,919.4
Less: current maturities (16.7) (31.4)
------------ ------------
$ 1,976.7 $ 1,888.0
============ ============
</TABLE>
In October 1998, the Company drew down $16.0 million under the
Custodial Trust Agreement, and the borrowing converted to a term loan
maturing on October 21, 1999, as provided under the terms of the agreement.
The loan is secured by 7,915,000 shares of Kaiser common stock.
On July 20, 1998, Scotia LLC, a recently formed limited liability
company wholly owned by Pacific Lumber, issued the Timber Notes which
consist of $867.2 million aggregate principal amount of Class A-1, Class A-
2 and Class A-3 timber collateralized notes which mature on July 20, 2028
and have an overall effective interest rate of 7.43% per annum. Net
proceeds from the offering of the Timber Notes were used primarily to
prepay the Old Timber Notes and to redeem the Pacific Lumber Senior Notes
and the MGI Notes effective August 19, 1998. The Company recognized an
extraordinary loss of $42.5 million, net of the related income tax benefit
of $22.9 million, in the quarter ended September 30, 1998 for the early
extinguishment of the Old Timber Notes, Pacific Lumber Senior Notes and MGI
Notes. Concurrently with the issuance of the Timber Notes, (i) Scotia
Pacific was merged into Scotia LLC, (ii) Pacific Lumber transferred to
Scotia LLC approximately 13,500 acres of timberlands and the timber and
timber harvesting rights with respect to an additional 19,700 acres of
timberlands, and (iii) Scotia LLC transferred to Pacific Lumber the timber
and timber harvesting rights related to approximately 1,400 acres of
timberlands.
Under the Timber Notes Indenture, the business activities of
Scotia LLC are generally limited to the ownership and operation of its
timber and timberlands. The Timber Notes are senior secured obligations of
Scotia LLC 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
LLC's timber and timberlands (representing $245.1 million of the Company's
consolidated balance at September 30, 1998), and (ii) substantially all of
Scotia LLC's other property. Interest on the Timber Notes is further
secured by the Timber Notes Line of Credit. The Timber Notes Indenture
permits Scotia LLC to have outstanding up to $75.0 million of non-recourse
indebtedness to acquire additional timberlands and to issue additional
timber notes provided certain conditions are met (including repayment or
redemption of the $160.7 million of Class A-1 Timber Notes).
The Timber Notes are structured to link, to the extent of cash
available, the deemed depletion of Scotia LLC's timber (through the harvest
and sale of logs) to the required amortization of the Timber Notes. The
required amount of amortization on any Timber Note payment date is
determined by various mathematical formulas set forth in the Timber Notes
Indenture. The minimum amount of principal which Scotia LLC must pay (on a
cumulative basis and subject to available cash) through any Timber Notes
payment date in order to avoid an Event of Default is referred to as
Minimum Principal Amortization. If the Timber Notes were amortized in
accordance with Minimum Principal Amortization, the final installment of
principal would be paid on July 20, 2028. The minimum amount of principal
which Scotia LLC must pay (on a cumulative basis) through any Timber Notes
payment date in order to avoid payment of prepayment or deficiency premiums
is referred to as Scheduled Amortization. If all payments of principal are
made in accordance with Scheduled Amortization, the payment date on which
Scotia LLC will pay the final installment of principal is January 20, 2014.
Such final installment would include a single bullet principal payment of
$463.3 million related to the Class A-3 Timber Notes.
Principal and interest on the Timber Notes are payable
semiannually on January 20 and July 20. The Timber Notes are redeemable at
the option of Scotia LLC 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.
5. PER SHARE INFORMATION
Basic earnings per share is calculated by dividing net income by
the weighted average number of common shares outstanding during the period
including the weighted average impact of the shares of common stock issued
and treasury stock acquired during the year from the date of issuance or
repurchase. The weighted average common shares outstanding were 7,000,597
shares and 8,491,364 shares for the nine months ended September 30, 1998
and 1997, respectively.
Diluted earnings per share calculations also include the dilutive
effect of the Class A Preferred Stock (which is convertible into Common
Stock) as well as common and preferred stock options. The weighted average
number of common and common equivalent shares was 7,816,615 shares and
9,272,428 shares for the nine months ended September 30, 1998 and 1997,
respectively.
6. CONTINGENCIES
Environmental Contingencies
Kaiser and KACC are subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches of the
environmental laws and regulations, and to claims and litigation based upon
such laws. KACC is currently subject to a number of lawsuits under CERCLA
and, along with certain other entities, has been named as a potentially
responsible party for remedial costs at certain third-party sites listed on
the National Priorities List under CERCLA.
Based on Kaiser's evaluation of these and other environmental
matters, Kaiser has established environmental accruals primarily related to
potential solid waste disposal and soil and groundwater remediation
matters. At September 30, 1998, the balance of such accruals, which are
primarily included in noncurrent liabilities, was $28.3 million. These
environmental accruals represent Kaiser's estimate of costs reasonably
expected to be incurred based on presently enacted laws and regulations,
currently available facts, existing technology and Kaiser's assessment of
the likely remedial action to be taken. Kaiser expects that these remedial
actions will be taken over the next several years and estimates that annual
expenditures to be charged to these environmental accruals will be
approximately $2.0 million to $9.0 million for the years 1998 through 2002
and an aggregate of approximately $7.0 million thereafter.
As additional facts are developed and definitive remedial plans
and necessary regulatory approvals for implementation of remediation are
established or alternative technologies are developed, changes in these and
other factors may result in actual costs exceeding the current
environmental accruals. Kaiser believes that it is reasonably possible
that costs associated with these environmental matters may exceed current
accruals by amounts that could range, in the aggregate, up to an estimated
$18.0 million. As the resolution of these matters is subject to further
regulatory review and approval, no specific assurances can be given as to
when the factors upon which a substantial portion of this estimate is based
can be expected to be resolved. However, Kaiser is working to resolve
these matters. Kaiser believes that it has insurance coverage available to
recover certain incurred and future environmental costs and is actively
pursuing claims in this regard. As of September 30, 1998, no accruals have
been made for any such insurance recoveries. However, subsequent to
September 30, 1998, KACC determined that recoveries totaling up to
approximately $34.0 million are likely to be received during the fourth
quarter 1998 related to current and future claims against its insurers.
Approximately one-fourth to one-third of the recoveries are allocable to
previously accrued (expensed) items. The amount ultimately allocated to
previously expensed items will be reflected in earnings during the fourth
quarter of 1998. No assurances can be given that the Kaiser will be
successful in other attempts to recover incurred or future costs from other
insurers or that the amount of any recoveries received will ultimately be
adequate to cover the costs incurred. While uncertainties are inherent in
the final outcome of these environmental matters, and it is impossible to
determine the actual costs that ultimately may be incurred, management
believes that the resolution of such uncertainties should not have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
Asbestos Contingencies
KACC is a defendant in a number of lawsuits, some of which
involve claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure to
asbestos during, and as a result of, their employment or association with
KACC or exposure to products containing asbestos produced or sold by KACC.
The lawsuits generally relate to products KACC has not manufactured for at
least 20 years. At September 30, 1998, the number of claims pending was
approximately 86,400 compared to 77,400 at December 31, 1997. During the
quarter and nine months ended September 30, 1998, approximately 5,500 and
16,000 of such claims were received and 3,000 and 7,000 of such claims were
settled or dismissed, respectively. In addition, the foregoing pending
claims and settlement figures as of September 30, 1998 do not reflect the
fact that KACC reached agreements under which it will settle approximately
20,000 of the pending asbestos-related claims over an extended period.
Based on past experience and reasonably anticipated future
activity, Kaiser has established an accrual for estimated asbestos-related
costs for claims filed and estimated to be filed through 2008. There are
inherent uncertainties involved in estimating asbestos-related costs and
KACC's actual costs could exceed these estimates. Kaiser's accrual was
calculated based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, and the
advice of Wharton, Levin, Ehrmantraut, Klein & Nash, P.A. with respect to
the current state of the law related to asbestos claims. Accordingly, an
asbestos-related cost accrual of $164.9 million, before consideration of
insurance recoveries, is included primarily in other noncurrent liabilities
at September 30, 1998. While Kaiser does not believe there is a reasonable
basis for estimating such costs beyond 2008 and, accordingly, no accrual
has been recorded for such costs which may be incurred beyond 2008, there
is a reasonable possibility that such costs may continue beyond 2008, and
such costs may be substantial. Kaiser estimates that annual future cash
payments in connection with such litigation will be approximately $15.0
million to $26.0 million for each of the years 1998 through 2002, and an
aggregate of approximately $64.0 million thereafter.
Kaiser believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs. While active
coverage litigation has been concluded, the timing and amount of future
recoveries from the insurance carriers will depend on the pace of claims
review and processing by such carriers, and on the resolution of any
disputes which may arise in the course of discussions regarding coverage
under their policies. Kaiser believes, based on prior insurance-related
recoveries with respect to asbestos-related claims, existing insurance
policies, and the advice of Thelen, Reid & Priest LLP (formerly 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 $131.9 million,
determined on the same basis as the asbestos-related cost accrual, is
recorded primarily in long-term receivables and other assets at September
30, 1998.
Kaiser continues to monitor claims activity, the status of
lawsuits (including settlement initiatives), legislative progress, and
costs incurred in order to ascertain whether an adjustment to the existing
accruals should be made to the extent that historical experience may differ
significantly from Kaiser's underlying assumptions. While uncertainties
are inherent in the final outcome of these asbestos matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred and insurance recoveries that will be received, Kaiser believes
that, based on the factors discussed in the preceding paragraphs, the
resolution of asbestos-related uncertainties and the incurrence of
asbestos-related costs net of related insurance recoveries should not have
a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
OTS Contingency and Related Matters
On December 26, 1995, the OTS initiated a formal administrative
proceeding against the Company and others by filing the Notice. The Notice
alleges, among other things, misconduct by the Company, Federated, Mr.
Charles Hurwitz and others (the "respondents") with respect to the failure
of USAT, a wholly owned subsidiary of UFG. The Notice claims that the
Company was a savings and loan holding company, that with others it
controlled USAT, and that it was therefore obligated to maintain the net
worth of USAT. The Notice makes numerous other allegations against the
Company and the other respondents, including, among other things,
allegations that through USAT it was involved in prohibited transactions
with Drexel, Burnham, Lambert Inc. The OTS, among other things, seeks
unspecified damages in excess of $560.0 million from the Company and
Federated, civil money penalties and the removal from, and prohibition
against the Company and the other respondents engaging in, the banking
industry. The hearing on the merits of this matter commenced on September
22, 1997, adjourned on December 19, 1997, recommenced on June 16, 1998 and
adjourned on October 16, 1998. The hearing is expected to recommence on
February 9, 1999 and conclude in April 1999.
On August 2, 1995, the FDIC filed the FDIC action in the U.S.
District Court for the Southern District of Texas. The original complaint
against Mr. Hurwitz alleged damages in excess of $250.0 million based on
the allegation that Mr. Hurwitz was a controlling shareholder, de facto
senior officer and director of USAT, and was involved in certain decisions
which contributed to the insolvency of USAT. The original complaint
further alleged, among other things, that Mr. Hurwitz was obligated to
ensure that UFG, Federated and the Company maintained the net worth of
USAT. On January 15, 1997, the FDIC filed an amended complaint which
seeks, conditioned on the OTS prevailing in its administrative proceeding,
unspecified damages from Mr. Hurwitz relating to amounts the OTS does not
collect from the Company and Federated with respect to their alleged
obligations to maintain USAT's net worth.
The Company's bylaws provide for indemnification of its officers
and directors to the fullest extent permitted by Delaware law. The Company
is obligated to advance defense costs to its officers and directors,
subject to the individual's obligation to repay such amount if it is
ultimately determined that the individual was not entitled to
indemnification. In addition, the Company's indemnity obligation can,
under certain circumstances, include amounts other than defense costs,
including judgments and settlements. The Company has concluded that it is
unable to determine a reasonable estimate of the loss (or range of loss),
if any, that could result from this contingency. Accordingly, it is
impossible to assess the ultimate outcome of the foregoing matters or their
potential impact on the Company; however, any adverse outcome of these
matters could have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
Other Matters
The Company is involved in various other claims, lawsuits and
other proceedings relating to a wide variety of matters. While
uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management believes that the resolution of such uncertainties and
the incurrence of such costs should not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
7. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
At September 30, 1998, the net unrealized gain on KACC's position
in aluminum forward sales and option contracts (based on an average
contract price of $.74 per pound of primary aluminum), natural gas, fuel
oil and diesel fuel forward purchase and option contracts, and forward
foreign exchange contracts, was approximately $17.6 million. Any gain or
losses on the derivative contracts utilized in KACC's hedging activities
are offset by losses or gains, respectively, on the transactions being
hedged. See Note 1 for a discussion of SFAS No. 133, a new accounting
pronouncement which requires the Company to "mark-to-market" its hedging
positions at each period end in advance of the period of recognition for
the transaction to which the hedge relates.
Alumina and Aluminum
Kaiser's earnings are sensitive to changes in the prices of
alumina, primary aluminum and fabricated aluminum products, and also depend
to a significant degree upon the volume and mix of all products sold.
Primary aluminum prices have historically been subject to significant
cyclical fluctuations. Since 1993, the AMT Price for primary aluminum has
ranged from approximately $.50 to $1.00 per pound. Alumina prices as well
as fabricated aluminum product prices (which vary considerably among
products) are significantly influenced by changes in the price of primary
aluminum but generally lag behind primary aluminum price changes by up to
three months.
From time to time in the ordinary course of business, KACC enters
into hedging transactions to provide price risk management of the net
exposure of earnings resulting from (i) anticipated sales of alumina,
primary aluminum and fabricated aluminum products, less (ii) expected
purchases of certain items, such as aluminum scrap, rolling ingot, and
bauxite, whose prices fluctuate with the price of primary aluminum.
Forward sales contracts are used by KACC to effectively fix the price that
KACC will receive for its shipments. KACC also uses option contracts (i)
to establish a minimum price for its product shipments, (ii) to establish a
"collar" or range of prices for KACC's anticipated sales, and/or (iii) to
permit KACC to realize possible upside price movements. As of September
30, 1998, KACC had sold forward, at fixed prices, approximately 23,400 and
24,000 tons of primary aluminum with respect to 1998 and 1999,
respectively. As of September 30, 1998, KACC had also purchased put
options to establish a minimum price for approximately 11,250 tons of
primary aluminum with respect to 1998 and had entered into option contracts
that established a price range for an additional 57,900 and 124,500 tons
with respect to 1998 and 1999, respectively. Additionally, at September
30, 1998, KACC also held fixed price purchase contracts for 16,100 tons of
primary aluminum with respect to 1998.
As of September 30, 1998, KACC had sold forward virtually all of
the alumina available to it in excess of its projected internal smelting
requirements for 1998, 1999 and 2000 at prices indexed to future prices of
primary aluminum.
Energy
KACC is exposed to energy price risk from fluctuating prices for
fuel oil, diesel fuel, and natural gas consumed in the production process.
Accordingly, KACC from time to time in the ordinary course of business
enters into hedging transactions with major suppliers of energy and energy
related financial instruments. As of September 30, 1998, KACC had a
combination of fixed price purchase and option contracts for the purchase
of approximately 45,000 MMBtu of natural gas per day during the remainder
of 1998. As of September 30, 1998, KACC also held a combination of fixed
price purchase and option contracts for an average of 232,000 and 245,000
barrels per month of fuel oil and diesel fuel for 1998 and 1999,
respectively.
Foreign Currency
KACC enters into forward exchange contracts to hedge material
cash commitments to foreign subsidiaries or affiliates. At September 30,
1998, KACC had net forward foreign exchange contracts totaling
approximately $168.8 million for the purchase of 246.6 million Australian
dollars from October 1998 through December 2000, in respect of its
commitments for 1998 through 2000 expenditures denominated in Australian
dollars.
8. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Supplemental disclosure of cash flow information
(in millions):
Interest paid, net of capitalized interest $ 171.5 $ 164.0
Income taxes paid 12.7 15.2
Capital spending excluded from investing
activities - 10.3
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the response to
Part I, Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any
capitalized terms used but not defined in this Item are defined in the
"Glossary of Defined Terms" contained in Appendix A.
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements appear in several places in this Form
10-Q. Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates," "will,"
"should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of
strategy. Readers are cautioned that any such forward-looking statements
are not guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in
the forward-looking statements as a result of various factors. These
factors include the effectiveness of management's strategies and decisions,
general economic and business conditions, developments in technology, new
or modified statutory or regulatory requirements and changing prices and
market conditions. This Form 10-Q and the Form 10-K identify other factors
that could cause such differences. No assurance can be given that these
are all of the factors that could cause actual results to vary materially
from the forward-looking statements.
RESULTS OF OPERATIONS
The Company operates in three principal industries: aluminum,
through its majority owned subsidiary, Kaiser, an integrated aluminum
producer; forest products, through MGI and its wholly owned subsidiaries,
principally Pacific Lumber and Britt; real estate investment and
development, managed through MAXXAM Property Company; and other commercial
operations through various other wholly owned subsidiaries. MGHI owns 100%
of MGI and is a wholly owned subsidiary of the Company. All references to
the "Company," "Kaiser," "MGHI," "MGI" and "Pacific Lumber" refer to the
respective companies and their subsidiaries, unless otherwise indicated or
the context indicates otherwise.
ALUMINUM OPERATIONS
Aluminum operations account for a substantial portion of the
Company's revenues and operating results. Kaiser, through its principal
subsidiary KACC, operates in two business segments: bauxite and alumina,
and aluminum processing. As an integrated aluminum producer, Kaiser uses a
portion of its bauxite, alumina and primary aluminum production for
additional processing at certain of its facilities.
Recent Events and Developments
Substantially all of KACC's hourly workforce at the Gramercy,
Louisiana, alumina refinery, Mead and Tacoma, Washington, aluminum
smelters, Trentwood, Washington, rolling mill, and Newark, Ohio, extrusion
facility were covered by a master labor agreement with the USWA which
expired on September 30, 1998. Kaiser did not reach a settlement with the
USWA prior to the expiration of the master labor agreement, and the USWA
chose to strike. Until the strike ends, Kaiser plans to run the facilities
using a combination of temporary workers, salaried employees, retirees and
others. Based on operating results to date, Kaiser believes that a
significant business interruption will not occur. Kaiser will initially
experience an adverse impact on its profitability until plant operations
and temporary workforce levels are stabilized at the five facilities.
Kaiser expects operations at facilities to be stabilized and able to run
at, or near, full capacity, if it is deemed appropriate to do so, at a
level of profitability approximating pre-strike levels (subject to market
conditions) by the end of the fourth quarter of 1998 or during the first
quarter of 1999. However, no assurances can be given that Kaiser's
efforts to run the plants on a sustained basis without business
interruption or material negative impact on its operating results will be
successful.
Kaiser and the USWA are communicating and several meetings have
been held; however, no formal schedule for bargaining sessions have been
developed as of the date of this report. The objective of Kaiser has been
and continues to be to negotiate a fair labor contract that is consistent
with its business strategy and the commercial realities of the marketplace.
Kaiser has previously announced that it temporarily curtailed
three out of a total of eleven potlines at its Mead and Tacoma, Washington
aluminum smelters at September 30, 1998, as a result of the USWA strike.
The curtailed potlines represent approximately 70,000 tons of annual
production capacity of 273,000 tons per year at the facilities. Kaiser has
also announced that it has begun preparations to restart all three
curtailed lines. However, neither the number of potlines nor the actual
timing of any such restart has been determined and will be dependent upon
market conditions and other factors.
During 1998, Kaiser's 90%-owned Valco smelter in Ghana reached an
agreement with the VRA to receive compensation in lieu of the power
necessary to run two potlines that were curtailed during February and April
1998. The compensation is substantially mitigating the financial impact of
the curtailment. Valco had previously curtailed one additional potline in
January 1998 for which it received no compensation. Valco is now
operating only one of its five potlines, as compared to 1997, when Valco
operated four potlines. Each of Valco's potlines produces, on average,
approximately 40,000 tons of primary aluminum per year. As previously
announced, Kaiser has notified the VRA that it believes it had the
contractual rights at the beginning of 1998 to sufficient energy to run
four and one-half potlines for the balance of the year. Valco continues to
seek compensation from the VRA with respect to the January 1998 reduction
of its power allocation. Valco and the VRA also are in continuing
discussions concerning other matters, including steps that might be taken
to reduce the likelihood of power curtailments beyond 1998. No assurances
can be given as to the success of these discussions. In November 1998,
Valco received notification from the VRA as to the facility's proposed 1999
power allocation. Valco anticipates making a formal response to the VRA's
proposal no later than December. While the proposed allocation would
enable Valco to operate up to approximately three potlines in 1999,
any decisions by Valco to restart any of the currently curtailed
potlines will be made only after further discussions with the VRA and after
consideration of market and other economic factors.
Kaiser believes that it has insurance coverage available to
recover certain incurred and future environmental costs and is actively
pursuing claims in this regard. Through September 30, 1998, no accruals
have been made for any such insurance recoveries. However, subsequent to
September 30, 1998, KACC determined that recoveries totaling up to
approximately $34.0 million are likely to be received during the fourth
quarter of 1998 related to current and future claims against certain of its
insurers. It is currently estimated that approximately one-fourth to one-
third of the recoveries are allocable to previously accrued (expensed)
items. The amount ultimately allocated to previously expensed items will
be reflected in earnings during the fourth quarter of 1998. No assurances
can be given that Kaiser will be successful in other attempts to recover
incurred or future costs from other insurers or that the amount of any
recoveries received will ultimately be adequate to cover costs incurred.
Summary
The following table presents selected operational and financial
information for the three and nine months ended september 30, 1998 and
1997. The information presented in the table is in millions of dollars,
except shipments and prices, and intracompany shipments have been excluded.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shipments: (1)
Alumina 644.6 579.2 1,721.7 1,457.0
Aluminum products:
Primary aluminum 61.5 86.4 210.3 246.9
Fabricated aluminum products 97.7 105.2 311.0 299.5
------------ ------------ ------------ ------------
Total aluminum products 159.2 191.6 521.3 546.4
============ ============ ============ ============
Average realized sales price:
Alumina (per ton) $ 190 $ 200 $ 195 $ 196
Primary aluminum (per pound) .70 .76 .70 .75
Net sales:
Bauxite and alumina:
Alumina $ 122.6 $ 115.9 $ 336.4 $ 285.6
Other (2) (3) 24.7 27.1 77.2 80.2
------------ ------------ ------------ ------------
Total bauxite and
alumina 147.3 143.0 413.6 365.8
------------ ------------ ------------ ------------
Aluminum processing:
Primary aluminum 94.6 145.0 326.6 409.5
Fabricated aluminum products 298.8 341.7 1,008.7 990.6
Other (3) .9 4.4 4.5 12.7
------------ ------------ ------------ ------------
Total aluminum
processing 394.3 491.1 1,339.8 1,412.8
------------ ------------ ------------ ------------
Total net sales $ 541.6 $ 634.1 $ 1,753.4 $ 1,778.6
============ ============ ============ ============
Operating income (4) $ 32.3 $ 56.1 $ 135.4 $ 125.6
============ ============ ============ ============
Income before income taxes and
minority interests $ 5.9 $ 30.7 $ 52.2 $ 44.0
============ ============ ============ ============
Capital expenditures $ 15.6 $ 25.9 $ 52.3 $ 94.7
============ ============ ============ ============
<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.
(4) Includes a pre-tax charge of $19.7 million related to restructuring of
the aluminum operations for the nine months ended September 30, 1997.
</TABLE>
Overview
Kaiser's operating results are sensitive to changes in the prices
of alumina, primary aluminum and fabricated aluminum products, and also
depend to a significant degree on the volume and mix of all products sold
and on KACC's hedging strategies. Primary aluminum prices have
historically been subject to significant cyclical fluctuations. Alumina
prices as well as fabricated aluminum product prices (which vary
considerably among products) are significantly influenced by changes in the
price of primary aluminum but generally lag behind primary aluminum price
changes by up to three months.
During 1997, the AMT price for primary aluminum remained
relatively stable in the $.75 to $.80 per pound range through November and
then declined during December to the $.70 to $.75 per pound range. After
beginning 1998 at approximately $.73, the AMT price for primary aluminum
declined to approximately $.69 at the end of March 1998 and further
declined to approximately $.63 at the end of September 1998. The AMT price
for primary aluminum for the week ended October 30, 1998, was approximately
$.62 per pound.
Net Sales - Bauxite and Alumina
Net sales of alumina increased by 6% for the quarter ended
September 30, 1998, from the comparable period in the prior year, as a
result of an 11% increase in alumina shipments, offset by a 5% decrease in
average realized prices. For the nine month period ended September 30,
1998, net sales of alumina increased by 18% from the comparable period in
the prior year due to a 18% increase in alumina shipments. Increased
shipments of alumina in the quarter and nine month period ended September
30, 1998, were due, in part, to reduced intracompany usage of alumina at
Valco.
Net Sales - Aluminum Processing
Net sales of primary aluminum for the quarter ended September 30,
1998, decreased by 35% from the comparable prior year period as a result of
an 8% decrease in average realized prices as well as a 29% decrease in
shipments. The decrease in shipments is primarily a result of the Valco
potline curtailments described above. Net sales of fabricated aluminum
products for the quarter ended September 30, 1998, were down 13% as
compared to the prior year period primarily as a result of a 6% decrease in
average realized prices as well as a 7% decrease in shipments. The
decrease in fabricated aluminum product shipments from the third quarter of
1997 was the result of a reduced demand for engineered products resulting
from earlier strikes at two major end users of such products and an
inventory destocking among customers of heat-treat general engineering
products.
For the nine month period ended September 30, 1998, net sales for
the aluminum processing segment decreased by approximately 5% compared to
the same period ended September 30, 1997. Net sales of primary aluminum
for the 1998 period declined by 20% from the comparable prior year period
as a result of the price and volume factors discussed above. This decline
was partially offset on a year-to-date basis by a 2% increase in net sales
of fabricated aluminum products. The increase in net sales of fabricated
aluminum products on a year-to-date basis was the result of a 4% increase
in shipments offset by a 2% decrease in average realized prices. Increased
year-over-year shipments reflected increased demand in the first half of
the year, particularly for heat treat products.
Operating Income
Operating income for the three and nine month periods ended
September 30, 1998, decreased by 42% and 7%, respectively, as compared to
the comparable prior year periods and after adjusting 1997 results for the
impact of a non-recurring $19.7 million restructuring charge. Operating
income declined in the quarter and nine month periods ended September 30,
1998, from the comparable prior year periods primarily due to a decline in
the average realized prices of alumina, primary aluminum and fabricated
aluminum products. Operating income for the 1998 periods was also affected
by the increased costs and reduced profitability caused by preparations for
the strike discussed above. Reduced shipments of primary aluminum in the
third quarter of 1998, as well as on a year-to-date basis, were
substantially offset by compensation recorded by Kaiser for two of the
three Valco potlines curtailed during 1998. The compensation will be
received over a 18-month period which began in July 1998. Operating income
for the quarter and nine-month period ended September 30, 1997, included
approximately $2.7 million and $7.5 million, respectively, from the
settlement of certain issues related to energy service contracts.
FOREST PRODUCTS OPERATIONS
The Company's forest products operations are conducted by MGI
through its principal operating 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. Accordingly, MGI's
results for any one quarter are not necessarily indicative of results to be
expected for the full year. The following table presents selected
operational and financial information for the three and nine months ended
September 30, 1998 and 1997. The information presented in the table is in
millions of dollars except shipments and prices.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SHIPMENTS:
Lumber: (1)
Redwood upper grades 11.1 12.7 33.2 39.0
Redwood common grades 63.6 53.9 177.1 178.7
Douglas-fir upper grades 1.6 3.3 5.1 8.3
Douglas-fir common grades 11.6 22.5 32.9 59.0
Other .7 4.6 6.4 13.4
------------ ------------ ------------ ------------
Total lumber 88.6 97.0 254.7 298.4
============ ============ ============ ============
Logs (2) 1.8 4.0 3.1 10.6
============ ============ ============ ============
Wood chips (3) 58.8 63.6 139.6 185.9
============ ============ ============ ============
Average sales price:
Lumber: (4)
Redwood upper grades $ 1,453 $ 1,537 $ 1,486 $ 1,427
Redwood common grades 560 546 540 533
Douglas-fir upper grades 1,264 1,243 1,275 1,205
Douglas-fir common grades 376 443 353 473
Logs (4) 478 426 452 412
Wood Chips (5) 74 73 72 75
Net sales:
Lumber, net of discount $ 57.9 $ 64.1 $ 163.7 $ 191.8
Logs .9 1.7 1.4 4.4
Wood Chips 4.3 4.7 10.0 13.9
Cogeneration power 1.4 1.2 3.2 3.4
Other 1.4 1.1 3.0 3.0
------------ ------------ ------------ ------------
Total net sales $ 65.9 $ 72.8 $ 181.3 $ 216.5
============ ============ ============ ============
Operating income $ 12.9 $ 23.2 $ 37.7 $ 66.5
============ ============ ============ ============
Operating cash flow (6) $ 18.8 $ 29.4 $ 55.0 $ 85.9
============ ============ ============ ============
Income (loss) before income taxes $ (8.1) $ 7.3 $ (15.0) $ 17.1
============ ============ ============ ============
Capital expenditures $ 4.4 $ 4.3 $ 10.4 $ 16.7
============ ============ ============ ============
<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>
Recent Operating Results
Net sales declined from $72.8 million and $216.5 million for the
three and nine months ended September 30, 1997, respectively, to $65.9
million and $181.3 million for the comparable periods of 1998 primarily due
to lower shipments of lumber, logs and wood chips. The decline in shipments
which occurred during the first six months of the 1998 period was
principally due to well-above-normal rainfall which reduced demand for
lumber products and severely limited the availability of rail
transportation. The increased rainfall, combined with additional
restrictions on Pacific Lumber's wet weather operations pursuant to the
terms of the Stipulation and the applicability of logging restrictions
during the nesting seasons for both the northern spotted owl and the
marbled murrelet, also impeded Pacific Lumber's ability to transport logs
to its mills and hindered logging operations, thereby reducing the volume
of logs available for the production of lumber products. Revenues for the
three months ended September 30, 1998 were primarily affected by a
reduction in the volume of logs harvested and converted into lumber
products. Pacific Lumber's reduced harvest level during the third quarter
of 1998 was due in substantial part to the absence of a sufficient number
of available THPs to enable it to conduct its operations at levels
consistent with those in the comparable period of 1997. The diminished
supply of available THPs was attributable to a reduced volume of approved
THPs during the third quarter of 1998 as well as regulatory and judicial
restrictions imposed upon harvesting activities in areas covered by
previously approved THPs. See "--Trends." These difficulties in
harvesting and transporting logs affected the types of logs available for
the mills and Pacific Lumber's ability to produce a desirable mix of lumber
products which in turn adversely affected sales.
The reduced number of approved THPs was, and continues to be,
attributable to several factors, including a significantly reduced level of
thps submitted by Pacific Lumber to the CDF during the first nine months of
1998 due to (a) the extensive amount of time devoted by Pacific Lumber's
foresters, wildlife and fisheries biologists and other personnel to (i)
amending a significant number of previously submitted THPs to incorporate
various new requirements which Pacific Lumber agreed to as part of the Pre-
Permit Agreement, (ii) preparing the Combined Plan and all the related
data, (iii) responding to comments received from various federal and state
governmental agencies with respect to its filed THPs in light of the new
and more stringent requirements that Pacific Lumber agreed to observe
pursuant to the Pre-Permit Agreement and (iv) assisting with responding to
newly filed litigation involving certain approved THPs (see Part II.
Item 1. "Legal Proceedings") and (b) implementation of a provision
contained in the Pre-Permit Agreement which requires, for the first time, a
licensed geologist to review virtually all of Pacific Lumber's THPs prior
to submission to the CDF. Pacific Lumber has also experienced an
unexpected significantly slower rate of review and approval with respect to
its filed THPs due, in large part, to the issues that have emerged in
applying the requirements embodied in the Pre-Permit Agreement to Pacific
Lumber's THPs, certain of which requirements impose new forestry practices
that apply solely to Pacific Lumber's operations. As a result of the
factors discussed above, Pacific Lumber had a severely diminished inventory
of approved THPs at November 1, 1998 which is limiting Pacific Lumber's
ability to conduct harvesting operations. Pacific Lumber believes that its
harvesting levels during the fourth quarter of 1998 will be significantly
below that of the fourth quarter of 1997 which would in turn have an
adverse impact on lumber production and shipments.
Pacific Lumber has released a draft of the Combined Plan for
public review and comment, and therefore believes that it has completed
most of its work in connection with preparation of the Combined Plan;
however, additional work will be required as a result of completion of the
public review and comment process for the Combined Plan and as a result of
the California Headwaters Bill. Pacific Lumber has also retained several
geologists, and believes it has made progress with the various state and
federal government agencies in resolving issues regarding the application
of the requirements of the Pre-Permit Agreement to Pacific Lumber's filed
THPs. Accordingly, Pacific Lumber believes that it will be able to
increase its rate of THP submissions during the first half of 1999. In
addition, if the Combined Plan and the Permits are approved, Pacific Lumber
expects to experience a more streamlined THP process, which should result
in an increased volume of approved THPs. However, there can be no
assurance that Pacific Lumber will not continue to experience difficulties
in submitting and receiving approvals of its THPs similar to those
difficulties it has been experiencing.
Pacific Lumber expects that its cash flow from operations,
together with other available sources of funds, will be sufficient to fund
its working capital, capital expenditures and required debt service
obligations for the next year. However, cash flows from operations may be
adversely affected if Pacific Lumber continues to experience difficulties
in the THP submission and approval process, additional judicial or
regulatory restrictions are imposed on Pacific Lumber's harvesting
activities, inclement weather conditions hamper harvesting operations or
the Combined Plan is not approved or is not acceptable to Pacific Lumber.
See "--Financial Conditions and Investing Activities."
Net Sales
Net sales decreased from $72.8 million to $65.9 million for the
quarters ended September 30, 1997 and 1998, respectively, due to lower
shipments of redwood upper grade lumber and Douglas-fir upper and common
grade lumber. Third quarter lumber shipments were lower primarily as a
result of the factors described above. Lumber shipments also were
adversely affected by a general oversupply in the market for Douglas-fir
common grade lumber. Net sales declined from $216.5 million in the first
nine months of 1997 to $181.3 million for the first nine months of 1998
primarily due to lower shipments of lumber, logs and wood chips which was
the result of the factors described above.
Operating income
Operating income for the three and nine months ended September
30, 1998 decreased from the comparable prior year periods primarily due to
the decrease in net sales discussed above. In addition, cost of sales for
the three months ended September 30, 1998 increased by 10% over the
comparable prior year period due to an increase in logging costs. This
impact was partially offset by a decrease in depletion expense as a result
of the decline in volumes discussed above for the three and nine months
ended September 30, 1998 from the comparable prior year periods, and a
decrease in logging costs for the nine months ended September 30, 1998 from
the prior year period.
Income (loss) before income taxes and minority interests
Income before income taxes for the three and nine months ended
September 30, 1998 decreased from the comparable 1997 periods, primarily
due to the decrease in operating income discussed above. Results for both
1998 periods were also affected by a decrease in investment income from
marketable securities.
REAL ESTATE AND OTHER OPERATIONS
The Company, principally through its wholly owned subsidiaries,
invests in and develops residential and commercial real estate primarily in
Arizona, California, Texas and Puerto Rico. The Company, through its
subsidiaries, also has majority ownership in SHRP, Ltd., a Texas limited
partnership, which owns and operates a Class 1 horse racing facility in
Houston, Texas.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(IN MILLIONS OF DOLLARS
<S> <C> <C> <C> <C>
Net sales:
Real estate $ 15.2 $ 14.0 $ 41.0 $ 36.0
SHRP, Ltd. 6.1 5.1 16.7 15.6
------------ ------------ ------------ ------------
Total net sales $ 21.3 $ 19.1 $ 57.7 $ 51.6
============ ============ ============ ============
Operating income (loss):
Real estate $ (0.9) $ 0.3 $ (0.7) $ (1.0)
SHRP, Ltd. - (0.7) 0.6 (0.8)
------------ ------------ ------------ ------------
Total operating loss $ (0.9) $ (0.4) $ (0.1) $ (1.8)
============ ============ ============ ============
Income before income taxes and minority
interests:
Real estate $ 1.2 $ 5.8 $ 11.8 $ 9.0
SHRP, Ltd. (0.6) (1.5) (1.4) (2.9)
------------ ------------ ------------ ------------
Total income before income
taxes and minority
interests $ 0.6 $ 4.3 $ 10.4 $ 6.1
============ ============ ============ ============
</TABLE>
Net sales
Net sales for the quarter and nine months ended September 30,
1998 increased from the same prior year periods primarily due to higher
revenue from SHRP, Ltd. and increased revenues from the Company's real
estate development projects offset by a decline in revenues from commercial
operations reflecting dispositions of assets from the RTC Portfolio.
Operating loss
Real estate and other operations had a higher operating loss for
the quarter ended September 30, 1998 as compared to the same period in 1997
resulting in part from estimated losses from hurricane damage at the
Company's Palmas del Mar project in Puerto Rico. The estimated losses from
hurricane damage are primarily due to deductibles related to insurance
coverages. The decrease in operating loss for the year-to-date period of
1998, as compared to the same period in 1997, was the result of higher net
sales discussed above, offset by the decline in operating income from
commercial operations reflecting dispositions of RTC Portfolio assets and
estimated losses from hurricane damage.
Income before income taxes and minority interests
Income before income taxes and minority interests for the quarter
ended September 30, 1998 decreased when compared to the same period in
1997 due to gains from RTC Portfolio sales in 1997 and the higher operating
loss discussed above. Income before income taxes and minority interests
for the nine months ended September 30, 1998 increased from the comparable
period of 1997 due to an increase in income from the Sunridge Canyon joint
venture and a gain from the sale of the resort operations at the Company's
Waterwood development project, and the lower operating loss discussed
above.
OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Operating loss $ (3.9) $ (5.0) $ (10.3) $ (14.7)
Loss before income taxes and
minority interests (7.5) (6.4) (19.0) (19.4)
</TABLE>
Operating loss
The operating losses represent corporate general and
administrative expenses that are not allocated to the Company's industry
segments. The operating loss for the quarter ended September 30, 1998
decreased from the comparable prior year period due to compensation related
accruals made in 1997. The operating loss for the nine months ended
September 30, 1998 decreased from the same periods in 1997 due to lower
accruals for certain legal contingencies.
Loss before income taxes and minority interests
The loss before income taxes and minority interests includes
operating losses, investment, interest and other income (expense) and
interest expense, including amortization of deferred financing costs, which
are not attributable to the Company's industry segments. The loss for the
third quarter ended September 30, 1998 increased from the same period in
1997 primarily due to lower interest and other income from cash equivalents
and marketable securities. The loss for the nine months ended September
30, 1998 was nearly unchanged when compared to the loss for the same period
in 1997 as the lower operating loss discussed above was offset by lower
earnings from cash equivalents and marketable securities and higher
interest expense.
Credit for income taxes
Results for the quarter and nine month period ended September 30,
1998, include a non-recurring, favorable $8.3 million non-cash tax benefit
resulting from the resolution of certain matters. Results for the nine
month period ended September 30, 1997 include a non-recurring, non-cash tax
benefit of $32.1 million relating to settlement of certain matters.
Minority interests
Minority interests primarily represents the minority stockholders'
interest in the Company's aluminum operations.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
PARENT COMPANY AND MGHI
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See above for cautionary information with respect to
such forward-looking statements.
The various credit instruments of Kaiser, MGHI, Pacific Lumber
and Scotia LLC contain various covenants which, among other things, limit
the ability of such entities to incur additional indebtedness and liens, to
engage in transactions with affiliates, to pay dividends and to make
investments. As of September 30, 1998, no dividends could be paid by MGHI.
Pursuant to the terms of the KACC Credit Agreement, Kaiser is prohibited
from paying any dividends with respect to its common stock. On October 30,
1998, the MCOP Credit Agreement was replaced by a new credit facility for
$14.0 million. The most restrictive covenants governing debt of the
Company's real estate and other subsidiaries would not restrict payment to
the Company of all nonrestricted cash and unused borrowing availability for
such subsidiaries (approximately $8.2 million could be paid as of November
13, 1998).
In October 1998, the Company drew down $16.0 million under the
Custodial Trust Agreement, and the borrowing converted to a term loan
maturing on October 21, 1999 as provided under the terms of the agreement.
The loan is secured by 7,915,000 shares of Kaiser common stock.
On May 14, 1998, the Company repaid the $35.1 million of one-year
notes issued to NL and CMRT.
Kaiser has an effective shelf registration statement covering the
offering of up to 10 million shares of Kaiser common stock owned by the
Company. Net proceeds from any transaction initiated by the Company
pursuant to this registration statement would be for the benefit of the
Company rather than Kaiser.
As of September 30, 1998, the Company (excluding its
subsidiaries) had cash and marketable securities of approximately $27.8
million. The Company believes that its existing resources, together with
the cash available from subsidiaries and other sources of financing, will
be sufficient to fund its working capital requirements for the next year.
With respect to its long-term liquidity, the Company believes that its
existing cash and cash resources, together with the cash proceeds from the
sale of assets and distributions from its subsidiaries should be sufficient
to meet its working capital requirements. However, there can be no
assurance that the Company's cash resources, together with the cash
proceeds from the sale of assets, distributions from its subsidiaries and
other sources of financing, will be sufficient for such purposes. Any
substantially adverse outcome of the litigation described in Note 6 to the
Consolidated Financial Statements could materially adversely affect the
Company's consolidated financial position, results of operations or
liquidity. See Note 6 to the Consolidated Financial Statements for a
discussion of the Company's material contingencies.
During the nine months ended September 30, 1998, the Company
purchased an additional amount of the SHRP Notes and the corresponding
equity interest in SHRP Equity, Inc. for $10.6 million, thereby increasing
the Company's ownership in SHRP, Ltd. to 98.2%.
ALUMINUM OPERATIONS
At September 30, 1998, Kaiser had long-term debt of $964.5
million, compared with $971.7 million at December 31, 1997.
At September 30, 1998, $274.1 million (of which $74.1 million
could have been used for letters of credit) was available to KACC under the
KACC Credit Agreement and no amounts were outstanding under the revolving
credit facility. Loans under the KACC Credit Agreement bear interest at a
spread (which varies based on the results of a financial test) over either
a base rate or LIBOR, at Kaiser's option. During the nine months ended
September 30, 1998, the average per annum interest rates on loans
outstanding under the KACC Credit Agreement were approximately 9%.
Kaiser has an effective shelf registration statement covering the
offering from time to time of up to $150.0 million of equity securities.
Kaiser's capital expenditures during the nine months ended
September 30, 1998, were $52.3 million, and were used primarily to improve
production efficiency, reduce operating costs, expand capacity at existing
facilities, and construct new facilities. Total capital expenditures (of
which approximately 8% is expected to be funded by Kaiser's minority
partners in certain foreign joint ventures) are expected to be between
$75.0 and $125.0 million per annum in each of 1998 through 2000.
During 1998, the Micromill(TM) facility commenced shipments of
products to customers, but the amount of such shipments has been
minimal. Additional product trials for international and domestic
customers were conducted in the third quarter. However, the Micromill(TM)
technology has not yet been fully implemented or commercialized, and there
can be no assurance that full implementation or commercialization will be
successful. In October 1998, Kaiser temporarily suspended substantially
all of its Micromill(TM) commercialization efforts and temporarily
transferred the employees of the Micromill(TM) facility to KACC's strike
affected plants in the state of Washington in order to supplement the
workforce at those locations. Recommencement of the commercialization
efforts on the Micromill(TM) technology will depend on when the strike
ends, when the employees from the Micromill(TM) facility are no longer
needed at the strike affected plants and other economic considerations.
Management continues to evaluate numerous projects, including the
Micromill(TM) technology, all of which require substantial capital in both
the United States and overseas.
Kaiser believes that its existing cash resources, together with
cash flow from operations and borrowings under the KACC Credit Agreement,
will be sufficient to satisfy its working capital and capital expenditure
requirements for the next year. With respect to its long-term liquidity,
Kaiser believes that operating cash flow, together with its expected
ability to obtain both short- and long-term financing, should provide
sufficient funds to meet its long-term working capital and capital
expenditure requirements.
FOREST PRODUCTS OPERATIONS
As discussed further in Note 4 to the Consolidated Financial
Statements, on July 20, 1998, Scotia LLC issued $867.2 million aggregate
principal amount of Timber Notes. Proceeds from the offering of the Timber
Notes were used primarily to prepay the Old Timber Notes and redeem the
Pacific Lumber Senior Notes and the MGI Notes effective August 19, 1998.
In addition to principal payments, proceeds from the issuance of the Timber
Notes were used to pay redemption premiums and financing costs, and
provided $25 million for timberland acquisitions.
As of September 30, 1998, $34.1 million of borrowings was
available under the Pacific Lumber Credit Agreement, of which $5.6 million
was available for letters of credit and $20.6 million was restricted to
timberland acquisitions. As of September 30, 1998 no borrowings were
outstanding and letters of credit outstanding amounted to $14.4 million.
At November 13, 1998, Pacific Lumber had borrowings outstanding of $5.0
million. The Pacific Lumber Credit Agreement expires on November 30, 1998;
however, Pacific Lumber and the existing bank have executed a term sheet
setting forth the basic terms of a new three-year credit facility. The new
facility would allow borrowings up to $60 million, all of which may be used
for revolving borrowings, $20 million of which may be used for standby
letters of credit and $30 million of which may be used for timberland
acquisitions. Borrowings would be secured by all of Pacific Lumber's
domestic accounts receivable and inventory. Borrowings for timberland
acquisitions would also be secured by the acquired timberlands and prior to
maturity of the facility would be repaid annually from 50% of Pacific
Lumber's cash flow (as defined). The remaining 50% of cash flow would be
available for dividends. Upon maturity of the facility, all outstanding
borrowings under the credit facility would convert to a term loan repayable
over four years.
MGI and its subsidiaries anticipate that cash from operations,
together with existing cash, cash equivalents, marketable securities and
available sources of financing, will be sufficient to fund their working
capital and capital expenditure requirements for the next year. However,
cash flows from operations may be adversely affected if Pacific Lumber
continues to experience difficulties in the THP submission and approval
process, additional judicial or regulatory restrictions are imposed on
Pacific Lumber's harvesting activities, inclement weather conditions hamper
harvesting operations or the Combined Plan is not approved or is not
acceptable to Pacific Lumber. With respect to their long-term liquidity,
MGI and its subsidiaries believe that their existing cash and cash
equivalents, together with their ability to generate sufficient levels of
cash from operations and their ability to obtain both short and long-term
financing, should provide sufficient funds to meet their working capital
and capital expenditure requirements. However, due to their highly
leveraged condition, MGI and its subsidiaries (and in turn MGHI) are more
sensitive than less leveraged companies to factors affecting their
operations, including litigation and governmental regulation affecting
their timber harvesting practices (see "--Trends" below), increased
competition from other lumber producers or alternative building products
and general economic conditions.
REAL ESTATE AND OTHER OPERATIONS
The Company's real estate and other subsidiaries obtained a $14.0
million replacement credit facility for the MCOP Credit Agreement on
October 30, 1998. As of November 13, 1998, the Company's real estate and
other subsidiaries had approximately $8.2 million available for use under
the new credit facility. The Company believes that the existing cash and
credit facilities of its real estate and other subsidiaries are sufficient
to fund the working capital and capital expenditure requirements of such
subsidiaries for the next year. With respect to the long-term liquidity of
such subsidiaries, the Company believes that their ability to generate cash
from the sale of their existing real estate, together with their ability to
obtain financing, should provide sufficient funds to meet their working
capital and capital expenditure requirements.
TRENDS
FOREST PRODUCTS OPERATIONS
Pacific Lumber's business is subject to a variety of California
and federal laws and regulations dealing with timber harvesting, threatened
and endangered species and habitat for such species, and air and water
quality. Compliance with such laws and regulations plays a significant
role in Pacific Lumber's business. While compliance with such laws,
regulations and judicial and administrative interpretations, and related
litigation have increased the costs of Pacific Lumber, they have not
historically had a significant adverse effect on the Company's financial
position, results of operations or liquidity, although Pacific Lumber's
recent results of operations have been adversely affected by the absence of
a sufficient number of available THPs to enable it to conduct its
operations at historic levels. These laws and related administrative
actions and legal challenges have also severely restricted the ability of
Pacific Lumber to harvest virgin old growth timber and, to a lesser extent,
residual old growth timber on its timberlands. On August 12, 1998, the
EPIC lawsuit was filed by two environmental groups against Pacific Lumber,
Scotia Pacific and Salmon Creek under which the environmental groups allege
that certain violations of the ESA have resulted from logging activities on
Pacific Lumber's timberlands and seek to prevent the defendants from
carrying out any harvesting activities until certain purported intra-agency
wildlife consultation requirements under the ESA are satisfied in
connection with the Combined Plan (see below). Pacific Lumber is uncertain
what impact the EPIC lawsuit will have upon its operations and financial
results but it is possible that other approved timber harvesting activities
on Pacific Lumber's timberlands could be severely restricted (and revenues
potentially significantly adversely affected) until such time as the
consultation requirements are satisfied. Pacific Lumber is vigorously
defending this matter and is devoting resources toward facilitating
completion of the consultation requirements as soon as practicable.
On September 28, 1996, the Pacific Lumber Parties entered into
the Headwaters Agreement with the United States and California which
provides the framework for the acquisition by the United States and
California of the Headwaters Timberlands. A substantial portion of the
Headwaters Timberlands contains virgin old growth timber. Approximately
4,900 of these acres are owned by Salmon Creek, with the remaining acreage
being owned by Scotia LLC (Pacific Lumber owning the timber and related
timber harvesting rights on this acreage). The Headwaters Timberlands
would be transferred in exchange for (a) cash or other consideration from
the United States and California having an aggregate fair market value of
$300 million, and (b) approximately 7,700 acres of timberlands to be
acquired from a third party. As part of the Headwaters Agreement, the
Pacific Lumber Parties agreed to not enter the Headwaters Timberlands to
conduct any logging or salvage operations. Closing of the Headwaters
Agreement is subject to various conditions, including obtaining federal and
California funding, approval of an SYP, approval of a Multi-Species HCP and
issuance of the Permits, acquisition of the third party timberlands and the
issuance of certain tax agreements satisfactory to the Pacific Lumber
Parties.
In November 1997, President Clinton signed an appropriations bill
which authorizes the expenditure of $250 million of federal funds towards
consummation of the Headwaters Agreement. These funds remain available
until March 1, 1999, and their availability is subject to, among other
things, contribution by California of its $130 million portion of funding
for the Headwaters Agreement. In September 1998, California Governor
Wilson signed the California Headwaters Bill, which among other things,
appropriated California's $130 million portion of the funding required to
consummate the Headwaters Agreement. The state funds remain available
until June 30, 1999. The bill also contains an additional appropriation
available from July 1, 1999 until June 30, 2000 authorizing the expenditure
of up to $80 million toward acquisition at fair market value of the Owl
Creek grove from Scotia LLC. If any portion of the $80 million remains
after purchase of the Owl Creek grove, it may be used to purchase certain
other timberlands. An additional $20 million was appropriated under the
bill toward purchase of a forest grove referred to as "Grizzly Creek" from
Pacific Lumber at fair market value. The Combined Plan (see below) would
have allowed the harvesting over time of either the Owl Creek grove or
Grizzly Creek grove. The Scheduled Amortization schedule for the Timber
Notes assumed that the Owl Creek grove would be harvested over time;
however, a provision of the California Headwaters Bill designates the Owl
Creek grove as a conservation area for the marbled murrelet, which would
have the effect of restricting the activities which could be conducted in
the grove. Pacific Lumber estimates that the Owl Creek grove constitutes
approximately 2% of the aggregate Mbfe contained in the timber owned by
Scotia LLC. It is uncertain whether the Owl Creek grove will ultimately be
sold to the state of California. Furthermore, Scotia LLC could arrange to
exchange the Owl Creek grove for other timberlands pursuant to the
substitute collateral provisions of the Timber Notes Indenture. Were the
Owl Creek grove to be sold to the state of California, Scotia LLC would be
required to recognize Deemed Production (as defined in the Timber Notes
Indenture) with respect to the Mbfe contained within the grove, which could
result in significant prepayments (and related prepayment premiums) which
might be offset by a reduction in the required amortization in later years
attributable to not having any actual harvest from the Owl Creek grove.
The California Headwaters Bill contains provisions requiring the
inclusion of additional environmentally focused provisions in the final
version of the Multi-Species HCP, including establishing wider interim
streamside "no-cut" buffers (while the watershed assessment process referred
to below is being completed) than provided for in the Combined Plan,
obligating Pacific Lumber and the government agencies to establish a
schedule that results in completion of the watershed assessment process
within five years (on a watershed by watershed basis), imposing minimum and
maximum "no-cut" buffers upon the watershed assessment process and
designating the Company's Owl Creek grove as a marbled murrelet
conservation area. The California Headwaters Bill also provides that the
SYP shall be subject to the foregoing provisions.
With respect to the SYP, Pacific Lumber has proposed an LTSY
which is approximately 10% less than Pacific Lumber's average timber
harvest over the last three calendar years. If the SYP is approved by the
CDF, Pacific Lumber will have complied with certain BOF regulations
requiring timber companies to project timber growth and harvest on their
timberlands over a 100-year planning period and establish an LTSY harvest
level. The SYP must demonstrate that the average annual harvest over any
rolling ten-year period will not exceed the LTSY harvest level and that
Pacific Lumber's projected timber inventory is capable of sustaining the
LTSY harvest level in the last decade of the 100-year planning period. The
SYP is expected to be valid for ten years, although it would be subject to
review after five years. Thereafter, revised SYPs would be prepared every
decade that address the LTSY harvest level based upon reassessment of
changes in the resource base and other factors.
In July 1998, the proposed Combined Plan was made available to
the public for review and comment. The proposed Multi-Species HCP and
related Permits would have a term of 50 years, and would, among other
things, limit the activities which could be conducted by Pacific Lumber in
various forest groves to those which would not be detrimental to marbled
murrelet habitat. Under the Multi-Species HCP and the California
Headwaters Bill, these groves aggregate approximately 8,500 acres and
consist of substantial quantities of virgin and residual old growth redwood
and Douglas-fir timber. The Combined Plan and a draft EIR/EIS analyzing
the Headwaters Agreement were released and made available for public review
and comment in July 1998 and early October 1998, respectively. The public
review and comment periods for the Combined Plan and the draft EIR/EIS
closed on November 16, 1998.
The Company believes that submission of the proposed Combined
Plan and the draft EIR/EIS for public review and comment and passage of the
California Headwaters Bill are favorable developments that enhance the
prospects for consummation of the Headwaters Agreement and the issuance of
the Permits. However, certain provisions of the California Headwaters
Bill, including its provisions relating to the watershed assessment
process, are required to be included in the final version of the Combined
Plan. In addition, discussions are expected to occur with regulatory
agencies following the conclusion of the public review and comment periods
referred to above, which discussions are expected to result in proposed
amendments to the Combined Plan. The provisions of the California
Headwaters Bill impose, and the potential proposed amendments could impose,
more stringent harvesting requirements and reduce the amount of timber that
Pacific Lumber will be permitted to harvest as contemplated by the SYP in
its current form. Inasmuch as approval of the Multi-Species HCP and the
SYP are conditions to the consummation of the Headwaters Agreement and
certain modifications proposed by the regulatory agencies may not be
acceptable to Pacific Lumber, any such proposed modifications could also
affect the consummation of the Headwaters Agreement. Accordingly, while
the parties are working diligently to complete the closing conditions
contained in the Headwaters Agreement, there can be no assurance that the
Multi-Species HCP and the SYP will be approved, that the Permits will be
issued or that the Headwaters Agreement will be consummated. If the
Headwaters Agreement is not consummated and Pacific Lumber is unable to
harvest or is severely limited in harvesting on various of its timberlands,
it intends to continue and/or expand its takings litigation seeking just
compensation from the appropriate government agencies on the grounds that
such restrictions constitute an uncompensated governmental taking of
private property for public use.
Several species, including the northern spotted owl, the marbled
murrelet and the coho salmon, have been listed as endangered or threatened
under the ESA and/or the CESA. Pacific Lumber has developed federal and
state ("no-take") northern spotted owl management plans which permit
harvesting activities to be conducted so long as Pacific Lumber adheres to
certain measures designed to protect the northern spotted owl. The
potential impact of the listings of the marbled murrelet and the coho
salmon is more uncertain. If the Multi-Species HCP is approved, Pacific
Lumber would be issued the Permits, which would allow limited incidental
"take" of listed species so long as there was no "jeopardy" to the
continued existence of such species, and the Multi-Species HCP would
identify the measures to be instituted in order to minimize and mitigate
the anticipated level of take to the greatest extent practicable. The
Multi-Species HCP would not only provide for Pacific Lumber's compliance
with habitat requirements for currently listed species, it should also
provide greater certainty and protection for Pacific Lumber with regard to
identified species that may be listed in the future.
Lawsuits are pending or threatened which seek to prevent Pacific
Lumber from implementing certain of its approved THPs or other operations.
While challenges with respect to Pacific Lumber's young growth timber have
historically been limited, on January 26, 1998, the Coho lawsuit was filed
against Pacific Lumber, Scotia Pacific and Salmon Creek. This action
alleges, among other things, violations of the ESA and claims that
defendants' logging operations in five watersheds have contributed to the
"take" of the coho salmon. The plaintiffs seek, among other things, to
enjoin timber harvesting on the THPs and acreage identified, and to require
Pacific Lumber to restore coho habitat allegedly harmed by adverse
cumulative effects of past (approved) timber harvesting. Pacific Lumber
has also received notice of additional threatened actions with respect to
the coho salmon. Pacific Lumber is unable to predict the outcome of this
case or its ultimate impact on its financial condition or results of
operations or the ability to harvest timber on its THPs. While the Company
expects environmentally focused objections and lawsuits to continue, it
believes that the Combined Plan should enhance its position in connection
with these challenges. The Company also believes that the Combined Plan
should expedite the preparation and facilitate approval of Pacific Lumber's
THPs, although there can be no assurance that Pacific Lumber will not face
difficulties in the THP submission and approval process similar to those it
has been experiencing. See "--Results of Operations--Forest Products
Operations--Recent Operating Results."
In the event that the final Combined Plan is not approved or is
not acceptable to Pacific Lumber, Pacific Lumber will not enjoy the
benefits of a more streamlined THP preparation and review process.
Furthermore, it is impossible for the Company to determine the potential
adverse effect of (i) the listings of the marbled murrelet and coho salmon
if the Combined Plan is not approved or is not acceptable to Pacific
Lumber, or (ii) the EPA's potential regulations regarding water quality on
the Company's financial position, results of operations or liquidity until
such time as the various regulatory and legal issues are resolved; however,
if Pacific Lumber is unable to harvest, or is severely limited in
harvesting, on significant amounts of its timberlands, such effect could be
materially adverse to the Company.
YEAR 2000
The Company utilizes software and related technologies throughout
its business that will be affected by the date change to the year 2000.
There may also be technology embedded in certain of the equipment owned or
used by the Company that is susceptible to the year 2000 date change as
well. Each of the Company's segments have implemented programs to assess
the impact of the year 2000 date change. Year 2000 progress and readiness
has also been the subject of the Company's normal, recurring internal audit
function.
Kaiser has implemented a company-wide program to coordinate the
year 2000 efforts of its individual business units and to track their
progress. The intent of the program is to make sure that critical items
are identified on a sufficiently timely basis to assure that the necessary
resources can be committed to address any material risk areas that could
prevent its systems and assets from being able to meet Kaiser's business
needs and objectives. Each of Kaiser's business units has developed, or
is completing, year 2000 plans specifically tailored to their individual
situations. A wide range of solutions are being implemented, including
modifying existing systems and, in limited cases where it is cost
effective, purchasing new systems. Spending related to these projects,
which began in 1997 and is expected to continue through 1999, is currently
estimated to be in the $10-15 million range. System modification costs are
being expensed as incurred. Costs associated with new systems are being
capitalized and will be amortized over the life of the product. Kaiser has
established an internal goal of having all necessary system changes in
place and tested by mid-year 1999. Kaiser plans to commit the necessary
resources to meet this deadline.
In addition to addressing Kaiser's internal systems, its company-
wide program involves identification of key suppliers, customers, and other
third party relationships that could be impacted by year 2000 issues. A
general survey has been conducted of Kaiser's supplier base. Direct
contact has been made, or is in progress, with parties which are deemed to
be critical including financial institutions, power suppliers and
customers, with which Kaiser has a material relationship.
Each business unit, including the corporate group, is developing
a contingency plan covering the steps that would be taken if a year 2000
problem were to occur despite Kaiser's best efforts to identify and remedy
all critical at-risk items. Each contingency plan will address, among
other things, matters such as alternative suppliers for critical inputs,
incremental standby labor requirements at the millennium to address any
problems as they occur, and backup processing capabilities for critical
equipment or processes. The goal of the contingency plans will be to
minimize any business interruptions and the associated financial
implications.
MGI has established a team to address the potential impacts of
the year 2000 on each of its critical business functions. The team has
substantially completed its assessment of MGI's critical information
technology and embedded technology, including its geographic information
system and the equipment and systems used in its operating sawmills and
cogeneration plant, and is now in the process of making the required
modifications for these systems to be year 2000 compliant. The
modification costs are expected to be immaterial, costing less than
$100,000, and are expected to be completed by mid-year 1999. In most cases
testing of the modifications will also be completed by such time. System
modification costs are being expensed as incurred. Costs associated with
new systems are being capitalized and will be amortized over the life of
the product.
In addition to addressing MGI's internal systems, the team is in
the process of identifying key vendors that could be impacted by year 2000
issues and surveys are being conducted regarding their compliance effort.
Management expects to evaluate the responses to the surveys over the next
several months and will make direct contact with parties which are deemed
to be critical.
The Company's real estate segment has substantially completed the
process of evaluating its information technology systems, and has either
completed the modifications to make these systems compliant or expects to
complete the required modifications by the end of 1998. The costs are not
material. Other assets with embedded technology are not significant to the
business operations of this segment. Several financial institutions
provide various services to this segment which are critical to its business
operations, and inquiries as to the status of their year 2000 compliance
evaluations are in the process of being conducted.
SHRP, Ltd. is currently in the process of assessing both its
information technology systems and its embedded technology in order to
determine that they are, or will be, year 2000 compliant. Management has
already determined that its financial data processing hardware and software
are compliant and is presently working with certain key third parties and
support groups of its embedded technology to ensure that they are taking
appropriate measures to assure compliance. SHRP, Ltd. believes that the
total cost to make these systems year 2000 compliant will not exceed
$100,000. The most significant area still being evaluated pertains to
certain key third parties, in particular, the firm that provides its
totalisator services to it and others in the horse racing industry. These
data processing services are required in order for SHRP, Ltd. to conduct
pari-mutuel wagering in the state of Texas. Management, as well as the
thoroughbred racing industry's association, has received assurances that
such systems will be compliant by the third quarter of 1999. Management is
evaluating other third party providers of these and other services and
equipment in the event that any such vendors can not provide assurance of
year 2000 compatibility in sufficient time to effect a change.
While the Company believes that its program is sufficient to
identify the critical issues and associated costs necessary to address
possible year 2000 problems in a timely manner, there can be no assurance
that the program, or underlying steps implemented, will be successful in
resolving all such issues prior to the year 2000. If the steps taken by
the Company (or critical third parties) are not made in a timely manner, or
are not successful in identifying and remedying all significant year 2000
issues, business interruptions or delays could occur and could have a
material adverse impact on the Company's results and financial condition.
However, based on the information the Company has gathered to date and its
expectations of remedying problems encountered, the Company believes that
it will not experience significant business interruptions that would have a
material impact on its results or financial condition.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Form 10-K for information
concerning material legal proceedings with respect to the Company. The
following material developments have occurred with respect to such legal
proceedings subsequent to the filing of the Form 10-K.
MAXXAM INC. LITIGATION
With respect to the Rockwell matter described in the Form 10-K,
on November 4, 1998, an agreement in principle was reached to settle for a
$3.2 million payment by the Company. Final settlement and dismissal
documents are being prepared.
With respect to the OTS action described in the Form 10-K, the
hearing adjourned for a second time on October 16, 1998 after the OTS
concluded the chief portion of its case. The hearing is scheduled to
recommence on February 9, 1999, at which time the respondents will present
their case. The hearing is expected to conclude in April 1999.
KAISER LITIGATION
With respect to the United States of America v. Kaiser Aluminum &
Chemical Corporation lawsuit described in the Form 10-K, on August 28,
1998, a Certificate of Completion was filed with the United States District
Court for the Eastern District of Washington, evidencing completion of a
program of plant improvements and operational changes at KACC's Trentwood,
Washington, facility, and the attainment and maintenance of furnace
compliance with the capacity standard in the Washington State
Implementation Plan. Thirty days thereafter, the Consent Decree between
KACC and the United States Environmental Protection Agency was terminated.
With respect to the Hammons v. Alcan Aluminum Corp. et al lawsuit
described in the Form 10-K, on May 4, 1998, the United States Court of
Appeals for the Ninth Circuit denied the plaintiff's petition for a
rehearing en banc. On August 12, 1998, the plaintiff filed a petition with
the Supreme Court of the United States for a writ of certiorari, which
petition was denied on October 19, 1998.
PACIFIC LUMBER LITIGATION
On August 12, 1998, the EPIC lawsuit was filed against Pacific
Lumber, Scotia Pacific and Salmon Creek in the United States District Court
for the Northern District of California. The action relates to a number of
Pacific Lumber's THPs. The plaintiffs allege that certain procedural
violations of the ESA have resulted from defendants' logging activities on
Pacific Lumber's timberlands and seek to prevent the defendants from
carrying out any harvesting activities until certain purported intra-agency
wildlife consultation requirements under the ESA are satisfied in
connection with the Combined Plan. See Part I. Item 2. "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Trends." On September 3, 1998, the Court granted plaintiffs' motion for
preliminary injunction covering three THPs (consisting principally of old
growth Douglas-fir timber). Following evidentiary hearings, which concluded
on October 22, 1998, the Court requested additional briefing which was filed
on November 9, 1998. The preliminary injunction remains in effect pending
the Court's review of the evidence and the additional briefs. Pacific
Lumber is uncertain what impact this matter will have upon its operations
and financial results, but were the Court to reaffirm the preliminary
injunction after consideration of the evidence and additional briefs, it is
possible that other approved timber harvesting activities on Pacific
Lumber's timberlands could be severely restricted (and revenues potentially
significantly adversely affected) until such time as the consultation
requirements are satisfied. Pacific Lumber is vigorously defending this
matter and is devoting resources toward facilitating completion of the
consultation requirements as soon as practicable.
With respect to the Coho lawsuit described in the Form 10-K, on
July 31, 1998, plaintiffs amended their complaint to include certain
additional THPs and are seeking to require defendants to restore coho habitat
allegedly harmed by adverse cumulative effects of past (approved) timber
harvesting. On November 2, 1998, the Court heard argument and took under
submission defendants' motion for summary judgment challenging plaintiffs
standing to bring this action. Pacific Lumber has also received notice of
additional threatened actions with respect to the coho salmon.
Pacific Lumber is also subject to certain other pending THP cases
which would not be expected to have a material adverse effect upon Pacific
Lumber; however, due to the diminished supply of THPs currently held by
Pacific Lumber, the issuance of injunctive or similar relief in certain of
these cases could exacerbate the difficulties that Pacific Lumber has been
experiencing with respect to the conduct of harvesting operations. See
Part I. Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Result of Operations--Forest Products
Operations--Recent Operating Results."
On May 27, 1998, an action entitled Mateel Environmental Justice
Foundation v. Pacific Lumber, et al. (No. DR980301) was brought and is now
pending in the Superior Court of Humboldt County against MGI, Scotia
Pacific, Pacific Lumber and Salmon Creek. This action alleges, among other
things, violations of California's unfair competition law of the business
and professions code based on citations and violations (primarily water
quality related) issued against certain defendants since 1994 in connection
with a substantial number of THPs. The plaintiff seeks, among other
things, an injunction prohibiting alleged unlawful actions and requiring
corrective action, disgorgement of profits, appointment of a receiver to
ensure compliance with the law and any judgment, and financial security
with respect to future THPs to ensure full compliance with the California
Forest Practice Act. The Company does not believe that this matter will
have a material adverse effect upon its business or financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
*4.1 Loan Agreement, dated as of October 27, 1998, among
Southwest Bank of Texas, N.A., MCO Properties Inc., MCO
Properties L.P., Horizon Corporation and Horizon
Properties Corporation
10.1 Employment Agreement between KACC and John T. La Duc
made effective for the period from January 1, 1998 to
December 31, 2002 (incorporated herein by reference to
Exhibit 10.5 to the Quarterly Report on Form 10-Q of
Kaiser for the quarter ended September 30, 1998, File
No. 1-9447)
10.2 Time-Based Stock Option Grant pursuant to the Kaiser
1997 Omnibus Stock Incentive Plan to John T. La Duc
effective July 10, 1998 (incorporated herein by
reference to Exhibit 10.6 to the Quarterly Report on
Form 10-Q of Kaiser for the quarter ended September 30,
1998, File No. 1-9447)
*11 Computation of Net Income per Common and Common Equivalent
Share
*27.1 Financial Data Schedule for the quarter ended September
30, 1998
* Included with this filing.
B. REPORTS ON FORM 8-K:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized, who have signed this report
on behalf of the Registrant and as the principal financial officer and
principal accounting officer of the Registrant, respectively.
MAXXAM INC.
Date: November 13, 1998 By: /S/ PAUL N. SCHWARTZ
Paul N. Schwartz
President and Chief Financial
Officer
(Principal Financial Officer)
Date: November 13, 1998 By: /S/ ELIZABETH D. BRUMLEY
Elizabeth D. Brumley
Assistant Controller
(Principal Accounting Officer)
<PAGE>
APPENDIX A
GLOSSARY OF DEFINED TERMS
AMT Price: Average Midwest transaction price for primary aluminum
BOF: California Board of Forestry
Britt: Britt Lumber Co., Inc., an indirect, wholly owned subsidiary of MGI
CDF: California Department of Forestry and Fire Protection
California Headwaters Bill: The bill enacted August 31, 1998 by the
California Legislature which, among other things appropriates California's
$130 million portion of funding required to consummate the Headwaters
Agreement, appropriates up to an additional $80 million to acquire the Owl
Creek grove and contains environmentally focused provisions regarding
streamside buffers, the watershed assessment process and designation of the
Owl Creek grove as a marbled murrelet conservation area
CERCLA: Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended by the Superfund Amendments and Reauthorization Act
of 1986
CESA: California Endangered Species Act
Class A Preferred Stock: Class A $.05 Non-Cumulative Participating
Convertible Preferred Stock of the Company
CMRT: The Combined Master Retirement Trust
Coho lawsuit: An action entitled Coho Salmon, et al. v. Pacific Lumber, et
al. (No. 98-0283) filed January 26, 1998 in the United States District
Court for the Northern District of California
Combined Plan: The combined SYP and Multi-Species HCP released by Pacific
Lumber and Scotia LLC for public review and comment in July 1998
Common Stock: $.50 par value common stock of the Company
Company: MAXXAM Inc., including its subsidiaries unless otherwise noted or
the context indicates otherwise
Custodial Trust Agreement: A loan and pledge agreement between the Company
and the Custodial Trust Company providing for up to $25.0 million in
borrowings
EIR/EIS: An environmental impact statement/report analyzing the
Combined Plan and the Headwaters Agreement released by Pacific Lumber
EPA: Environmental Protection Agency
EPIC lawsuit: An action entitled Environmental Protection Information
Center, Inc., Sierra Club v. Pacific Lumber, Scotia Pacific and Salmon
Creek (No. C98-3129) filed August 12, 1998 in the United States District
Court for the Northern District of California
ESA: The federal Endangered Species Act
Event of Default: Event of Default under the Timber Notes as defined in
the Timber Notes Indenture
FDIC: Federal Deposit Insurance Corporation
FDIC action: A civil action filed by the FDIC on August 2, 1995 entitled
Federal Deposit Insurance Corporation, as manager of the FSLIC Resolution
Fund v. Charles E. Hurwitz
Federated: Federated Development Company, a principal stockholder of the
Company
Form 10-K: The Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the fiscal year ended December 31,
1997
HCP: Habitat Conservation Plan
Headwaters Agreement: The September 28, 1996 agreement among the Pacific
Lumber Parties, the United States and California which provides the
framework for the acquisition by the United States and California of the
Headwaters Timberlands
Headwaters Timberlands: Approximately 5,600 acres of Pacific Lumber's
timberlands consisting of two forest groves commonly referred to as the
Headwaters Forest and the Elk Head Springs Forest
KACC: Kaiser Aluminum & Chemical Corporation, Kaiser's principal
operating subsidiary
KACC Credit Agreement: The revolving credit facility with KACC and a bank
under which KACC is able to borrow by means of revolving credit advances
and letters of credit (up to $125.0 million) in an aggregate amount equal
to the lesser of $325.0 million or a borrowing base relating to eligible
accounts receivable plus eligible inventory
Kaiser: Kaiser Aluminum Corporation, a subsidiary of the Company engaged
in aluminum operations
Liquidity Account: A liquidity account maintained by Scotia Pacific with
respect to the Old Timber Notes
LTSY: Long-term sustained yield
Mbfe: A concept used in structuring the Timber Notes; under this concept,
one thousand board feet, net Scribner scale, of old growth redwood timber
equates to one Mbfe
MCOP Credit Agreement: $14.0 million revolving credit facility between
certain of the Company's real estate subsidiaries and a bank
MGHI: MAXXAM Group Holdings Inc.
MGI: MAXXAM Group Inc.
MGI Discount Notes: 12-1/4% MGI Senior Secured Discount Notes due August
1, 2003
MGI Notes: MGI Discount Notes and MGI Senior Notes
MGI Senior Notes: 11-1/4% MGI Senior Secured Notes due August 1, 2003
Minimum Principal Amortization: The minimum amount of principal on the
Timber Notes which Scotia LLC must pay (on a cumulative basis and subject
to available cash) through any Timber Notes payment date in order to avoid
an Event of Default (as defined in the Timber Notes Indenture)
Multi-Species HCP: The HCP covering multiple species contemplated by the
Headwaters Agreement
NL: NL Industries, Inc.
Notice: A Notice of Charges filed on December 26, 1995 by the OTS against
the Company and others with respect to the failure of USAT
Old Timber Notes: The 7.95% Scotia Pacific Timber Collateralized Notes due
July 20, 2015
OTS: The United States Department of Treasury's Office of Thrift
Supervision
Owl Creek grove: A 900-acre grove of primarily old growth timber owned by
Scotia LLC
Pacific Lumber: The Pacific Lumber Company, an indirect, wholly owned
subsidiary of MGI
Pacific Lumber Credit Agreement: The revolving credit agreement between
Pacific Lumber and a bank which provides for borrowings of up to $60.0
million, of which $20.0 million may be used for standby letters of credit
and $30.0 million is restricted to timberland acquisitions
Pacific Lumber Parties: Pacific Lumber, including its subsidiaries and
affiliates, and MAXXAM
Pacific Lumber Senior Notes: 10-1/2% Pacific Lumber Senior Notes due March
1, 2003
Permits: The incidental take permits related to the Multi-Species HCP
Pre-Permit Agreement: The February 27, 1998 Pre-Permit Application
Agreement in Principle entered into by Pacific Lumber, MAXXAM and various
government agencies regarding certain understandings that they had reached
regarding the Multi-Species HCP, the Permits and the SYP
RTC Portfolio: A portfolio originally consisting of 27 parcels of income
producing real property and 28 loans purchased from the Resolution Trust
Corporation in June 1991
Salmon Creek: Salmon Creek Corporation, a wholly owned subsidiary of
Pacific Lumber
Scheduled Amortization: The minimum amount of principal on the Timber
Notes which Scotia LLC must pay (on a cumulative basis) through any Timber
Notes payment date in order to avoid payment of prepayment or deficiency
premiums
Scotia LLC: Scotia Pacific Company LLC, a limited liability company wholly
owned by Pacific Lumber
Scotia Pacific: Scotia Pacific Holding Company, a wholly owned subsidiary
of Pacific Lumber, which was merged into Scotia LLC on July 20, 1998
SFAS No. 130: Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income"
SFAS No. 133: Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
SHRP, Ltd.: Sam Houston Race Park, Ltd., a 98.2%-owned subsidiary of
MAXXAM
SHRP Notes: The SHRP, Ltd. 11% Senior Secured Extendible Notes due
September 1, 2001
Stipulation: Stipulation entered into between CDF and Pacific Lumber in
December 1997 in connection with the administrative action entitled: In
the matter of the Statement of Issues Against: The Pacific Lumber Company,
Timber Operator License A-5326 (No. LT 97-8) with respect to Pacific
Lumber's TOL
SYP: The sustained yield plan establishing LTSY harvest levels for Pacific
Lumber's timberlands
THP: Timber harvesting plan required to be filed with and approved by the
CDF prior to the harvesting of timber
Timber Notes Indenture: The indenture dated July 20, 1998 governing the
Timber Notes
Timber Notes: The Scotia LLC 6.55% Class A-1, 7.11% Class A-2 and 7.71%
Class A-3 Timber Collateralized Notes due July 20, 2028
Timber Notes Line of Credit: A line of credit provided as security for the
payment of interest on the Timber Notes, which line of credit secures the
payment of one year's interest on the Timber Notes
TOL: Timber operator's license allowing the holder to conduct timber
harvesting operations
UFG: United Financial Group, Inc.
USAT: United Savings Association of Texas
USWA: United Steelworkers of America
Valco: Volta Aluminum Company Limited, Kaiser's 90%-owned smelter facility
in Ghana
VRA: Volta River Authority, an electric power supplier to Valco
EXHIBIT 11
MAXXAM INC.
COMPUTATION OF NET INCOME
PER COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 7,000,597 8,289,722 7,000,597 8,491,364
Common equivalent shares
attributable to stock options
and convertible securities - 804,517 816,018 781,064
------------ ------------ ------------ ------------
Total common and common
equivalent shares 7,000,597 9,094,239 7,816,615 9,272,428
============ ============ ============ ============
Earnings per share information:
Basic:
Net income (loss) $ (6.35) $ 2.17 $ (4.31) $ 5.96
============ ============ ============ ============
Diluted:
Net income (loss) per common
and common equivalent
share $ (6.35) $ 1.98 $ (3.86) $ 5.46
============ ============ ============ ============
</TABLE>
EXHIBIT 4.1
LOAN AGREEMENT
This Loan Agreement (the "Agreement") is entered into by and between
MCO PROPERTIES INC., a Delaware corporation, MCO PROPERTIES L.P., a
Delaware limited partnership, HORIZON CORPORATION, a Delaware corporation,
HORIZON PROPERTIES CORPORATION, a Delaware corporation, and WESTCLIFF
DEVELOPMENT CORPORATION, a Texas corporation (collectively, "Borrower"),
and SOUTHWEST BANK OF TEXAS, N.A., a national banking association
("Lender") effective as of October 27, 1998. Borrower has requested and
Lender has agreed to lend to Borrower the sum of up to $14,000,000.00, upon
the terms and subject to the conditions set forth herein. In consideration
for the above premises and the mutual promises and covenants herein
contained, Borrower and Lender do hereby agree as follows:
1. Loan.
(a) On the terms and subject to the conditions set forth in this
Agreement, Lender agrees to lend to Borrower up to $14,000,000.00 (the
"Loan"). The Loan shall be evidenced by a Revolving Credit Note (the
"Note") in a form satisfactory to Lender, duly executed by Borrower in the
principal amount of $14,000,000.00 and made payable to the order of Lender.
Principal and interest on the Note shall be due and payable in the manner
and at the times set forth in the Note with final maturity (the "Maturity
Date") on October 1, 2000; provided however, that upon the request of
Borrower and the consent of Lender, which consent shall not be unreasonably
withheld, but may be conditioned upon: (i) Lender's review of the credit
standing and financial condition of the Borrower, and (ii) no Events of
Default (as hereinafter defined) hereunder, the final maturity shall be
October 1, 2001. The availability or proceeds of the Loan shall be used
only (i) for the issuance of one or more Letters of Credit (as hereinafter
defined), and (ii) for Borrower's general corporate purposes.
(b) On the terms and subject to the conditions set forth in this
Agreement, Lender agrees to make advances on the Note to Borrower for the
issuance of one or more letters of credit the total aggregate face amount
of which shall not exceed at any one time the lesser of (i) $14,000,000.00
and (ii) the "Borrower's Loan Limit", as such term is defined in Exhibit
"A" hereto. Each of the letters of credit shall be evidenced by an
Application and Agreement for Letter of Credit (the "Application") in a
form satisfactory to Lender. Each of these letters of credit and any
renewals, extensions and modifications thereof are collectively referred to
herein as the "Letter of Credit", and shall be for a term of no more than
one year from the date of issuance. Repayment of drafts against the Letter
of Credit shall be governed by this Agreement and the Application, and
shall be and is secured by the collateral and guaranties, if any, provided
herein.
2. Revolving Credit Advances. Subject to the terms hereof, Borrower
may borrow, pay, reborrow and repay under the Note, provided, however, the
maximum principal outstanding under the Note shall not exceed the lesser of
(i) $14,000,000.00 and (ii) the Borrower's Loan Limit. Borrower's requests
for advances (whether for cash or Letter of Credit) under the Note shall
specify the aggregate amount of the advance and the date of such advance.
Borrower shall furnish to Lender a request for borrowing in a form
satisfactory to Lender at least two (2) business day prior to the requested
borrowing date. Such request shall include, among other items, a Borrowing
Base Report as required under Paragraph 5(c). After receiving notice of a
requested advance in the manner provided herein, Lender shall make the
requested funds available to Borrower on the requested borrowing date at
Lender's principal banking office in Houston, Texas. If at any time prior
to the Maturity Date, the outstanding advances (including the face amount
of outstanding Letters of Credit) under the Note exceed the Borrower's Loan
Limit as shown on any reports delivered to Lender under Paragraph 5(c) or
as indicated by Lender's own records, Borrower shall, on the date of the
delivery of such report to Lender, prepay on the Note such amount as may be
necessary to eliminate such excess.
3. Conditions Precedent.
(a) The obligation of Lender to make the initial advance under
the Note is subject to the conditions precedent that, as of the date of
such advance, Lender shall have received (i) duly executed copies of each
document listed on the last page hereof relating to the Loan, in form and
substance acceptable to Lender and its legal counsel (all the documents
listed on the last page hereof, together with this Agreement and any other
security documents relating to the Loan, and any modifications thereof, are
hereinafter collectively referred to as the "Loan Documents"), (ii) an
origination fee of $140,000.00, as consideration for Lender's commitment to
make advances under the Note, (iii) copies of all deeds of trust, mortgages
and security documents related to the Real Estate Notes, and originals of
all of the Real Estate Notes (hereinafter defined) properly endorsed to the
order of Lender, (iv) Mortgagee Policies of Title Insurance issued with
respect to the Real Estate Notes endorsed for the benefit of Lender, (v)
appraisals of all the Real Estate Collateral (as hereinafter defined) and
the Real Estate Notes (as hereinafter defined), the principal amount of
which exceeds $250,000, in form and content satisfactory to Lender, (vi) a
Mortgagee Policy of Title Insurance for the Real Estate Collateral in form
and content satisfactory to Lender, and (vii) such other documents and
certificates as Lender or Lender's counsel may reasonably request.
(b) Lender's obligation to make advances under the Note shall be
subject to the additional conditions precedent that, as of the date of such
advance and after giving effect thereto: (i) all representations and
warranties made by Borrower to Lender are true and correct, as if made on
such date, (ii) all documents and proceedings shall be reasonably
satisfactory to legal counsel for Lender, (iii) no condition or event
exists which constitutes an Event of Default (as hereinafter defined) or
which, with the lapse of time and/or giving of notice, would constitute an
Event of Default, and (iv) all conditions precedent set forth in
subparagraph (a) above shall have been satisfied.
4. Representations and Warranties. In order to induce Lender to
make the Loan, Borrower represents and warrants to Lender that:
(a) The Loan Documents are the legal and binding obligations of
Borrower, enforceable in accordance with their respective terms, except as
limited by bankruptcy, insolvency or other laws of general application
relating to the enforcement of creditors' rights;
(b) All financial statements delivered by Borrower to Lender
prior to the date hereof are true and correct in all material respects,
fairly present the financial condition of Borrower and have been prepared
in accordance with generally accepted accounting principles, consistently
applied; as of the date hereof, there are no obligations, liabilities or
indebtedness (including contingent and indirect liabilities) which are
material to Borrower and not reflected in such financial statements; and no
material adverse changes have occurred in the financial condition or
business of Borrower since the date of the most recent financial statements
which Borrower has delivered to Lender;
(c) Except in connection with that certain Second Amended and
Restated Credit and Security Agreement dated July 15, 1995 among Borrower
and Bank Boston, N.A., which will be terminated on or about the date
hereof, neither the execution and delivery of this Agreement and the other
Loan Documents, nor consummation of any of the transactions herein or
therein contemplated, nor compliance with the terms and provisions hereof
or thereof, will contravene or conflict with any provision of law, statute
or regulation to which Borrower is subject or any judgment, license, order
or permit applicable to Borrower or any indenture, mortgage, deed of trust
or other instrument to which Borrower may be subject; no consent, approval,
authorization or order of any court, governmental authority or third party
is required in connection with the execution and delivery by Borrower of
this Agreement or the transactions contemplated herein or therein;
(d) No litigation, investigation, or governmental proceeding is
pending, or, to the knowledge of any of Borrower's officers, threatened
against or affecting Borrower, which may result in any material adverse
change in Borrower's business, properties or operations;
(e) There is no specific fact known to Borrower that Borrower
has not disclosed to Lender in writing which is likely to result in any
material adverse change in Borrower's business, properties or operations;
(f) Borrower owns all of the assets reflected on its most recent
balance sheet free and clear of all liens, security interests or other
encumbrances, except as previously disclosed in writing to Lender or in the
notes to the financial statements delivered by Borrower to Lender;
(g) The principal office, and principal place of business of
Borrower is in Fountain Hills, Arizona; the chief executive office is in
Houston, Texas;
(h) All taxes required to be paid by Borrower have in fact been
paid, except for taxes being contested in good faith by appropriate
proceedings for which adequate reserves have been established;
(i) Borrower is not in violation of any law, ordinance,
governmental rule or regulation to which it is subject, to the actual
knowledge of Borrower's officers, and is not in default in any material
respect under any material agreement, contract or understanding to which it
is a party;
(j) No written certificate or written statement herewith or
heretofore delivered by Borrower to Lender in connection herewith, or in
connection with any transaction contemplated hereby, contains any untrue
statement of a material fact or fails to state any material fact necessary
to keep the statements contained therein from being misleading;
(k) Borrower has taken certain reasonable steps necessary to
determine and has determined that no hazardous substances, or other
substances known or suspected to pose a threat to health or the environment
which are in violation of Applicable Environmental Laws ("Hazard[s]") exist
with respect to the Collateral (hereinafter defined). No prior use, either
by Borrower or, to Borrower's knowledge, the prior owners of the
Collateral, has occurred, which violates any laws pertaining to health or
the environment ("Applicable Environmental Laws"), including, without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA"), the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), the Texas Water Code and the
Texas Solid Waste Disposal Act. The Borrower's handling and maintenance of
the Collateral does not and will not result in the disposal or release of
any hazardous substance or Hazard on, in or to the Collateral. The terms
"hazardous substance" and "release" shall each have the meanings specified
in CERCLA, and the terms "solid waste" and "disposal" (or "disposed") shall
each have the meanings specified in RCRA; provided, however, that in the
event either CERCLA or RCRA is amended so as to broaden the meaning of any
term defined thereby, such broader meaning shall apply subsequent to the
effective date of such amendment; and provided further that, to the extent
that the laws of the State of Texas establish a meaning for "hazardous
substance", "release", "solid waste", or "disposal" which is broader than
that specified in either CERCLA or RCRA, such broader definition shall
apply.
(l) All Real Estate Notes included in the Borrowing Base were
"Eligible" (as defined in Exhibit "A") when pledged to Lender, and continue
to be "Eligible" so long as they are included in the Borrowing Base;
(m) All material software, hardware and critical systems used by
Borrower and its subsidiaries, if any, in the conduct of Borrower's
business ("Borrower's Computer Items") will record, store, process and
present calendar dates falling on or after January 1, 2000, and all
information pertaining to such dates accurately;
(n) Borrower's Computer Items will have all appropriate
capability and compatibility for handling century-aware or year 2000
compliant data, when reasonably necessary; and
(o) The data related user interface functions, data fields and
data related program instructions and functions of Borrower's Computer
Items will include the indication of the century.
5. Affirmative Covenants. Until payment in full of the Note and all
other obligations and liabilities of Borrower hereunder, Borrower agrees
and covenants that (unless Lender shall otherwise consent in writing):
(a) As soon as available, and in any event within forty-five
(45) days after the close of each calendar month, Borrower shall deliver to
Lender an unaudited financial statement showing the financial condition of
Borrower at the close of each such month and the results of operations
during such month, which financial statements shall include, but shall not
be limited to, a profit and loss statement, balance sheet, cash flow
statement and such other matters as Lender may reasonably request; all such
monthly financial statements shall be certified on the face thereof by the
chief financial officer of Borrower, or any person acceptable to Lender,
and shall be forwarded to Lender with a letter of transmittal from him in
which he shall certify that Borrower is in compliance with all of the
affirmative covenants contained in this Paragraph and further stating that
no Event of Default exists in the performance by Borrower of any of the
other terms, conditions and covenants required under this Agreement to be
performed by Borrower;
(b) As soon as available, and in any event within one hundred
twenty (120) days after the end of each fiscal year of Borrower, Borrower
shall deliver to Lender a copy of the annual audited financial statement of
Borrower prepared in conformity with generally accepted accounting
principles, certified (with no material qualifications or exceptions) by
independent public accountants selected by Borrower and acceptable to
Lender, which show the financial condition of Borrower at the close of such
fiscal year and the results of operations during such fiscal year, and
shall include, but not be limited to, a profit and loss statement, balance
sheet and such other matters as Lender may reasonably request;
(c) As soon as available, and in any event within forty-five
(45) days after the end of each calendar month, and upon each request for
an advance, Borrower shall deliver to Lender (i) a Borrowing Base Report
and Compliance Certificate in the form of Exhibit "B" attached hereto or
other form reasonably acceptable to Lender together with such other
information as may be deemed necessary or appropriate by Lender, and (ii)
an aging and listing of the Real Estate Notes, in summary form, or if
requested by Lender, setting forth all Real Estate Notes in all material
respects in a form reasonably acceptable to Lender;
(d) Borrower shall conduct its business in all material respects
in an orderly and efficient manner consistent with good business practices
and in accordance with all valid regulations, laws and orders of any
governmental authority, and will act in accordance with customary industry
standards in maintaining and operating its assets, properties and
investments;
(e) Borrower shall maintain complete and accurate books and
records of its transactions in accordance with generally accepted
accounting principles, and will give Lender access during business hours to
all books, records and documents of Borrower and permit Lender to make and
take away copies thereof;
(f) Borrower shall furnish to Lender, promptly upon becoming
aware of the existence of any condition or event constituting an Event of
Default or event which, with the lapse of time and/or giving of notice,
would constitute an Event of Default, written notice specifying the nature
and period of existence thereof and any action which Borrower is taking or
proposes to take with respect thereto;
(g) Borrower shall maintain or cause to be maintained insurance
from responsible and reputable companies in such amounts and covering such
risks as is acceptable to Lender, is prudent and is usually carried by
companies engaged in businesses similar to that of Borrower; Borrower shall
furnish Lender, on request, with certified copies of insurance policies or
other appropriate evidence of compliance with the foregoing covenant and
said policies shall contain the usual mortgagee clause, and provide that
loss, if any, shall be paid to Lender;
(h) Borrower shall promptly notify Lender of (i) any material
adverse change in its financial condition or business; (ii) any default
under any material agreement, contract or other instrument to which
Borrower is a party or by which any of its properties are bound, or any
acceleration of any maturity of any indebtedness owing by Borrower, (iii)
any material adverse claim against or affecting Borrower or any of its
properties; and (iv) any litigation, or any claim or controversy which
might become the subject of litigation, against Borrower or affecting any
of Borrower's property, if such litigation or potential litigation might,
in the event of an unfavorable outcome, have a material adverse effect on
Borrower's financial condition or business or might cause an Event of
Default;
(i) Borrower shall preserve and maintain all material licenses,
privileges, franchises, certificates and the like necessary for the
operation of its business;
(j) Borrower shall promptly furnish to Lender, at Lender's
request, such additional financial or other information concerning assets,
liabilities, operations and transactions of Borrower and each of its
subsidiaries as Lender may from time to time reasonably request;
(k) Borrower shall give notice to Lender promptly upon acquiring
knowledge of the presence of any Hazards relating to the Collateral, which
is in a condition that is resulting or could reasonably be expected to
result in any adverse environmental impact, with a full description
thereof; promptly comply with all Applicable Environmental Laws requiring
the notice, removal, treatment, or disposal of such hazardous substances;
and provide Lender, within thirty (30) days after demand by Lender, with
evidence to Lender's reasonable satisfaction that sufficient funds are
available to pay the cost of removing, treating and disposing of any such
known Hazards and discharging any liens or assessments that may be
established relating to the Collateral;
(l) Borrower shall make, execute or endorse, and acknowledge and
deliver or file or cause the same to be done, all such vouchers, invoices,
notices, certifications and additional agreements, undertakings,
conveyances, promissory notes, deeds of trust, mortgages, transfers,
assignments, financing statements or other assurances, and take any and all
such other action, as Lender may, from time to time, deem reasonably
necessary or proper, and as are reasonably acceptable to Borrower, in
connection with any of the Loan Documents, and/or the Collateral (as
hereinafter defined), the obligations of Borrower, or for better assuring
and confirming unto Lender all or any part of the security for any of such
obligations;
(m) Borrower shall pay Lender a letter of credit commission in
respect of each Letter of Credit issued by Lender equal to an amount
determined by multiplying (i) three quarters of one percent (.75%) of the
face amount of such Letter of Credit by (ii) a fraction, the numerator of
which shall be the number of days between the date of such Letter of Credit
and the stated expiration date thereof and the denominator of which shall
be 360; such commission shall be payable at the time a Letter of Credit is
issued and upon any renewal or extension thereof; additionally, Borrower
agrees to reimburse Lender for all actual out-of-pocket expenses incurred
by Lender, such as advising or confirming bank fees, telex charges and the
like and to pay those fees customarily charged by Lender for any amendments
to a Letter of Credit;
(n) Within thirty (30) days of any request therefor by Lender,
Borrower will deliver to Lender a statement from a person acceptable to
Lender to the effect that Borrower's Computer Items comply with the
representations contained in Paragraph 4, subparagraphs (m) through (o);
(o) Borrower shall maintain, for the benefit of Lender, a lock
box arrangement with Bank One, Arizona, N.A. to be serviced by Concord
Servicing Corporation in accordance with its normal practices in connection
with the payment and collection of the Real Estate Notes, all of which
shall be paid and processed thereby; and
(p) By March 31, 1999, Borrower will deliver to Lender fully
executed Note Maker Estoppels, with respect to the Real Estate Notes, in
form and content satisfactory to Lender; provided, however, Borrower shall
not be required to deliver Note Maker Estoppels for the Real Estate Notes:
(i) with a principal balance of less than $50,000.00 pertaining to the
Fountain Hills, Arizona property, or (ii) with a principal balance of less
than $100,000.00 pertaining to all other property.
6. Negative Covenants. Until payment in full of the Note and all
accrued obligations and liabilities of Borrower hereunder, Borrower
covenants that it shall not (unless Lender shall otherwise consent in
writing):
(a) Permit any transfer or other change in the ownership of
controlling interest of the stock of Borrower during the term of the Loan;
as used herein the term "controlling interest" means 51% or more of the
stock of Borrower. Notwithstanding the foregoing, Lender hereby consents
to the merger of Horizon Properties Corporation into Horizon corporation,
provided that Horizon Corporation shall succeed to all of Horizon
Properties Corporation's rights and obligations hereunder;
(b) Permit Borrower's Tangible Net Worth to be less than
$30,000,000.00; as used herein, the term "Tangible Net Worth" shall mean
the aggregate net worth of Borrower in accordance with generally accepted
accounting principles, minus all intangibles, expenses and other items
deducted in arriving at tangible net worth. Lender approves Borrower's
determination of Tangible Net Worth as being equal to total equity as shown
on Borrower's financial statements provided to Lender; or
(c) Permit, at any time, its ratio of total liabilities to
Tangible Net Worth to exceed 1.00 to 1.00.
(d) Extend, modify, or renew or consent to the extension,
modification or renewal of any of the Real Estate Notes.
(e) Upon receipt of any involuntary principal prepayment (e.g.,
condemnation or insurance proceeds) of a Real Estate Note, Borrower shall
pay to Lender an amount equal to such prepayment, which amount shall be
applied by Lender against the outstanding principal balance of the Note.
In the event a Real Estate Note is refinanced at or prior to its maturity
date, Borrower shall pay to Lender the amount received by Borrower in
payment of such Real Estate Note, which amount shall be applied by Lender
against the outstanding principal balance of the Note. Except with the
prior written consent of Lender, Borrower will not accept less than the
entire outstanding principal balance and interest accrued thereon in
connection with the pay off of any Real Estate Note which is refinanced.
In the event a Real Estate Note is not refinanced at or prior to its
maturity, Borrower shall pay to Lender within thirty (30) days of the
maturity date of the Real Estate Note an amount equal to the entire
outstanding principal balance on such Real Estate Note, which amount shall
be applied by Lender against the outstanding principal balance of the Note,
or the Borrowing Base shall be so reduced.
(f) Permit the outstanding principal balance of the Note to
exceed the lesser of the Borrowing Base or $14,000,000.00, and if such
event should occur, Borrower shall promptly pay to Lender a sufficient
amount such that when applied against the principal balance of the Note,
Borrower shall be in compliance herewith.
7. Default. An "Event of Default" shall exist if any one or more of
the following events (herein collectively called "Events of Default") shall
occur:
(a) Borrower shall fail to pay when due any principal of, or
interest on, the Note or any other fee or payment due hereunder or under
any of the Loan Documents within five (5) days of Lender's sending demand
therefor, provided, Lender shall not be obligated to send such demand more
often than twice per calendar year, and thereafter Borrower shall be in
default upon its failure to pay such sums when due;
(b) Any representation or warranty made in any of the Loan
Documents shall prove to be untrue or inaccurate in any material respect as
of the date on which such representation or warranty is made, and, if the
inaccuracy of such warranty or representation is capable of being cured,
Borrower fails to correct or cure same within fifteen (15) days of Lender's
sending written notice thereof;
(c) Default shall occur in the performance of any of the
covenants or agreements of Borrower contained herein or in any of the other
Loan Documents, and such default (other than a monetary default) shall
continue for a period of fifteen (15) days after Lender sends written
notice thereof to Borrower;
(d) Borrower shall (i) apply for or consent to the appointment
of a receiver, custodian, trustee, intervenor or liquidator of it or of all
or a substantial part of its assets, (ii) voluntarily become the subject of
a bankruptcy, reorganization or insolvency proceeding or be insolvent or
admit in writing that it is unable to pay debts as they become due, (iii)
make a general assignment for the benefit of creditors, (iv) file a
petition or answer seeking reorganization or an arrangement with creditors
or to take advantage of any bankruptcy or insolvency laws, (v) file an
answer admitting the material allegations of, or consent to, or default in
answering, a petition filed against it in any bankruptcy, reorganization or
insolvency proceeding, (vi) become the subject of an order for relief under
any bankruptcy, reorganization or insolvency proceeding, or (vii) fail to
pay any money judgment against it before the expiration of sixty (60) days
after such judgment becomes final and no longer subject to appeal;
(e) An order, judgment or decree shall be entered by any court
of competent jurisdiction or other competent authority approving a petition
appointing a receiver, custodian, trustee, intervenor or liquidator of
Borrower or of all or substantially all of its assets, and such order,
judgment or decree shall continue unstayed and in effect for a period of
sixty (60) days; or a complaint or petition shall be filed against Borrower
seeking or instituting a bankruptcy, insolvency, reorganization,
rehabilitation or receivership proceeding of Borrower, and such petition or
complaint shall not have been dismissed within sixty (60) days; or
(f) Borrower shall default in the payment of any indebtedness of
Borrower or in the performance of any of Borrower's obligations and such
default shall continue for more than any applicable period of grace, and in
Lender's judgment is likely to have a material adverse effect on Borrower's
ability to repay the Loan.
8. Remedies Upon Event of Default. If an Event of Default shall
have occurred and be continuing, then Lender, at its option, may (i)
declare the principal of, and all interest then accrued on, the Note and
any other liabilities of Borrower to Lender to be forthwith due and
payable, whereupon the same shall forthwith become due and payable without
notice, presentment, demand, protest, notice of intention to accelerate,
notice of acceleration, or other notice of any kind, all of which Borrower
hereby expressly waives, anything contained herein or in the Note to the
contrary notwithstanding, (ii) reduce any claim to judgment, and/or (iii)
without notice of default or demand, pursue and enforce any of Lender's
rights and remedies under the Loan Documents or otherwise provided under or
pursuant to any applicable law or agreement.
9. Collateral.
(a) Payment of the Note and performance of the obligations
described herein shall be secured, directly or indirectly, by (i) first
priority perfected collateral assignments of those certain promissory notes
listed on "Exhibit C," annexed hereto, and all liens, rights, titles,
equities and interests securing those Real Estate Notes, including but
limited to the liens of all deeds of trust or mortgages securing those Real
Estate Notes (collectively, the "Real Estate Notes"), and (ii) first lien
deeds of trust on certain real estate described in Exhibit" D," annexed
hereto (the "Real Estate Collateral"). The Real Estate Notes and Real
Estate Collateral are collectively referred to as the "Collateral".
(b) Release of Liens
(i) Borrower may sell or otherwise dispose of portions of
the Real Estate Collateral as hereinafter provided. If
an intended sale or disposition of any of the Real
Estate Collateral is evidenced by a bona fide
agreement to an unaffiliated third party acquiror, is
for adequate consideration, and provided there is no
existing Event of Default, such sale or disposition
shall not constitute an Event of Default, and the
Lender agrees to release its lien against such Real
Estate Collateral. The Lender may condition its
release of its lien against such Real Estate Collateral
upon (A) payment to the Lender of all or such portion
of the proceeds of such sale, as is sufficient to pay
the interest next due under the Note, (B) collateral
assignment to Lender of any purchase money notes, which
are a portion of the consideration of sale of such Real
Estate Collateral, and instruments associated with such
Real Estate Notes, or (C) a commensurate reduction in
the Borrowing Base.
(ii) Lender acknowledges that Borrower may collaterally
assign to Lender any purchase money notes, which are a
portion of the consideration of the sale of Real Estate
Collateral, and instruments associated with such Real
Estate Notes. Provided that any Real Estate Notes
which are collaterally assigned to Lender after the
date hereof are Eligible, as defined below, and such
collateral assignment is in form reasonably acceptable
to Lender, such Real Estate Notes shall be added to the
Borrowing Base, as defined below.
(iii)Upon sale or repayment in full of any Real Estate Note
and Borrower's compliance with (i) above, the Lender
agrees to release its lien against such Real Estate
Note upon request by Borrower and return such Real
Estate Note and associated instruments to Borrower.
(iv) In the event Borrower deems it reasonable necessary to
modify, extend or subordinate any Real Estate Note,
Lender's consent to any such modification shall not be
unreasonably withheld, provided however, that Lender's
consent in connection with subordination of any Real
Estate Note may be conditioned upon removal of such
Real Estate Note from the Borrowing Base.
10. Miscellaneous.
(a) Waiver. No advance hereunder shall constitute a waiver of
any of the conditions of Lender's obligation to make further advances nor,
in the event Borrower is unable to satisfy any such condition, shall any
such waiver have the effect of precluding Lender from thereafter declaring
such inability to be an Event of Default as hereinabove provided. No
failure to exercise, and no delay in exercising, on the part of Lender, any
right hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or
the exercise of any other right. The rights of Lender hereunder and under
the other Loan Documents shall be in addition to all other rights provided
by law. No notice or demand given in any case shall constitute a waiver of
the right to take other action in the same, similar or other instances
without such notice or demand.
(b) Notices. Any notices or other communications required or
permitted to be given by any of the Loan Documents must be given in writing
and must be personally delivered, or mailed by prepaid certified or
registered mail, with return receipt requested, to the party to whom such
notice or communication is directed at the address of such party as
follows:
(i) Borrower: MCO Properties Inc.
5847 San Felipe, Suite 2600
Houston, Texas 77057-3010
Attention: J. Richard Rosenberg
with a copy to: MCO Properties Inc.
5847 San Felipe, Suite 2600
Houston, Texas 77057-3010
Attention: Erik Erikkson, Jr., Esq.
and: MCO Properties Inc.
5847 San Felipe, Suite 2600
Houston, Texas 77057-3010
Attention: Delona Moore
(ii) Lender: Southwest Bank of Texas, N.A.
5 Post Oak Park
4400 Post Oak Parkway
Houston, Texas 77027
Attention: Commercial Real Estate
with a copy to: Brown, Parker and Leahy, L.L.P.
1200 Smith Street, Suite 3600
Houston, Texas 77002-4595
Attention: Alfred M. Meyerson, Esq.
Any such notice or other communication shall be deemed to have been given
(whether actually received or not) on the day it is personally delivered as
aforesaid, or, if mailed, on the third day after it is mailed as aforesaid.
Any party may change its address for purposes of this Agreement by giving
notice of such change to all other parties pursuant to this Paragraph.
(c) GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
ARE BEING EXECUTED AND DELIVERED, AND ARE INTENDED TO BE PERFORMED, IN THE
STATE OF TEXAS, AND THE SUBSTANTIVE LAWS OF TEXAS SHALL GOVERN THE
VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT
AND ALL OTHER LOAN DOCUMENTS, EXCEPT TO THE EXTENT: (I) OTHERWISE
SPECIFIED THEREIN; (II) THE FEDERAL OR STATE LAWS GOVERNING NATIONAL
BANKING ASSOCIATIONS EXPRESSLY SUPERSEDE AND HAVE CONTRARY APPLICATION; OR
(III) FEDERAL LAWS GOVERNING MAXIMUM INTEREST RATES SHALL PROVIDE FOR RATES
OF INTEREST HIGHER THAN THOSE PERMITTED UNDER THE LAWS OF THE STATE OF
TEXAS.
(d) Invalid Provisions. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under present or future laws
effective during the term of this Agreement, such provision shall be fully
severable and this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part of
this Agreement, and the remaining provisions of this Agreement shall remain
in full force and effect and shall not be affected by the illegal, invalid
or unenforceable provision or by its severance from this Agreement.
(e) Conditions for Benefit of Lender. All conditions to the
obligations of Lender to make any advances hereunder are imposed solely and
exclusively for the benefit of Lender and its assigns, and no other person
shall have standing to require satisfaction of such conditions in
accordance with their terms or be entitled to assume that Lender will
refuse to make advances in the absence of strict compliance with any or all
thereof, and any or all of such conditions may be freely waived in whole or
in part by Lender at any time if, in Lender's sole discretion, Lender deems
it advisable to do so.
(f) Entirety and Amendments. The Loan Documents embody the
entire agreement between the parties and supersede all prior agreements and
understandings, if any, relating to the subject matter hereof and thereof,
and this Agreement and the other Loan Documents may be amended only by an
instrument in writing executed by the party, or an authorized officer of
the party, against whom such amendment is sought to be enforced.
(g) Headings. Paragraph and section headings are for
convenience of reference only and shall in no way affect the interpretation
of this Agreement.
(h) Construction and Conflicts. The provisions of this
Agreement shall be in addition to those of the Note, the Loan Documents and
any guaranty, pledge or security agreement, note or other evidence of
liability held by Lender, all of which shall be construed as complementary
to each other. Nothing herein contained shall prevent Lender from
enforcing the Note, the Loan Documents and any and all other notes,
guaranty, pledge or security agreements in accordance with their respective
terms. To the extent of any conflict or contradiction between the terms
hereof and the terms of the Note, the Loan Documents or any other document
executed in connection herewith, the terms hereof shall control.
(i) Hazardous Substances; Indemnification. Borrower shall
protect, indemnify and hold Lender, its directors, officers, employees and
agents, and any immediate successors to Lender's interest in the Collateral
and any other person who acquires any portion of the Collateral at a
foreclosure sale or otherwise through the exercise of Lender's rights and
remedies under the Loan Documents, and all directors, officers, employees
and agents of all of the aforementioned indemnified parties, harmless from
and against any and all actual or potential claims, proceedings, lawsuits,
liabilities, damages, losses, fines, penalties, judgments, awards, and
reasonable costs and expenses (including, without limitation, attorneys'
fees and costs and expenses of investigation) which arise out of or relate
in any way to any use, handling, production, transportation, disposal or
storage of any hazardous substance or solid waste affecting the Collateral
whether by Borrower or any tenant or any other person, except resulting
from the gross negligence or intentional misconduct of Lender, during the
ownership of the Collateral by Borrower, including, without limitation, (i)
all foreseeable and all unforeseeable consequential damages directly or
indirectly arising out of (A) the use, generation, storage, discharge or
disposal of the Collateral by Borrower or (B) any residual contamination
affecting any natural resource or the environment, and (ii) the cost of any
required or necessary repair, cleanup, or detoxification of the Collateral
and the preparation of any closure or other required remedial plans. In
addition, Borrower agrees that in the event the Collateral is assigned an
identification number by the Environmental Protection Agency, the
Collateral shall be solely in the name of Borrower or other responsible
person and, as between Borrower and Lender, Borrower shall assume any and
all liability for such removed Collateral. All such costs, damages, and
expenses referred to herein shall hereinafter be referred to as "Expenses".
Borrower understands and agrees that its liability to the aforementioned
indemnified parties shall arise upon the earlier to occur of (a) discovery
of any violation of the Applicable Environmental Laws or (b) the
institution of any Hazardous Materials Claim, and not upon the realization
of loss or damage, and Borrower agrees to pay to Lender from time to time,
immediately upon Lender's request, an amount equal to such Expenses, as
reasonably incurred by Lender. In addition, Borrower agrees that any
Expenses incurred by Lender and not paid by Borrower within thirty (30)
days following demand by Lender shall be additional indebtedness of
Borrower and shall be secured by the Loan Documents and shall accrue
interest at the Maximum Rate. The agreements contained herein shall
survive the repayment of the Note and the termination of the Loan
Documents. As used herein, "Hazardous Materials Claims" shall mean any and
all enforcement, clean-up, removal or other governmental or regulatory
actions or orders threatened, instituted or completed pursuant to any
Applicable Environmental Laws, together with all claims made or threatened
by any third party against Borrower or the Collateral relating to damage,
contribution, cost recovery compensation, loss or injury resulting from any
hazardous substance or solid waste affecting the Collateral.
Notwithstanding anything to the contrary contained in this subparagraph or
in the Loan Documents, it is hereby expressly agreed and understood that
Borrower's obligation to protect, indemnify and hold Lender and the other
aforementioned indemnified parties harmless from and against any and all
Hazardous Materials Claims and Expenses pursuant to this subparagraph shall
not apply to Hazardous Materials Claims or Expenses arising out of or
relating in any way to any use, handling, production, transportation,
disposal or storage of the Collateral directly caused by Lender or any such
other indemnified party during the management, operation, possession or
ownership of the Collateral by Lender or any such other indemnified party,
and not resulting from a condition existing prior to the commencement of
such management, operation, possession or ownership of the Collateral by
Lender or any such other indemnified party.
(j) Financial Terms. As used in this Agreement, all financial
and accounting terms not otherwise defined herein shall be defined and
calculated in accordance with generally accepted accounting principles
consistently applied.
(k) Expenses of Lender. Borrower will, on demand, reimburse
Lender for all expenses except as otherwise provided herein, including the
reasonable fees and expenses of legal counsel for Lender, incurred by
Lender in connection with the preparation, administration, amendment,
modification, renewal, or enforcement of this Agreement, the Note and the
Loan Documents and the collection or the attempted collection of the Note.
(l) Maximum Interest Rate. It is the intention of the parties
hereto to comply with the usury laws of the State of Texas and the United
States; accordingly, it is agreed that notwithstanding any provision to the
contrary in the Notes, or in any of the documents securing payment hereof
or otherwise relating hereto, no such provision shall require the payment
or permit the collection of interest in excess of the maximum permitted by
applicable state or Federal law. If any excess of interest in such respect
is provided for, or shall be adjudicated to be so provided for, in the
Notes or in any of the documents securing payment hereof or otherwise
relating hereto, or in the event the maturity of the indebtedness evidenced
by the Notes is accelerated in whole or in part, or in the event that all
or part of the principal or interest of the Notes shall be prepaid, so that
under any of such circumstances the amount of interest contracted for,
charged or received under the Notes or under any of the instruments
securing payment hereof or otherwise relating hereto, on the amount of
principal actually outstanding from time to time under the Notes shall
exceed the maximum amount of interest permitted by the usury laws of the
State of Texas and the United States, then, in any such event, (i) the
provisions of this paragraph shall govern and control, (ii) neither
Borrower nor its heirs, legal representatives or assigns or any other party
liable for the payment hereof shall be obligated to pay the amount of such
interest to the extent that it is in excess of the maximum amount permitted
by applicable state or Federal law, (iii) any such excess which may have
been collected shall be, at the holder's option (at maturity or in the
Event of Default hereunder), either applied as a credit against the then
unpaid principal amount hereof or refunded to Borrower, and (iv) the
effective rate of interest shall be automatically subject to reduction to
the maximum lawful contract rate allowed under the usury laws of the State
of Texas or the United States as now or hereafter construed by the courts
having jurisdiction. It is further agreed that without limitation of the
foregoing, all calculations of the rate of interest contracted for, charged
or received under the Notes or under such other documents which are made
for the purpose of determining whether such rate exceeds the maximum lawful
rate of interest, shall be made, to the extent permitted by the laws of the
State of Texas and the United States, by amortizing, prorating, allocating
and spreading in equal parts during the period of the full stated term of
the Loans, all interest at any time contracted for, charged or received
from Borrower or otherwise by the holder of the Notes in connection with
such Loans.
11. NO ORAL AGREEMENTS. THE WRITTEN LOAN AGREEMENT REPRESENTS THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Executed effective as of the date and year first set forth
hereinabove.
"BORROWER"
MCO PROPERTIES INC.,
DELAWARE CORPORATION
By: /S/ J. RICHARD ROSENBERG
J. Richard Rosenberg, Vice-President
MCO PROPERTIES L.P,
A DELAWARE LIMITED PARTNERSHIP
BY: MCO PROPERTIES INC.,
GENERAL PARTNER
By: /S/ J. RICHARD ROSENBERG
J. Richard Rosenberg,
Vice-President
HORIZON CORPORATION,
A DELAWARE CORPORATION
By: /S/ J. RICHARD ROSENBERG
J. Richard Rosenberg, Vice-President
HORIZON PROPERTIES CORPORATION,
A DELAWARE CORPORATION
By: /S/ J. RICHARD ROSENBERG
J. Richard Rosenberg, Vice-President
WESTCLIFF DEVELOPMENT CORPORATION,
a Texas corporation
By: /S/ J. RICHARD ROSENBERG
J. Richard Rosenberg, Vice-President
"LENDER"
SOUTHWEST BANK OF TEXAS, N.A.,
A NATIONAL BANKING ASSOCIATION
By:/S/ CHRISTOPHER M. DENISON
Christopher M. Denison
Vice-President
List of Loan Documents
1. Loan Agreement
2. $14,000,000.00 Renewal and Modification Promissory Note (Revolving
Credit)
3. Transfer of Notes and Liens (Texas; Arizona; California; New Mexico
and Nevada)
4. Transfer of Collateral Assignment of Notes and Liens (Texas; Arizona;
California; New Mexico and Nevada)
5. Modification and Restatement Deeds of Trust, Security Agreements,
Fixture Filing and Assignment of Rents (Texas; Arizona; California;
New Mexico and Nevada)
6. Collateral Assignment of Notes and Liens (Texas; Arizona; California;
New Mexico and Nevada)
7. Security Agreement
8. UCC-1, UCC-2 or UCC-3 Financing Statements (Deeds of Trust -- all
counties)
9. UCC-1, UCC-2 or UCC-3 Financing Statements (Deeds of Trust --
Secretaries of State of Texas, Arizona, California, New Mexico and
Nevada)
10. UCC-1, UCC-2 or UCC-3 Financing Statements (Notes - Texas, Arizona,
California, New Mexico and Nevada Secretaries of State)
11. Partnership/Corporate Resolutions (each Borrower)
12. Indemnity Agreement
13. Note Maker Estoppels (in form and quantity satisfactory to Lender)
14. Arbitration Agreement
15. Opinion of Borrower's Counsel
16. Notice of Invalidity of Oral Agreements
17. Loans to One Borrower Affidavit
18. Instructions to Title Company
List of Exhibits
A - Definitions
B - Borrowing Base Report & Compliance Certificate
C - Description of Real Estate Notes
D- Description of Real Estate Collateral
<PAGE>
EXHIBIT "A"
DEFINITIONS
"BORROWER'S LOAN LIMIT", as used herein, shall mean the Borrowing Base
(as defined below) less (i) the total principal amount outstanding under
the Loan and (ii) the face amount of all Letters of Credit issued and
outstanding.
"BORROWING BASE", as used herein, shall mean the sum of: (i) 80% of
Borrower's Eligible Real Estate Notes (as defined below) on the date of a
request for a Loan advance; plus (ii) 60% of the value (as determined by
Lender) of the Real Estate Collateral owned by MCO Properties L.P.; plus
(iii) 50% of the value (as determined by Lender) of the Real Estate
Collateral owned by MCO Properties Inc., Horizon Properties Corporation and
Westcliff Development Corporation.
As used herein, "ELIGIBLE" Real Estate Note, means (i) such Real
Estate Note has a minimum cash equity of 20% (i.e., the principal balance
is less than 80% of the original purchase price), (ii) such Real Estate
Note has an interest rate of at least the then current prime rate as listed
in the "Wall Street Journal" (as such rate changes from time to time),
(iii) such Real Estate Note is not currently delinquent for 90 days or
more, (iv) the maturity date of such Real Estate Note has not been
accelerated, and no event of default or event which could, with the giving
of notice or the passage of time or both, constitute an event of default,
has occurred under such Real Estate Note, and/or any document securing such
Real Estate Note, (v) there are no late charges presently unpaid for 90
days or more on such Real Estate Note, and the obligors on the Real Estate
Note have no defenses to or rights of offset against their obligations
under such Real Estate Note, and/or any document securing such Real Estate
Note, (vi) there is no indebtedness owing to the Borrower or any related
party which is secured by any deed of trust or mortgage securing the Real
Estate Note other than the indebtedness secured by such Real Estate Note,
and the Borrower must not have made any agreement to extend any further
credit to be secured by such deed of trust or mortgage, or any other lien
upon property described in such deed of trust or mortgage, (vii) there are
no outstanding liens, encumbrances, security interests or claims of any
kind against or in respect of such Real Estate Note that are not
subordinate to the lien securing such, and (viii) Borrower has provided
Lender with the items described in Section 3(a)(iii), (iv), (v), (vi) and
(vii) hereof, all of which are satisfactory to Lender, in its sole
discretion.
<PAGE>
EXHIBIT "B"
BORROWING BASE REPORT
AND COMPLIANCE CERTIFICATE
I. Real Estate Notes: $____________________
Less: Ineligible Real
Estate Notes - $____________________
Eligible Real Estate Notes = $____________________
II. Real Estate Collateral of MCO
Properties L.P.: $____________________
III. Real Estate Collateral of MCO
related entities: $____________________
IV. 80% x Eligible Real Estate Notes $____________________
60% x Real Estate Collateral of
MCO Properties L.P.: + $____________________
50% x Real Estate Collateral of
other entities: + $____________________
Borrower's Loan Limit: = $____________________
(maximum $14,000,000.00)
V. Current Principal Balance: $____________________
VI. Available Funds: $____________________
VII. Advance Request: $____________________
VIII.Total Outstanding After Advance: $____________________
---------------
I. Tangible Net Worth $____________________
II. Debt to Worth Ratio $____________________
---------------
The undersigned officer of Borrower, hereby certifies to Lender that
(i) the computations set forth above are true, correct and complete as of
the date set forth above or as of the date of execution hereof, as the case
may be, (ii) such computations have been made in full compliance with and
conformity to the Letter Loan Agreement (the "Loan Agreement") between
Borrower and Lender, (iii) the matters set forth in Paragraph 3 of the Loan
Agreement are true and correct, and (iv) Borrower is not in default under
the Loan Agreement.
All capitalized terms used herein which have been defined in the Loan
Agreement have been used in accordance with the definitions ascribed to
them in the Loan Agreement.
EXECUTED this ____ day of _____________, 19___.
[BORROWER]
By:
Name:
Title:
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 253,900
<SECURITIES> 27,000
<RECEIVABLES> 220,400
<ALLOWANCES> 6,400
<INVENTORY> 573,600
<CURRENT-ASSETS> 1,340,600
<PP&E> 2,222,200
<DEPRECIATION> 902,600
<TOTAL-ASSETS> 4,046,600
<CURRENT-LIABILITIES> 633,200
<BONDS> 1,976,700
0
300
<COMMON> 5,000
<OTHER-SE> (38,400)
<TOTAL-LIABILITY-AND-EQUITY> 4,046,600
<SALES> 1,992,400
<TOTAL-REVENUES> 1,992,400
<CGS> 1,617,900
<TOTAL-COSTS> 1,617,900
<OTHER-EXPENSES> 211,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158,700
<INCOME-PRETAX> 28,600
<INCOME-TAX> 1,900
<INCOME-CONTINUING> 12,300
<DISCONTINUED> 0
<EXTRAORDINARY> (42,500)
<CHANGES> 0
<NET-INCOME> (30,200)
<EPS-PRIMARY> (4.31)
<EPS-DILUTED> (3.86)
</TABLE>
