Back to GetFilings.com
- --------------------------------------------------------------------------------
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 March 31, 2005
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 organization) Identification Number)
1330 Post Oak Blvd., Suite 2000
Houston, Texas 77056
(Address of Principal Executive Offices) (Zip Code)
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 |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |X| No |_|
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, as of the last business day of the registrant's most recently
completed second fiscal quarter: $82.4 million.
Number of shares of common stock outstanding at May 1, 2005: 5,976,542
-------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statement of Cash Flows
Condensed Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Security and Use of Proceeds
Item 6. Exhibits
Signatures
APPENDIX A - GLOSSARY OF DEFINED TERMS
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In millions of dollars, except share information)
March 31, December 31,
2005 2004
---------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents ($4.5 and $3.1, restricted, respectively,).................... $ 31.5 $ 21.4
Marketable securities and other short-term investments ($27.3 and $25.1, restricted,
respectively)........................................................................ 130.6 131.7
Trade and other receivables, net of allowance of $0.6 and $0.6, respectively............ 19.4 16.5
Inventories:
Lumber............................................................................... 12.8 17.0
Logs................................................................................. 2.7 7.2
Real estate held for sale............................................................... 16.7 21.1
Prepaid expenses and other current assets............................................... 15.1 16.6
---------- ------------
Total current assets............................................................... 228.8 231.5
Property, plant and equipment, net of accumulated depreciation of $190.2 and
$183.4, respectively.................................................................... 366.2 370.2
Timber and timberlands, net of accumulated depletion of $223.9 and $222.1, 213.2 213.6
respectively............................................................................
Real estate................................................................................ 56.0 52.5
Deferred income taxes...................................................................... 94.8 94.8
Restricted cash, marketable securities and other investments............................... 4.9 15.6
Intangible assets.......................................................................... 3.6 3.8
Long-term receivables and other assets..................................................... 32.8 33.2
---------- ------------
$ 1,000.3 $ 1,015.2
========== ============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable........................................................................ $ 10.3 $ 14.4
Accrued interest........................................................................ 11.8 24.9
Other accrued liabilities............................................................... 38.5 39.9
Short-term borrowings and current maturities of long-term debt.......................... 73.6 51.4
---------- ------------
Total current liabilities.......................................................... 134.2 130.6
Long-term debt, less current maturities.................................................... 899.2 912.0
Accrued pension and other postretirement benefits.......................................... 42.5 41.8
Losses in excess of investment in Kaiser................................................... 516.2 516.2
Other noncurrent liabilities............................................................... 79.6 71.7
---------- ------------
Total liabilities.................................................................. 1,671.7 1,672.3
---------- ------------
Commitments and contingencies (see Note 8)
Stockholders' deficit:
Preferred stock, $0.50 par value; $0.75 liquidation preference; 2,500,000
shares authorized; Class A $0.05 Non-Cumulative Participating Convertible
Preferred Stock; 669,019 shares issued; 668,119 and 668,174 shares
outstanding, respectively............................................................ 0.3 0.3
Common stock, $0.50 par value; 13,000,000 shares authorized; 10,063,359 shares
issued; 5,976,542 and 5,976,487 shares outstanding, respectively..................... 5.0 5.0
Additional capital...................................................................... 225.3 225.3
Accumulated deficit..................................................................... (680.6) (666.4)
Accumulated other comprehensive loss.................................................... (96.7) (96.6)
Treasury stock, at cost (shares held: preferred - 845; common - 4,086,817 and
4,086,872, respectively) ............................................................ (124.7) (124.7)
---------- ------------
Total stockholders' deficit........................................................ (671.4) (657.1)
---------- ------------
$ 1,000.3 $ 1,015.2
========== ============
The accompanying notes are an integral part of these financial statements.
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions of dollars, except per share information)
Three Months Ended
March 31,
--------------------------
2005 2004
------------ ------------
(Unaudited)
Net sales:
Forest products..................................................................... $ 47.3 $ 43.4
Real estate......................................................................... 22.8 11.0
Racing.............................................................................. 12.9 14.5
------------ ------------
83.0 68.9
------------ ------------
Cost and expenses:
Cost of sales and operations:
Forest products.................................................................. 42.1 32.0
Real estate...................................................................... 6.8 4.6
Racing........................................................................... 10.6 11.5
Selling, general and administrative expenses........................................ 11.8 18.7
Depreciation, depletion and amortization............................................ 8.9 8.7
------------ ------------
80.2 75.5
------------ ------------
Operating income (loss):
Forest products..................................................................... (2.8) (0.3)
Real estate......................................................................... 6.7 (1.8)
Racing.............................................................................. (0.2) 0.6
Corporate........................................................................... (0.9) (5.1)
------------ ------------
2.8 (6.6)
Other income (expense):
Investment and interest income...................................................... 1.2 3.8
Other income........................................................................ - 1.3
Interest expense.................................................................... (17.7) (18.2)
Amortization of deferred financing costs............................................ (0.5) (0.6)
------------ ------------
Loss before income taxes............................................................... (14.2) (20.3)
Provision for income taxes............................................................. - -
------------ ------------
Net loss............................................................................... $ (14.2) $ (20.3)
============ ============
Basic and diluted loss per common and common equivalent share.......................... $ (2.38) $ (3.40)
============ ============
The accompanying notes are an integral part of these financial statements.
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions of dollars)
Three Months Ended
March 31,
-------------------------
2005 2004
----------- ------------
(Unaudited)
Cash flows from operating activities:
Net loss............................................................................. $ (14.2) $ (20.3)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation, depletion and amortization............................................. 8.9 8.7
Non-cash stock-based compensation (benefit) expense.................................. (1.6) 2.2
Net gains on marketable securities................................................... (0.2) (2.0)
Equity in loss (earnings) of unconsolidated affiliates, net of dividends............. 0.2 (1.0)
Amortization of deferred financing costs and discounts on long-term debt............. 0.5 0.6
Increase (decrease) in cash resulting from changes in:
Receivables..................................................................... (2.6) (2.9)
Inventories..................................................................... 8.5 0.5
Prepaid expenses and other assets............................................... 1.5 2.0
Accounts payable................................................................ (4.2) (0.7)
Other accrued liabilities....................................................... (1.3) 1.1
Accrued interest................................................................ (13.1) (13.8)
Long-term assets and long-term liabilities...................................... 10.8 1.2
Other........................................................................... (0.1) (0.6)
----------- ------------
Net cash used for operating activities.......................................... (6.9) (25.0)
----------- ------------
Cash flows from investing activities:
Net sales of marketable securities and other investments............................. 3.3 8.6
Capital expenditures................................................................. (3.3) (14.2)
Other................................................................................ (0.1) 0.3
----------- ------------
Net cash used for investing activities.......................................... (0.1) (5.3)
----------- ------------
Cash flows from financing activities:
Proceeds from issuances of long-term debt............................................ 2.4 0.5
Redemptions and repurchases of, and principal payments on, long-term debt............ (14.8) (15.5)
Borrowings under revolving and short-term credit facilities.......................... 21.5 33.3
Restricted cash withdrawals, net..................................................... 8.6 10.1
Other................................................................................ (0.6) (0.6)
----------- -----------
Net cash provided by financing activities....................................... 17.1 27.8
----------- -----------
Net increase (decrease) in cash and cash equivalents.................................... 10.1 (2.5)
Cash and cash equivalents at beginning of the period.................................... 21.4 13.8
----------- ------------
Cash and cash equivalents at end of the period.......................................... $ 31.5 $ 11.3
=========== ============
Supplemental disclosure of non-cash investing and financial activities:
Repurchases of debt using restricted cash............................................ $ - $ 3.6
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest........................................... $ 30.8 $ 32.1
The accompanying notes are an integral part of these financial statements.
MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
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 read 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 majority and wholly owned subsidiaries (but exclusive of Kaiser and
its subsidiaries), unless otherwise indicated or the context indicates
otherwise. All references to specific entities refer to the respective companies
and their subsidiaries, unless otherwise indicated or the context indicates
otherwise. Accounting measurements at interim dates inherently involve greater
reliance on estimates than at year end. The results of operations for the
interim periods presented are not necessarily indicative of the results to be
expected for the entire year.
The consolidated financial statements included herein are unaudited;
however, they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary for a fair presentation of the consolidated
financial position of the Company at March 31, 2005, the consolidated results of
operations for the three months ended March 31, 2005 and 2004, and the
consolidated cash flows for the three months ended March 31, 2005 and 2004.
Financial Difficulties of Certain Forest Products Entities
Regulatory and environmental matters as well as legal actions have played
and are expected to continue to play a significant role in the Company's forest
products operations. Scotia LLC has previously experienced delays in the
approval of its THPs as the result of regulatory compliance and related
litigation, and expects these difficulties to persist. Moreover, the Company
expects a recurrence of the additional delays that have recently been
experienced in harvesting on previously-approved THPs due to regulatory
oversight by the North Coast Water Board (see below). The foregoing matters have
in the past adversely affected timber harvest and timber harvesting and other
costs; these effects are expected to continue.
The North Coast Water Board is requiring Palco and Scotia LLC to apply
various waste discharge reporting, mitigation and erosion control requirements
in respect of timber harvesting activities in several watersheds, and may impose
additional measures in the future. The North Coast Water Board in December 2003
directed its staff to formulate WWDRs for the Freshwater and Elk River
watersheds on the Scotia LLC Timberlands. The WWDRs have not yet been
formulated, and, as a result, the North Coast Water Board has failed to release
for harvest THPs already approved by the other government agencies which review
Scotia LLC's THPs and significantly delayed the release of a substantial number
of other previously-approved THPs. The THPs approved for release by the North
Coast Water Board restrict the harvest allowed to only 75% of the harvest limit
established by the CDF for the Freshwater and Elk River watersheds. Moreover, a
hearing officer acting on behalf of the State Water Board has issued a stay
order which precludes harvest on a portion of the THPs that were released for
harvest by the North Coast Water Board. Palco and Scotia LLC are continuing
efforts to obtain clearance from the North Coast Water Board of the remaining
THPs, which constitute a significant portion of the harvest planned for the
first six months of 2005. Palco and Scotia LLC are also in the process of
appealing the decision of the State Water Board hearing officer. There can be no
assurance that these efforts will be successful. Additionally, should the
Freshwater-Elk River WWDRs not be formulated during 2005 or in the first few
months of 2006, there could be a material adverse impact on Palco's and Scotia
LLC's future cash flows from operations. See Note 8 for further discussion of
these matters.
The foregoing matters have materially adversely impacted the cash flows of
both Scotia LLC and Palco. Scotia LLC estimates that its cash flows from
operations, together with funds available under the Scotia LLC Line of Credit,
will be inadequate to pay all of the interest due on the July 20, 2005 payment
date for the Timber Notes, which would be an event of default under the Timber
Notes Indenture. Under the new Revolving Credit Facility and Term Loan
(discussed below), Palco is permitted to invest up to $5.0 million in Scotia
LLC. However, there can be no assurance that Palco will make such investment in
whole or part.
In the event of a failure to pay interest on the Timber Notes in full when
due, the Trustee under the Timber Notes Indenture or the holders of at least 25%
of the aggregate outstanding principal amount of the Timber Notes may cause all
principal, interest and other amounts related to the Timber Notes to become
immediately due and payable. Also, in the event of a failure by Palco or Scotia
LLC to perform its respective covenants or agreements under the Master Purchase
Agreement or the failure by Palco to perform its covenants or agreements under
the Services Agreement, which failure continues for 30 days after notice from
the Trustee or the holders of 25% or more of the outstanding principal amount of
the Timber Notes, the holders of a majority of the aggregate outstanding
principal amount of the Timber Notes may cause all principal, interest and other
amounts related to the Timber Notes to become immediately due and payable. In
the event of any such acceleration, the agent under the Scotia LLC Line of
Credit may also accelerate the advances then outstanding thereunder. If such
accelerations of Timber Notes and/or advances under the Scotia LLC Line of
Credit occur, the Trustee may exercise all rights under the Timber Notes
Indenture and related security documents, including applying funds to pay
accelerated amounts, and selling the Scotia LLC Timberlands and other assets and
using the proceeds thereof to pay accelerated amounts. In the event that Scotia
LLC were to seek protection by filing under the Bankruptcy Code, all amounts
related to the Timber Notes would become immediately due and payable under the
Timber Notes Indenture and all advances under the Scotia LLC Line of Credit
agreement could be accelerated. The foregoing rights of the Trustee and holders
of Timber Notes are subject to the rights of Scotia LLC under the Bankruptcy
Code.
Scotia LLC has entered into an agreement for UBS Securities LLC to assist
in seeking to restructure its obligations with respect to its outstanding Timber
Notes. There can be no assurance that Scotia LLC will be successful in its
efforts to restructure its Timber Notes.
At March 31, 2005, Palco continued to be in default under the Palco Credit
Agreement and its liquidity crisis continued. Previously-granted waivers of
default were subsequently extended through April 22, 2005. On April 19, 2005,
Palco and Britt, as borrowers, closed the five-year $30.0 million secured,
asset-based Revolving Credit Facility and the five-year $35.0 million secured
Term Loan. The Term Loan was fully funded on April 19, 2005 and the Borrowers
used approximately $10.8 million of the funds from the Term Loan to pay off
amounts previously borrowed under the Palco Credit Agreement and terminated that
facility. As of April 30, 2005, no borrowings had been made under the Revolving
Credit Facility. Palco estimates that its cash flow from operations will not
provide sufficient liquidity to fund its operations until the fourth quarter of
2006. Accordingly, Palco expects to be dependent on the funds available under
the Term Loan and Revolving Credit Facility to fund its working capital
requirements in 2005 and 2006. Borrowings under the Revolving Credit Facility
are limited to the sum of 85% of the Borrowers' eligible accounts receivable
plus 75% of the Borrowers' eligible inventories (up to a maximum of $30.0
million, subject to limitations such as the ability of the lender to establish
reasonable reserves). Additionally, both the Term Loan and the Revolving Credit
Facility contain EBITDA maintenance covenants that, if not met, could trigger a
mandatory prepayment of the borrowings. The operating cash flow estimates used
to establish the EBITDA maintenance covenants are subject to a number of
assumptions about future operating cash flow and actual results could differ
from these estimates. Accordingly, the availability of these funds is largely
dependent on Palco's ability to harvest adequate timber from the Scotia LLC
Timberlands and reduce operating costs. See Note 4 for further discussion of
these new debt facilities.
In the event of a Scotia LLC default under the Timber Note Indenture or a
future Palco liquidity shortfall, Palco and Scotia LLC could be forced to take
extraordinary actions, which may include: reducing expenditures by laying off
employees and shutting down various activities; seeking other sources of
liquidity, such as from asset sales; and seeking protection by filing under the
Bankruptcy Code. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
On February 7, 2005, Moody's lowered the ratings on the Class A-1 Timber
Notes from A1 to Baa2; the Class A-2 Timber Notes from A3 to Baa3; and the Class
A-3 Timber Notes from Baa2 to Bal. On April 7, 2005, S&P announced that it
had further lowered its ratings on all classes of the Timber Notes to CCC-. On
December 8, 2004, S&P lowered Palco's credit rating from B- to CCC+ and on
April 7, 2005, S&P announced that it had further lowered Palco's credit
rating to CCC- (which rating it affirmed on April 28, 2005). As a result of the
S&P credit actions, Palco may be required to post a security deposit for
workers compensation liabilities in July 2005 in the amount of $9.9 million. If
Palco's credit rating is raised to B- or better, or if a waiver of this
requirement is allowed under applicable law, then posting of such a security
deposit may not be necessary. However, there can be no assurance that such a
security deposit will not be required. Palco management is also evaluating
whether other potential obligations or unanticipated adverse financial
consequences may result from the S&P credit actions described above.
The liquidity issues being experienced by Scotia LLC, and those recently
experienced by Palco should they recur, could result in claims against and could
have adverse impacts on MAXXAM Parent, MGHI and/or MGI. For example, under ERISA
law, were Palco to terminate its pension plan, MAXXAM Parent and its wholly
owned subsidiaries would be jointly and severally liable for any unfunded
pension plan obligations. The unfunded obligation attributable to Palco's
pension plan as of December 31, 2004, is estimated to have been in the range of
approximately $35 million based upon annuity placement interest rate assumptions
at that time. In addition, it is possible that certain transactions could be
entered into in connection with a potential restructuring or reorganization of
Palco or Scotia LLC, such as a sale of all or a portion of the equity ownership
in Palco and/or Scotia LLC, a sale of a substantial portion of Palco's and/or
Scotia LLC's assets and/or a cancellation of some or all of Palco's and/or
Scotia LLC's indebtedness, which could require the utilization of all or a
substantial portion of, or the loss of a significant portion of, the Company's
net operating losses for federal and state income tax purposes and could require
tax payments in future periods.
In addition, there can be no assurance that certain other pending legal,
regulatory and environmental matters or future governmental regulations,
legislation or judicial or administrative decisions, adverse weather conditions,
or low lumber or log prices, will not have a material adverse effect on the
Company's financial condition, results of operations or liquidity. See Note 8
for further discussion regarding regulatory and legislative matters and legal
proceedings relating to the Company's forest products operations.
Under generally accepted accounting principles, consolidation is generally
required for investments of more than 50% of the outstanding voting stock of an
investee, except when control is not held by the majority owner. Under these
rules, legal reorganization or bankruptcy represent conditions which can
preclude consolidation in instances where control rests with the bankruptcy
court, rather than the majority owner. As discussed above, Palco and Scotia
LLC's cash flows have been adversely impacted by ongoing delays in approvals
from the North Coast Water Board. If Scotia LLC is unable to make its July
interest payment or were Palco's liquidity problems to recur, one of the actions
that would be considered is seeking protection by filing for bankruptcy. Were
this to occur, the financial results of the subsidiaries which file for
bankruptcy would be deconsolidated on the date of such filing, and the Company
would begin reporting its investments in such subsidiaries using the cost
method. If Palco and/or Scotia LLC were among the subsidiaries which filed for
bankruptcy, the resulting impact on the Company's financial statements would be
significant.
The following condensed pro forma financial information reflects the
Company's results as if MGI and its subsidiaries are not consolidated, and the
impact of reporting the Company's investment in MGI and its subsidiaries on the
cost method (in millions). This information is on a pro forma basis as of March
31, 2005 only, however, and the actual impact of a deconsolidation at some point
in the future would differ. Furthermore, this pro forma information assumes that
MGI and all of its subsidiaries file for bankruptcy, rather than the impact of
only one or more subsidiaries filing.
Three Months
Ended
March 31, 2005
--------------
Revenues........................................................................................... $ 35.7
Costs and expenses................................................................................. (30.0)
--------------
Operating income................................................................................... 5.7
MAXXAM's equity in MGI's losses.................................................................... (16.3)
Other expenses - net............................................................................... (3.6)
Income tax benefit................................................................................. -
--------------
Net loss........................................................................................... $ (14.2)
==============
March 31,
2005
--------------
Current assets..................................................................................... $ 153.2
Property, plant, and equipment (net)............................................................... 250.8
Other assets....................................................................................... 173.0
--------------
Total assets................................................................................. $ 577.0
==============
Current liabilities................................................................................ 37.5
Long-term debt, less current maturities............................................................ 223.3
Other liabilities.................................................................................. 82.9
Losses recognized in excess of investment in MGI and certain intercompany items.................... 388.5
Losses recognized in excess of investment in Kaiser................................................ 516.2
--------------
Total liabilities............................................................................ 1,248.4
Stockholders' deficit.............................................................................. (671.4)
--------------
Total liabilities and stockholders' deficit.................................................. $ 577.0
==============
In the event that MGI and /or any of it subsidiaries file for bankruptcy,
the Company believes that it is not probable that it would be obligated to fund
losses related to its investment in such subsidiaries.
Deconsolidation of Kaiser
On February 12, 2002, Kaiser and certain of its subsidiaries filed for
reorganization under Chapter 11 of the Bankruptcy Code. As a result, the Company
discontinued consolidating Kaiser's financial results beginning February 12,
2002, and the Company began reporting its investment in Kaiser using the cost
method, under which the investment is reflected as a single amount on the
Company's balance sheet of $(516.2) million, and the recording of earnings or
losses from Kaiser was discontinued after February 11, 2002.
Through February 11, 2002, under generally accepted principles of
consolidation, the Company had recognized losses in excess of its investment in
Kaiser of $516.2 million. Since Kaiser's results are no longer consolidated and
the Company believes that it is not probable that it will be obligated to fund
losses related to its investment in Kaiser, any adjustments reflected in
Kaiser's financial statements subsequent to February 12, 2002 (relating to the
recoverability and classification of recorded asset amounts and classification
of liabilities or the effects on existing stockholders' deficit as well as
adjustments made to Kaiser's financial information for loss contingencies and
other matters), are not expected to affect the Company's financial results.
The Company expects it will consider reversal of its losses in excess of
its investment in Kaiser when either: (1) Kaiser's bankruptcy is resolved and
the amount of the Company's remaining investment in Kaiser is determined or (2)
the Company disposes of its shares of Kaiser common stock. Accordingly, these
consolidated financial statements do not reflect any adjustments related to the
deconsolidation of Kaiser other than presenting the Company's investment in
Kaiser using the cost method. When either of the events described above occurs,
the Company will re-evaluate the appropriate accounting treatment of its
investment in Kaiser based upon the facts and circumstances at such time. It is
likely that the Company's ownership interest in Kaiser will be cancelled. In
such event, the Company will reverse the $516.2 million of losses in excess of
its investment in Kaiser and recognize the entire amount in income for the
period. Such benefit would be reduced, however, by losses, if any, which the
Company estimates it would be obligated to fund. See Note 7 for further
discussion of the Company's investment in Kaiser.
Use of Estimates and Assumptions
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions that affect (1) the reported amounts of assets and
liabilities, (2) the disclosure of contingent assets and liabilities known to
exist as of the date the financial statements are published and (3) the reported
amount of revenues and expenses recognized during each period presented. The
Company reviews all significant estimates affecting its consolidated financial
statements on a recurring basis and records the effect of any necessary
adjustments prior to filing the consolidated financial statements with the
Securities and Exchange Commission. Adjustments made to estimates often relate
to improved information not previously available. Uncertainties regarding such
estimates and related assumptions are inherent in the preparation of the
Company's consolidated financial statements; accordingly, actual results could
differ from these estimates.
Risks and uncertainties are inherent with respect to the ultimate outcome
of the matters discussed in Note 8. The results of a resolution of such
uncertainties could have a material effect on the Company's consolidated
financial position, results of operations or liquidity. In addition,
uncertainties related to the projection of future taxable income could affect
the realization of the Company's deferred tax assets. Estimates of future
benefit payments used to measure the Company's pension and other postretirement
benefit obligations are subject to a number of assumptions about future
experience, as are the estimated future cash flows projected in the evaluation
of long-lived assets for possible impairment. To the extent there are material
differences between these estimates and actual results, the Company's financial
statements or liquidity could be affected.
Reclassifications
Certain reclassifications have been made to prior periods' consolidated
financial statements to be consistent with the current period's presentation.
The reclassification of prior period balances includes $10.9 million of auction
rate securities which were reclassified from cash and cash equivalents to
marketable securities in the Consolidated Statement of Cash Flows.
2. New Accounting Standards
Postretirement Medical Costs
In May 2004, the FASB issued FSP FAS 106-2 related to the Prescription Drug
Act. FSP FAS 106-2 applies only to sponsors of single-employer defined benefit
postretirement health care plans for which (1) the employer has concluded that
prescription drug benefits available under the plan to some or all participants,
for some or all future years, are "actuarially equivalent" to Medicare Part D
and thus qualify for the subsidy provided by the Prescription Drug Act, and (2)
the expected subsidy will offset or reduce the employer's share of the cost of
the underlying postretirement prescription drug coverage on which the subsidy is
based. FSP FAS 106-2 provides guidance on the accounting for the effects of the
Prescription Drug Act on a company's accumulated postretirement benefit
obligation. In addition, FSP FAS 106-2 addresses accounting for plan amendments
and requires certain financial statement disclosures regarding the Prescription
Drug Act and its effects.
FSP FAS 106-2 was effective for the first interim period beginning after
June 15, 2004. The Company believes that the benefits provided by the Company's
postretirement medical plan are actuarially equivalent to Medicare Part D;
however, based on the proposed regulations issued to date and the Company's
understanding of the Prescription Drug Act, the Company is uncertain as to the
potential future subsidies which may be realized under the Prescription Drug
Act. Therefore, measures of the accumulated postretirement benefit obligation
and net periodic benefit cost included herein do not reflect any amount
associated with potential subsidies under the Prescription Drug Act. The Company
expects to be able to determine amounts of potential subsidies when additional
clarification and final regulations are issued.
Accounting for Stock Options
In December 2004, the FASB issued SFAS No. 123(r), Share Based Payments.
SFAS No. 123(r) will require compensation costs related to share-based payments
determined by the fair value of the equity or liability instruments issued on
the grant date. In addition, liability awards will be remeasured each reporting
period. Compensation cost will be recognized over the period that an employee
provides service in exchange for the award. SFAS No. 123(r) also requires that
for the portion of outstanding awards for which the requisite service has not
yet been rendered, compensation cost is recognized as of the required effective
date based on the grant-date fair value of those awards. SFAS No. 123(r) applies
to all awards granted after the required effective date. SFAS No. 123(r) was
originally effective as of the first interim or annual reporting period that
begins after June 15, 2005; however, the SEC has deferred the required effective
date until the first interim or annual reporting period of the first fiscal year
beginning on or after June 15, 2005, making it applicable to the Company on
January 1, 2006. The Company is in the process of evaluating the effects of this
Statement on its financial condition and results of operations.
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies that abnormal amounts
of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and requires the
allocation of fixed production overhead to inventory based on the normal
capacity of the production facilities. The new Statement is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company is in the process of evaluating the effects of this Statement on its
financial condition and results of operations.
Exchanges of Nonmonetary Assets
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29. SFAS No. 153 is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. Opinion No. 29 provided an exception to this
principle for exchanges of similar productive assets. Under Opinion No. 29, an
exchange of a productive asset was based on the recorded amount of the asset
relinquished. SFAS No. 153 eliminated this exception and replaced it with an
exception for exchanges of nonmonetary assets that do not have commercial
substance. The new Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Management does not
expect that adoption of this Statement will have a material impact on the
Company's financial condition and results of operations.
3. Segment Information and Other Items
Net sales and operating income (loss) for each reportable segment are
presented in the Consolidated Statement of Operations. Operating income (loss)
for "Corporate" represents general and administrative expenses not directly
attributable to the reportable segments. The amounts reflected in the
"Corporate" column also serve to reconcile the total of the reportable segments'
amounts to totals in the Company's consolidated financial statements.
The following table presents certain other unaudited financial information
by reportable segment (in millions).
Reportable Segments
---------------------------
Forest Real Consolidated
Products Estate Racing Corporate Total
--------- ------ -------- ----------- -------------
Depreciation, depletion and amortization for the three months ended:
March 31, 2005.......................................... $ 4.9 $ 3.6 $ 0.4 $ - $ 8.9
March 31, 2004.......................................... 4.8 3.5 0.4 - 8.7
Total assets as of:
March 31, 2005.......................................... 423.3 346.6 33.9 196.5 1,000.3
December 31, 2004....................................... 440.0 338.2 33.2 203.8 1,015.2
Forest Products
In March 2005, Palco entered into a $3.1 million settlement of a lawsuit
filed by Palco against several insurance companies for reimbursement of
settlement payments and defense costs related to a legal matter which was
concluded in 2002. As of April 30, 2005, Palco has received $1.4 million and,
under the terms of the agreement, is required to be paid the remaining $1.7
million by May 18, 2005. This settlement was fully recognized in operating
income, as a reduction of selling, general and administrative expenses, in the
first quarter of 2005.
Palco has announced the permanent closure of its Carlotta and Fortuna
mills. In connection therewith, certain equipment from these mills is being and
will be moved to Palco's new mill in Scotia. Management is considering
alternative uses for the properties and remaining equipment, including sales to
third parties, and future write-downs of certain assets may be required if the
net book value (less costs to sell) of the remaining assets exceeds their
estimated realizable values.
Real Estate
Operating income from real estate operations improved for the first quarter
of 2005 as compared to the same period of 2004 primarily due to receipt and
recognition of deferred profits at the Company's Palmas development and higher
sales at the Company's Mirada and Fountain Hills developments.
Racing
Net sales for the racing operations declined $1.6 million for the first
quarter of 2005 as compared to the same period in 2004, primarily due to lower
average daily attendance and reduced simulcasting wagering.
Other Items not Directly Related to Industry Segments
The Corporate segment's operating results improved primarily due to a $1.6
million benefit recognized in the first quarter of 2005 related to changes in
stock-based compensation expense, which is adjusted as the market value of the
Company's Common Stock changes. In the first quarter of 2004, expense of $2.2
million was recognized related to changes in stock-based compensation expense.
Additionally, the first quarter of 2004 included $0.8 million of lease
termination costs.
4. Debt
Palco
At March 31, 2005, $12.3 million in borrowings and $0.3 million in letters
of credit were outstanding under the Palco Credit Agreement. As of December 31,
2004 and March 31, 2005, Palco was in default under the Palco Credit Agreement,
but obtained limited waivers of the default through April 22, 2005.
On April 19, 2005, the Borrowers closed the Revolving Credit Facility and
the Term Loan. The Term Loan was fully funded on April 19, 2005 and the
Borrowers used approximately $10.8 million of the funds from the Term Loan to
pay off amounts previously borrowed under the Palco Credit Agreement and
terminated that facility. Deferred loan costs of $1.3 million related to the
Palco Credit Agreement were written off in April 2005 and direct loan costs of
$2.3 million related to the Revolving Credit Facility and the Term Loan were
capitalized and will be amortized using the effective interest rate method
beginning in April 2005. As of April 30, 2005, no borrowings had been made under
the Revolving Credit Facility.
Borrowings under the Revolving Credit Facility are limited to the sum of
85% of the Borrowers' eligible accounts receivable plus 75% of the Borrowers'
eligible inventories (up to a maximum of $30 million, subject to limitations
such as the ability of the lender to establish reasonable reserves). Loans under
the Revolving Credit Facility will bear interest, at the Borrowers' option, at
the rate of LIBOR plus 2.25% or prime plus 0.50%. The Revolving Credit Facility
matures on April 19, 2010. The Term Loan bears interest, at the Borrowers'
option, at the rate of LIBOR plus 6% or prime plus 5%. The Term Loan is
repayable in quarterly installments of $87,500 each, beginning on June 1, 2005.
A balloon payment of the remaining principal balance is due on April 19, 2010.
The Revolving Credit Facility and Term Loan are each secured by a security
interest in the stock of Palco held by its immediate parent, MGI, and
substantially all of the assets of the Borrowers (other than Palco's equity
interest in Scotia LLC). The Revolving Credit Facility and the Term Loan contain
substantially identical restrictive covenants that limit the Borrowers' ability
to incur debt, grant liens, make investments, pay dividends, make capital
expenditures in excess of stated amounts or merge or consolidate, and require
the Borrowers to maintain minimum levels of EBITDA throughout the life of the
loans. The Revolving Credit Facility and the Term Loan contain customary events
of default and customary remedies with respect to the occurrence of an event of
default.
The Revolving Credit Facility includes a prepayment premium of 1% payable
in connection with any prepayment or reduction in the commitment occurring
within the first two years. The Term Loan includes prepayment premiums of 4%,
3%, 2% and 1% payable in connection with any prepayment of the Term Loan that
occurs during the first, second, third and fourth years, respectively. No
prepayment premium will be payable under either credit facility to a lender who
is also a lender under any refinancing used to prepay such credit facility. The
Term Loan also requires certain mandatory prepayments in connection with asset
sales by Borrowers.
Under the new Revolving Credit Facility and Term Loan, Palco is permitted
to invest up to $5.0 million in Scotia LLC. However, there can be no assurance
that Palco will make such investment in whole or part.
Scotia LLC
On the note payment date in January 2005, Scotia LLC used the funds
available under the Scotia LLC Line of Credit to pay all of the $28.5 million of
interest due ($26.3 million net of interest due in respect of Timber Notes held
by Scotia LLC). Scotia LLC also repaid $10.6 million of principal on the Timber
Notes (an amount equal to Scheduled Amortization) using funds held in the SAR
Account.
With respect to the note payment date in July 2005, as a result of the
matters discussed in Notes 1 and 8, Scotia LLC estimates that its cash flows
from operations, together with funds available under the Scotia LLC Line of
Credit, will be inadequate to pay all of the $27.9 million of interest which
will be due ($25.9 million net of interest relating to the Timber Notes held by
Scotia LLC), which would be a default under the Timber Notes Indenture.
At March 31, 2005, the maximum availability under the Scotia LLC Line of
Credit was $55.9 million, and there was $40.4 million in borrowings outstanding
under this facility.
5. Income Taxes
The Company generated a loss before income taxes of $14.2 million for the
first quarter of 2005; however, the Company has recorded no tax benefit
associated with the loss for this period. Each period, the Company evaluates
appropriate factors in determining the realizability of the deferred tax assets
attributable to losses and credits generated in the current period and those
being carried forward. These factors are discussed further in Note 9 to the
Company's consolidated financial statements included in the Form 10-K. Based on
this evaluation, the Company provided valuation allowances with respect to the
deferred tax assets attributable to the losses and credits generated during the
three months ended March 31, 2005. These valuation allowances were in addition
to the valuation allowances which were provided in prior years.
6. Employee Benefit Plans
The components of pension and other postretirement benefits expense are as
follows (in millions):
Pension Benefits Medical/Life Benefits
------------------- --------------------
Three Months Ended March 31,
-----------------------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Components of net periodic benefit costs:
Service cost.......................................................... $ 0.9 $ 0.7 $ 0.1 $ 0.1
Interest cost......................................................... 1.4 1.3 0.2 0.2
Expected return on assets............................................. (1.3) (1.3) - -
Amortization of prior service costs................................... - - (0.1) (0.1)
Recognized net actuarial loss......................................... 0.2 - - -
--------- --------- --------- ---------
Net periodic benefit costs............................................ $ 1.2 $ 0.7 $ 0.2 $ 0.2
========= ========= ========= =========
Management estimates that contributions to the Company's pension and other
postretirement benefit plans during 2005 will range from $3.0 million to $3.3
million.
7. Investment in Kaiser
As discussed further in the Form 10-K, Kaiser, its wholly owned subsidiary,
KACC, and 24 of KACC's subsidiaries have filed separate voluntary petitions in
the Bankruptcy Court for reorganization under Chapter 11 of the Bankruptcy Code.
The Debtors currently believe that it is likely that substantially all
pre-Filing Date claims will be settled at less than 100% of their face value and
the equity of Kaiser's stockholders, including the Company, will likely be
cancelled without consideration.
As provided by the Bankruptcy Code, the Original Debtors had the exclusive
right to propose a plan of reorganization for 120 days following the initial
Filing Date. The Bankruptcy Court has subsequently approved several extensions
of the exclusivity period for the Debtors. The Bankruptcy Court has approved the
extension of the exclusivity period to April 30, 2005 for certain Debtors and
June 30, 2005 for the remaining Debtors. Kaiser has filed a motion for further
extension beyond April 30, 2005 and has indicated that additional extensions may
be sought. However, no assurance can be given that any future extension requests
will be granted by the Bankruptcy Court. If the Debtors fail to file a plan of
reorganization during the exclusivity period, or if such plan is not accepted by
the requisite number of creditors and equity holders entitled to vote on the
plan, other parties in interest in the Cases may be permitted to propose their
own plans of reorganization for the Debtors.
Kaiser's common stock is publicly traded on the OTC Bulletin Board under
the trading symbol "KLUCQ.OB." The market value for the 50,000,000 Kaiser
Shares, based on the price per share quoted at the close of business on April
29, 2005, was $4.0 million. There can be no assurance that such value would be
realized should the Kaiser Shares be sold.
8. Contingencies
Forest Products Operations
Regulatory and environmental matters play a significant role in the
Company's forest products business, which is subject to a variety of California
and federal laws and regulations, as well as the HCP, dealing with timber
harvesting practices, threatened and endangered species and habitat for such
species, and air and water quality.
Environmental Plans
From March 1999 until October 2002, Scotia LLC prepared THPs in accordance
with the SYP. The SYP was intended to comply with CDF regulations requiring
timber companies to project timber growth and harvest on their timberlands over
a 100-year planning period and to demonstrate sustained yield, i.e. that their
projected average annual harvest for any decade within the 100-year planning
period will not exceed the average annual growth level at the end of the
100-year planning period. The forest practice rules allow companies which do not
have a sustained yield plan to follow alternative procedures to document
compliance with the sustained yield requirements. As discussed below, on October
31, 2003, the Court hearing the EPIC-SYP/Permits lawsuit entered a judgment
invalidating the SYP and the California Permits, and that decision is now on
appeal. As a result of an earlier stay order issued in this case, Scotia LLC has
since October 2002 been obtaining review and approval of THPs under alternative
procedures pending approval of the Option A Plan, which is an alternative to a
sustained yield plan. The Option A Plan was approved by the CDF in March 2005.
The HCP and related Federal Permits allow incidental "take" of certain
federally listed species located on the Scotia LLC Timberlands so long as there
is no "jeopardy" to the continued existence of such species. The HCP identifies
the measures to be instituted in order to minimize and mitigate the anticipated
level of take to the greatest extent practicable. The HCP and Federal Permits
have terms of 50 years. Since the consummation of the Headwaters Agreement in
March 1999, there has been a significant amount of work and additional costs
required in connection with the implementation of the HCP and SYP, and this work
and the additional costs are expected to continue for the forseeable future.
Water Quality
Laws and regulations dealing with water quality are impacting Palco and
Scotia LLC primarily in four areas: efforts by the federal EPA and the North
Coast Water Board to establish TMDLs in watercourses that have been declared to
be water quality impaired; actions by the North Coast Water Board to impose
waste discharge reporting requirements in respect of watersheds on the Scotia
LLC Timberlands and, in some cases, clean-up or prevention measures; actions by
the North Coast Water Board during the THP approval process which impose certain
operational requirements on individual THPs; and a directive of the North Coast
Water Board to its staff to develop WWDRs for the Freshwater and Elk River
watersheds.
Under the CWA, the EPA is required to establish TMDLs in watercourses that
have been declared to be "water quality impaired." The EPA and the North Coast
Water Board are in the process of establishing TMDLs for many northern
California rivers and certain of their tributaries, including nine watercourses
that flow within the Scotia LLC Timberlands. The Company expects this process to
continue into 2010. The final TMDL requirements applicable to the Scotia LLC
Timberlands may require aquatic protection measures that are different from or
in addition to those in the HCP or that result from the prescriptions to be
developed pursuant to the watershed analysis process provided for in the HCP.
Beginning with the 2002-2003 winter operating period, Palco has been
required to submit "Reports of Waste Discharge" to the North Coast Water Board
each year in order to conduct winter harvesting activities in the Elk River and
Freshwater watersheds. After consideration of these reports, the North Coast
Water Board imposed requirements on Palco to implement additional mitigation and
erosion control practices in these watersheds for these winter operating
periods. In addition, the North Coast Water Board has extended the requirements
for certain mitigation and erosion control practices to the Bear, Jordan and
Stitz watersheds. Reporting and mitigation requirements imposed by the North
Coast Water Board have significantly increased operating costs and may in the
future further increase costs or cause delays in THP approvals or harvesting on
approved THPs.
The North Coast Water Board has also issued the Elk River Order, which is a
clean up and abatement order aimed at addressing existing sediment production
sites in the Elk River watershed through clean up actions. The North Coast Water
Board has also initiated the process which could result in similar orders for
the Freshwater and Bear Creek watersheds, and is contemplating similar actions
for the Jordan and Stitz Creek watersheds. The Elk River Order has resulted in
increased costs to Palco that could extend over a number of years. Additional
orders in other watersheds (should they be issued) may also result in further
cost increases. Palco's appeal of the Elk River Order to the State Water Board
was denied. Palco has appealed the decision of the State Water Board but is
holding such appeal in abeyance until resolution of the THP 520 lawsuit
discussed below.
In addition to the foregoing actions, the North Coast Water Board in
December 2003 directed its staff to formulate WWDRs for the Freshwater and Elk
River watersheds. As harvesting activities on the Scotia LLC Timberlands cannot
readily be moved between watersheds due to, among other things, historic harvest
patterns, adjacency restrictions, and the age classes of trees, that action and
the other matters described above could, in addition to the potential effects
noted above, individually or collectively result in reduced harvest. In that
regard, the staff of the North Coast Water Board has not yet formulated the
required WWDRs for the Freshwater and Elk River watersheds. As a result, the
North Coast Water Board for some time failed to release for harvest a number of
Scotia LLC's THPs which had already been approved by the other governmental
agencies which approve Scotia LLC's THPs. On February 25, 2005, the Executive
Officer of the staff of the North Coast Water Board enrolled THPs that would
allow the harvest of up to 50% of the harvest limit established by the CDF for
the Freshwater and Elk River watersheds. On March 16, 2005, the North Coast
Water Board ordered that additional THPs be enrolled that would allow the
harvest of up to 75% of the harvest limit established by the CDF for the
Freshwater and Elk River watersheds. This decision was subsequently appealed to
the State Water Board and on April 6, 2005, a hearing officer acting on behalf
of the State Water Board issued a stay order that precludes harvest of a portion
of the THPs that were released for harvest by the North Coast Water Board. The
Company's request for emergency reconsideration by the full State Water Board of
this decision was denied. The State Water Board is expected to hold a hearing on
the merits of the appeal in June 2005.
The unreleased and stayed THPs represent a significant portion of the
Company's planned harvest for the first half of 2005. The ongoing regulatory,
environmental and litigation matters faced by Palco and Scotia LLC, exacerbated
by the developments described in the previous paragraph, have materially
adversely impacted the cash flows of both Palco and Scotia LLC. Furthermore, it
is likely that additional delays in the development of the Freshwater and Elk
River WWDRs will occur, and such delays are expected to continue.
Effective January 1, 2004, California Senate Bill 810 provides regional
water quality control boards with additional authority related to the approval
of THPs on land within impaired watersheds. The Company is uncertain of the
operational and financial effects which will ultimately result from Senate Bill
810; however, because substantially all rivers and waterbodies on the Scotia LLC
Timberlands are classified as sediment-impaired, implementation of this law
could result in delays in obtaining approvals of THPs, lower harvest levels and
increased costs and additional protection measures beyond those contained in the
HCP. Also see the description of the THP No. 520 lawsuit below.
Timber Harvest Litigation
A California state court has invalidated the SYP in connection with two
lawsuits filed against Palco, as described below, which decision has been
appealed. Other pending judicial and administrative proceedings, as described
below, could affect Palco's and Scotia LLC's ability to implement the HCP,
implement certain approved THPs, or carry out other operations, as described
below.
In March 1999, the EPIC-SYP/Permits lawsuit was filed. This action alleged,
among other things, various violations of the CESA and the California
Environmental Quality Act, and challenged, among other things, the validity and
legality of the SYP and the California Permits. The plaintiffs sought, among
other things, to set aside California's approval of the SYP and the California
Permits and injunctive relief to prevent implementation of THPs approved in
reliance upon these documents. In March 1999, a similar action, the USWA
lawsuit, was filed challenging the validity and legality of the SYP. The
EPIC-SYP/Permits and USWA lawsuits were consolidated for trial.
Following trial, the Court on October 31, 2003, entered a judgment
invalidating the SYP and the California Permits due to several deficiencies in
agency procedures and the failure of the Palco Companies to submit a complete
and comprehensible SYP. The Court's decision, however, allowed for harvesting on
THPs which rely on the SYP and were approved prior to July 23, 2003. The
short-term effect of the ruling was to preclude approval, under the SYP, of a
small number of THPs which were under review but had not been approved, and a
minor reduction in 2003 harvesting that had been expected from those specific
THPs. As a result of this case, Scotia LLC has, since October 2002, when the
Court issued a stay order preventing future reliance upon the SYP, been
obtaining review and approval of new THPs under alternative procedures pending
approval of the Option A Plan. As noted above, the Option A Plan was approved by
the CDF in March 2005. The Palco Companies and the State of California have
appealed the October 31, 2003 decision. In September 2004, the Court granted the
plaintiffs' request for reimbursement of an aggregate of $5.8 million in
attorneys fees and other expenses incurred in connection with these matters. The
Palco Companies and the State of California have also appealed this decision.
In July 2001, the Bear Creek lawsuit was filed and later amended to add the
EPA as a defendant. The lawsuit alleges that harvesting and other forestry
activities under certain of Scotia LLC's approved THPs will result in discharges
of pollutants in violation of the CWA. The plaintiff asserts that the CWA
requires the defendants to obtain a permit from the North Coast Water Board
before beginning timber harvesting and road construction activities and is
seeking to enjoin these activities until such permit has been obtained. The
plaintiff also seeks civil penalties of up to $27,500 per day for the alleged
continued violation of the CWA. On October 14, 2003, in connection with certain
motions that had been filed, the Court upheld the validity of an EPA regulation
which exempts harvesting and other forestry activities from certain discharge
requirements.
Both state and federal agencies, along with Palco and other timber
companies, have relied upon this regulation for more than 25 years. However, the
Court interpreted the regulation in such a way as to narrow the forestry
operations which are exempted, thereby limiting the regulation's applicability
and subjecting culverts and ditches to permit requirements. This ruling has
widespread implications for the timber industry in the United States. The case
is not yet final as the trial has not yet been held, and there are many
unresolved issues involving interpretation of the Court's decision and its
application to actual operations. Should the decision ultimately become final
and held to apply to all of Palco's timber operations, it may have some or all
of the following effects: imposing additional permitting requirements, delaying
approvals of THPs, increasing harvesting costs, and adding water protection
measures beyond those contained in the HCP. Nonetheless, it is not likely that
civil penalties will be awarded for operations that occurred prior to the
Court's decision due to the historical reliance by timber companies on the
regulation and Palco's belief that the requirements under the HCP are adequate
to ensure that sediment and pollutants from harvesting activities on the Scotia
LLC Timberlands will not reach levels harmful to the environment. While the
impact of a conclusion to this case that upholds the October 14, 2003 ruling may
be adverse, the Company does not believe that such an outcome would have a
material adverse impact on the Company's consolidated financial condition,
results of operations or liquidity. Nevertheless, due to the numerous ways in
which the Court's interpretation of the regulation could be applied to actual
operations, there can be no assurance that this will be the case.
On November 20, 2002, the Cook action and the Cave action were filed, which
name Palco, Scotia LLC and certain affiliates as defendants. On April 4, 2003,
the plaintiffs in these actions filed amended complaints and served the
defendants with notice of the actions. The Cook action alleges, among other
things, that defendants' logging practices have contributed to an increase in
flooding along Freshwater Creek (which runs through the Scotia LLC Timberlands),
resulting in personal injury and damage to the plaintiffs' properties.
Plaintiffs further allege that in order to have THPs approved in the affected
areas, the defendants engaged in certain unfair business practices. The
plaintiffs seek, among other things, compensatory and exemplary damages,
injunctive relief, and appointment of a receiver to ensure that the watershed is
restored. The Cave action contains similar allegations and requests similar
relief with respect to the Elk River watershed (a portion of which is contained
on the Scotia LLC Timberlands). The Company does not believe the resolution of
these actions should result in a material adverse effect on its consolidated
financial condition, results of operations or liquidity.
On February 25, 2003, the District Attorney of Humboldt County filed the
Humboldt DA action. The suit was filed under California's unfair competition law
and alleges that the Palco Companies used certain unfair business practices in
connection with completion of the Headwaters Agreement, and that this resulted
in these companies being able to harvest significantly more trees under the
Environmental Plans than would have otherwise been the case. The suit sought a
variety of remedies including a civil penalty of $2,500 for each additional tree
that has been or will be harvested due to this alleged increase in harvest, as
well as restitution and an injunction in respect of the additional timber
harvesting allegedly being conducted. In response to motions filed by the Palco
Companies for sanctions and dismissal of this suit, on April 30, 2004, the Court
issued a ruling requiring the District Attorney to amend his suit to prove that
"extrinsic" fraud occurred. In addition, the Court eliminated the remedies being
sought, other than for civil penalties, and suggested that it would be
inappropriate to base civil penalties on the additional trees harvested. The
Court also ruled that it declined "at this juncture" to impose sanctions on the
District Attorney. The District Attorney subsequently amended his suit, and the
Palco Companies later filed new motions to dismiss and for sanctions. After
delays resulting from the District Attorney's efforts to disqualify the trial
judge, and that judge's later self-disqualification, a hearing on these motions
was held on February 18, 2005. The Court rejected the sanctions motion, but has
not yet ruled on the motion for dismissal. The Company believes that this suit
is without merit and that the April 30, 2004 ruling diminished significantly its
exposure with respect to this matter; however, there can be no assurance that
the Palco Companies will ultimately prevail or that an adverse outcome would not
be material to the Company's consolidated financial condition, results of
operations or liquidity.
On November 2, 2004, the EPIC-USFWS/NOAA lawsuit was filed. This lawsuit
alleges that two federal agencies have violated certain federal laws and related
regulations in connection with their oversight of the HCP and Federal Permits.
The plaintiff also alleges that the Federal Permit for the northern spotted owl
was unlawfully issued and asserted several claims, including that the Palco
Companies violated California's unfair competition law by using false
advertising and making misleading environmental claims. The plaintiff seeks a
variety of remedies including requiring additional actions by the federal
agencies and precluding them from authorizing take of the northern spotted owl,
an injunction requiring the Palco Companies to cease certain alleged unlawful
activities, as well as restitution and remediation by Palco. On April 22, 2005,
pursuant to motions to dismiss filed by the Palco Companies and the federal
defendants, the Court dismissed all but one of the claims. The Company does not
believe the resolution of this action should result in a material adverse effect
on its consolidated financial condition, results of operations or liquidity.
On November 16, 2001, Palco and Scotia LLC filed the THP No. 520 lawsuit
alleging that the State Water Board had no legal authority to impose mitigation
measures that were requested by the staff of the North Coast Water Board during
the THP review process and rejected by the CDF prior to approving the THP. When
the staff of the North Coast Water Board attempted to impose these mitigation
measures in spite of the CDF's decision, Palco and Scotia LLC appealed to the
State Water Board, which imposed certain of the requested mitigation measures
and rejected others. Palco and Scotia LLC filed the THP No. 520 lawsuit
challenging the State Water Board's decision, and in January 2003, the Superior
Court granted their request for an order invalidating the imposition of these
additional measures. The State Water Board appealed this decision, and on March
18, 2004, the appellate court reversed the decision of the Superior Court. The
appellate court's decision could result in increased demands by the regional and
state water boards and their staffs to impose controls and limitations upon
Palco's timber harvesting beyond those provided for by the Environmental Plans
or could provide additional regulatory powers to the regional and state water
boards and their staffs beyond those provided in Senate Bill 810. Palco and
Scotia LLC filed a petition for review of the appellate court's decision by the
California Supreme Court, which in June 2004 agreed to review the decision.
Briefing was completed on April 26, 2005, but no date has been set for oral
argument.
OTS Contingency and Related Matters
On December 26, 1995, the OTS initiated the OTS action against the Company
and others alleging, among other things, misconduct by the Respondents and
others with respect to the failure of USAT. The OTS sought damages ranging from
$326.6 million to $821.3 million under various theories. Following a lengthy
administrative hearing during portions of 1997-1999, the administrative law
judge on September 12, 2001, issued a recommended decision in favor of the
Respondents on each claim made by the OTS. On October 17, 2002, the OTS action
was settled for $0.2 million with no admission of wrongdoing on the part of the
Respondents.
As a result of the dismissal of OTS action, a related civil action, the
FDIC action, alleging damages in excess of $250.0 million, was subsequently
dismissed. The FDIC action was originally filed by the FDIC in August 1995
against Mr. Charles E. Hurwitz (Chairman and Chief Executive Officer of the
Company).
On May 31, 2000, the Respondents filed a counterclaim to the FDIC action.
On November 8, 2002, the Respondents filed the Sanctions Motion. The Sanctions
Motion states that the FDIC illegally paid the OTS to bring the OTS action
against the Respondents and that the FDIC illegally sued for an improper purpose
(i.e., in order to acquire timberlands held by a subsidiary of the Company). The
Respondents are seeking as a sanction to be made whole for the attorneys' fees
they have paid (plus interest) in connection with the OTS and FDIC actions. As
of March 31, 2005, such fees were in excess of $40.5 million. The Respondents
are pursuing this claim vigorously.
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.
On January 16, 2001, the Kahn lawsuit was filed. The plaintiff purports to
bring this action as a stockholder of the Company derivatively on behalf of the
Company. The lawsuit concerns the OTS and FDIC actions, and the Company's
advancement of fees and expenses on behalf of Federated and certain of the
Company's directors in connection with these actions. It alleges that the
defendants have breached their fiduciary duties to the Company, and wasted
corporate assets, by allowing the Company to bear all of the costs and expenses
of Federated and certain of the Company's directors related to the OTS and FDIC
actions. The plaintiff seeks to require Federated and certain of the Company's
directors to reimburse the Company for all costs and expenses incurred by the
Company in connection with the OTS and FDIC actions, and to enjoin the Company
from advancing to Federated or certain of the Company's directors any further
funds for costs or expenses associated with these actions. The parties to the
Kahn lawsuit have agreed to an indefinite extension of the defendants'
obligations to respond to the plaintiffs' claims. Although it is impossible to
assess the ultimate outcome of the Kahn lawsuit, the Company believes that the
resolution of this matter should not result in a material adverse effect on its
consolidated financial condition, results of operations or liquidity.
Other Matters
On September 2, 2004, the Company was advised that one of its former
subsidiaries is a successor to a company which manufactured munitions for the
U.S. Navy during World War II. The current owner of the underlying property,
which is located in Cranbury, New Jersey, is seeking the Company's participation
in efforts to address contamination of the site which resulted from such
operations. The current owner estimates that the costs to determine what
remedial actions are needed, and to perform any remedial actions determined
necessary, could range from $3.0 million to $8.0 million. Costs for the
investigation and remediation could exceed $8.0 million as the result of
information learned during the investigation. The Company is currently in the
process of determining the extent of its liability, which could require payment
of a substantial portion of the costs, as well as the availability of funding
from the U.S. Navy and insurance coverage for these activities. Such
investigation continues and is anticipated to be completed by the third quarter
of 2005. On December 29, 2004, the NJDEP issued a directive against the current
owner of the property, MGI, and the U.S. Navy requiring these parties to conduct
a RI/RA in respect of the property. As further required by the directive, MGI
and the current owner on January 28, 2005, entered into an Administrative
Consent Order providing, among other things, that MGI and the current owner
begin implementing the RI/RA within 120 days of execution of the Order. MGI and
the current owner of the property have also entered into a Participation
Agreement providing, among other things, for them to jointly fund the RI/RA and
for a mediation process to assist in equitably allocating the costs of the
RI/RA. The Company accrued its expected share of the estimated costs of the
R1/RA in 2004. While the Company believes its estimates are reasonable, as
additional information is obtained, future charges may be required.
The Company is involved in other claims, lawsuits and proceedings. While
uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred or their effect on the Company, management believes that the resolution
of such uncertainties and the incurrence of such costs should not result in a
material adverse effect on the Company's consolidated financial condition,
results of operations or liquidity.
9. Stock-Based Compensation Plans
Stock options issued to employees and outside directors are accounted for
under the intrinsic value method of accounting as defined by APB Opinion No. 25
and related interpretations. The Company has not yet changed to the fair value
based method of accounting for stock-based employee compensation as prescribed
by SFAS No. 123. The following table illustrates the pro forma effect on net
income and earnings per share had the Company accounted for its stock options
under the fair value method of accounting (in millions, except per share
information):
Three Months Ended
March 31,
------------------------
2005 2004
----------- -----------
Net loss, as reported..................................................................... $ (14.2) $ (20.3)
Add: Stock-based employee compensation (income) expenses included in reported net
loss, net of related tax effects.................................................... (1.6) 2.2
Deduct: Total stock-based employee compensation income(expense) determined under the
fair value method for all awards, net of related tax effects........................ 1.1 (2.7)
----------- -----------
Pro forma net loss........................................................................ $ (14.7) $ 20.8
=========== ===========
Basic and diluted loss per share:
As reported............................................................................ $ (2.38) $ (3.40)
Pro forma.............................................................................. (2.45) (3.47)
10. Per Share Information
The weighted average number of shares used to determine basic and diluted
earnings per share was:
Three Months Ended
March 31,
--------------------------
2005 2004
------------ ------------
Weighted average shares outstanding:
Common Stock........................................................................ 5,976,530 5,976,466
Effect of dilution:
Class A Preferred Stock (1)...................................................... - -
------------ ------------
Weighted average number of common and common equivalent
shares - Basic ..................................................................... 5,976,530 5,976,466
Effect of dilution:
Stock options (1)................................................................ - -
------------ ------------
Weighted average number of common and common equivalent
shares - Diluted.................................................................... 5,976,530 5,976,466
============ ============
- ------------------
(1) The Class A Preferred Stock and options were not included in the
computation of basic or diluted earnings per share because the Company had
a loss for the three months ended March 31, 2005 and 2004, respectively.
11. Comprehensive Loss
The following table sets forth comprehensive loss (in millions).
Three Months Ended
March 31,
----------------------
2005 2004
---------- ----------
Net loss:.................................................................................. $ (14.2) $ (20.3)
Other comprehensive loss:
Unrealized losses on available-for-sale investments.................................. (0.1) (0.3)
Applicable income tax benefit (expense).............................................. - -
---------- ----------
Total comprehensive loss................................................................... $ (14.3) $ (20.6)
========== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the financial statements
in Part I, Item 1. of this Report and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Item 8.
"Financial Statements and Supplementary Data" 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. Except as otherwise noted, all references to
Notes represent the Condensed Notes to Consolidated Financial Statements
included herein.
This Quarterly Report on Form 10-Q contains statements which constitute
"forward-looking statements" within the meaning of the PSLRA. These statements
appear in a number of places in this section and in Part II, Item 1. "Legal
Proceedings." Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates," "will," "should,"
"plans" "intends," "projects," "seeks," 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 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,
environmental or regulatory requirements, litigation developments, and changing
prices and market conditions. This Form 10-Q and the Form 10-K identify other
factors which could cause differences between such forward-looking statements
and actual results. 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
This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See the statement in Item 2. above
for cautionary information with respect to such forward-looking statements.
The Company conducts the substantial portion of its operations through its
subsidiaries, which operate in three principal industries: forest products,
through MGI and its wholly owned subsidiaries, principally Palco and its
subsidiaries; real estate investment and development, through MPC and other
wholly owned subsidiaries as well as joint ventures; and racing operations
through SHRP, Ltd. MGHI owns 100% of MGI and is a wholly owned subsidiary of the
Company. In addition, the Company owns approximately 63% of Kaiser, a producer
of fabricated aluminum products. All references to the "Company" include MAXXAM
Inc. and its majority and wholly-owned subsidiaries (but exclusive of Kaiser and
its subsidiaries), unless otherwise indicated or the context indicates
otherwise. All references to specific entities refer to the respective companies
and their subsidiaries, unless otherwise indicated or the context indicates
otherwise.
Consolidated Operations
Selected Operational Data
The following table presents selected financial information for the three
months ended March 31, 2005 and 2004 for the Company's consolidated operations.
Three Months Ended
March 31,
---------------------
2005 2004
---------- ----------
(In millions of dollars)
----------
Net sales................................................................................... $ 83.0 $ 68.9
Costs and expenses.......................................................................... (80.2) (75.5)
---------- ----------
Operating income (loss)..................................................................... 2.8 (6.6)
Other income, net........................................................................... 1.2 5.1
Interest expense, including amortization of deferred financing costs........................ (18.2) (18.8)
---------- ----------
Loss before income taxes.................................................................... $ (14.2) $ (20.3)
========== ==========
Deconsolidation of Kaiser
See Notes 1 and 7 for information regarding the deconsolidation of Kaiser's
financial results and the Company's investment in Kaiser.
Overview of Consolidated Results of Operations
Net Sales
Net sales for the first quarter of 2005 totaled $83.0 million, compared to
$68.9 million for the first quarter of 2004. Net sales for the Company's forest
products operations increased $3.9 million for the first quarter of 2005, as
compared to the same quarter in 2004, primarily as a result of an increase in
shipments of Douglas-fir lumber inventories. Real estate sales more than doubled
in the first quarter of 2005, resulting in an increase of $11.8 million in
revenue over the same quarter in 2004. The increase was principally due to a
higher volume of property sales at the Company's Fountain Hills and Mirada
developments and receipt and recognition of deferred profits at the Company's
Palmas development. Net sales for the racing segment decreased $1.6 million,
principally due to lower average daily attendance and reduced simulcasting
wagering.
Operating Income (Loss)
The Company recorded operating income of $2.8 million in the first quarter
of 2005 compared to an operating loss of $6.6 million in the first quarter of
2004. Operating results for forest products operations declined by $2.5 million
primarily as a result of increased logging, hauling and production costs
partially offset by a $3.1 million insurance settlement that was reached in the
first quarter of 2005. See Note 3 for further information regarding this
settlement. Operating results for real estate operations increased by $8.5
million, primarily as a result of increased real estate sales, as discussed
above. Operating results for racing operations decreased by $0.8 million due
principally to lower net sales as discussed above partially offset by lower
expenses. The corporate segment's operating loss decreased by $4.2 million
primarily as a result of lower stock-based compensation expense in 2005,
reflecting a reduction in the market value of the Company's stock since December
31, 2004.
Loss Before Income Taxes
The Company's consolidated loss before income taxes decreased by $6.1
million in the first quarter of 2005 as compared to the prior year first
quarter, principally due to the improved results of real estate operations
partially offset by a decline in investment, interest and other income of $3.9
million.
Forest Products Operations
Industry Overview and Selected Operational Data
The Company's forest products operations are conducted through MGI and its
wholly owned subsidiaries, principally Palco and its subsidiaries. The segment's
business is somewhat seasonal, and its net sales have been historically higher
in the months of April through November than in the months of December through
March. Management expects that MGI's revenues and cash flows will continue to be
somewhat seasonal because of the harvesting, road use, wet weather and other
restrictions imposed by the HCP and regulation. Accordingly, MGI's results for
any one quarter are not necessarily indicative of results to be expected for the
full year.
Regulatory and environmental matters as well as legal actions have played
and are expected to continue to play a significant role in the Company's forest
products operations. Scotia LLC has previously experienced delays in the
approval of its THPs as the result of regulatory compliance and related
litigation, and expects these difficulties to persist. Moreover, the Company
expects a recurrence of the additional delays that have recently been
experienced in harvesting on previously-approved THPs due to regulatory
oversight by the North Coast Water Board. The foregoing matters have in the past
adversely affected timber harvest and timber harvesting and other costs; these
effects are expected to continue. In addition, there can be no assurance that
certain other pending legal, regulatory and environmental matters or future
governmental regulations, legislation or judicial or administrative decisions,
adverse weather conditions, or low lumber or log prices, will not have a
material adverse effect on the financial condition, results of operations or
liquidity of the Company's forest products operations. See Item 1.
"Business--Forest Products Operations--Regulatory and Environmental Matters" of
the Form 10-K and Note 8 for further discussion of these matters.
The ongoing regulatory, environmental and litigation matters faced by Palco
and Scotia LLC, exacerbated by certain recent developments, have materially
adversely impacted the cash flows of both Scotia LLC and Palco. Scotia LLC
estimates that its cash flows from operations, together with funds available
under the Scotia LLC Line of Credit, will be inadequate to pay all of the
interest due on the July 20, 2005 payment date for the Timber Notes, which would
be an event of default under the Timber Notes Indenture. For further
information, see "--Financial Condition and Investing and Financing
Activities--Forest Products Operations."
During 2001, comprehensive external and internal reviews were conducted of
Palco's business operations. These reviews were conducted in an effort to
identify ways in which Palco could operate on a more efficient and
cost-effective basis. Based upon these reviews, Palco implemented a number of
changes during the last quarter of 2001 and the first quarter of 2002, including
closing two of its four sawmills, eliminating certain of its operations,
including its company- staffed logging operations (now relying exclusively on
contract loggers) and its soil amendment and concrete block activities,
utilizing more efficient harvesting methods and adopting other cost saving
measures. Palco has continued to examine ways in which to achieve cost savings.
During 2004, Palco opened a new (replacement) planer facility and began
construction on a new sawmill, both in Scotia, California. The new sawmill
construction project is expected to cost $27.3 million ($20.5 million of which
was expended in 2004) with the last phase scheduled for completion in the third
quarter of 2005 (subject to available cash). Funds for this project have been
provided from existing cash resources and borrowings under the Palco Credit
Agreement and the remaining funds are expected to be provided by borrowings from
the Term Loan and/or the Revolving Credit Facility. As part of the project,
Palco's Carlotta mill was permanently closed in 2004 and, in April 2005, Palco
announced that it would also close its Fortuna mill. Certain equipment from
these mills is being and will be moved to Palco's new sawmill in Scotia and
management is considering alternative uses for the properties and remaining
equipment, including sales to third parties. Further actions may be taken during
2005 as a result of Palco's continuing evaluation process or in response to the
financial difficulties discussed above, and writedowns of certain assets may be
required.
The following table presents selected operational and financial information
for the three months ended March 31, 2005 and 2004, for the Company's forest
products operations.
Three Months Ended
March 31,
--------------------------
2005 2004
------------ ------------
(In millions of dollars,
except shipments and prices)
Shipments:
Lumber: (1)
Redwood upper grades.............................................................. 2.4 4.3
Redwood common grades............................................................. 43.1 44.0
Douglas-fir upper grades.......................................................... 0.3 1.0
Douglas-fir common grades......................................................... 33.0 14.7
Other............................................................................. 0.8 0.9
------------ ------------
Total lumber......................................................................... 79.6 64.9
============ ============
Cogeneration power (2)............................................................... 40.7 36.3
============ ============
Average sales price:
Lumber: (3)
Redwood upper grades.............................................................. $ 1,183 $ 1,321
Redwood common grades............................................................. 610 603
Douglas-fir upper grades.......................................................... 895 939
Douglas-fir common grades......................................................... 367 373
Cogeneration power (4)............................................................... 63 64
Net sales:
Lumber, net of discount.............................................................. $ 41.4 $ 38.4
Logs................................................................................. 1.5 1.3
Cogeneration power................................................................... 2.6 2.3
Wood chips........................................................................... 1.1 0.8
Other................................................................................ 0.7 0.6
------------ ------------
Total net sales .................................................................. $ 47.3 $ 43.4
============ ============
Operating loss.......................................................................... $ (2.8) $ (0.3)
============ ============
Loss before income taxes................................................................ $ (16.3) $ (12.9)
============ ============
- ------------------------------------
(1) Lumber shipments are expressed in millions of board feet.
(2) Power deliveries are expressed in thousands of megawatts.
(3) Dollars per thousand board feet.
(4) Dollars per megawatt.
Net Sales
Net sales for forest products operations increased $3.9 million for the
first quarter of 2005, as compared to the same period in 2004. Shipments of
Douglas-fir lumber inventories more than doubled, as compared to the same period
in 2004, resulting in an increase in net sales of $6.6 million. This increase
was offset by lower shipments of redwood lumber of $2.8 million.
Operating Loss
Although sales improved, the operating loss for forest products operations
increased by $2.5 million for the first quarter of 2005, compared to the same
period in 2004, primarily due to increased logging, hauling and production
costs, partially offset by a $3.1 million insurance settlement that was reached
in the first quarter of 2005. See Note 3 for further discussion of this
settlement. The gross margin percentage on lumber sales has decreased from 29%
in the first quarter of 2004 to 10% in the first quarter of 2005, primarily due
to the increased operating costs noted above. Selling, general and
administrative expenses decreased for the first quarter of 2005, as compared to
the same period in 2004, due primarily to the $3.1 million insurance settlement
and a reduction in administrative costs of $0.4 million.
Loss Before Income Taxes
Forest products operations' loss before income taxes increased by $3.4
million for the first quarter of 2005 as compared to the same period in 2004
primarily due to the decreased operating results discussed above and lower
returns on cash, cash equivalents and investments of $1.1 million.
Real Estate Operations
Industry Overview and Selected Operational Data
The Company, principally through its wholly owned subsidiaries and joint
ventures, invests in and develops residential and commercial real estate
primarily in Puerto Rico, Arizona, California, and Texas. The following table
presents selected operational and financial information for the three months
ended March 31, 2005 and 2004, for the Company's real estate operations.
Three Months Ended
March 31,
----------------------
2005 2004
---------- ----------
(In millions of dollars)
----------
Net sales:
Real estate:
Fountain Hills....................................................................... $ 6.7 $ 2.0
Mirada............................................................................... 2.6 0.5
Palmas............................................................................... 4.6 0.5
---------- ----------
Total.............................................................................. 13.9 3.0
---------- ----------
Resort, commercial and other:
Fountain Hills....................................................................... 1.4 1.4
Palmas............................................................................... 2.9 2.5
Commercial lease properties.......................................................... 4.5 4.0
Other................................................................................ 0.1 0.1
---------- ----------
Total.............................................................................. 8.9 8.0
---------- ----------
Total net sales......................................................................... $ 22.8 $ 11.0
========== ==========
Operating income (loss):
Fountain Hills.......................................................................... $ 2.6 $ 0.6
Mirada.................................................................................. 0.8 (0.8)
Palmas.................................................................................. 1.8 (2.8)
Commercial lease properties............................................................. 1.5 1.5
Other................................................................................... - (0.3)
---------- ----------
Total operating income (loss)........................................................ $ 6.7 $ (1.8)
========== ==========
Investment, interest and other income (expense), net:
Equity in earnings from real estate joint ventures...................................... $ (0.2) $ 1.0
Other................................................................................... 0.6 0.6
---------- ----------
$ 0.4 $ 1.6
========== ==========
Income (Loss) before income taxes.......................................................... $ 2.7 $ (4.9)
========== ==========
Net Sales
Net sales for the real estate segment for the first quarter of 2005 more
than doubled, as compared to the same period in 2004, largely driven by
increased sales activity at the Company's Fountain Hills and Mirada developments
and the receipt and recognition of deferred profits at the Company's Palmas
development.
Operating Income (Loss) and Income (Loss) Before Income Taxes
Operating income improved by $8.5 million for the first quarter of 2005 as
compared to the same period of 2004 primarily due to receipt and recognition of
deferred profits at the Company's Palmas development and higher sales at the
Company's Fountain Hills and Mirada developments. The segment's income before
income taxes increased between quarters primarily due to the improved operating
results discussed above, partially offset by $1.2 million of decreased equity in
earnings from the Company's investment in FireRock LLC as a result of the
sell-out of lots at the development in 2004. FireRock LLC's sole remaining asset
is the FireRock LLC Country Club.
Racing Operations
Industry Overview and Selected Operational Data
The Company indirectly owns SHRP, Ltd., which owns and operates Sam Houston
Race Park, a Class 1 horse racing facility in Houston, Texas, and Valley Race
Park, a greyhound racing facility located in Harlingen, Texas. Results of
operations between quarterly periods are generally not comparable for these
facilities due to the timing, varying lengths and types of racing meets held.
Historically, Sam Houston Race Park and Valley Race Park have derived a
significant amount of their annual pari-mutuel commissions from live racing and
simulcasting. Pari-mutuel commissions have typically been highest during the
first and fourth quarters of the year, the time during which Sam Houston Race
Park and Valley Race Park have historically conducted live thoroughbred and
greyhound racing, respectively.
The following table presents selected operational and financial information
for the three months ended March 31, 2005 and 2004, for the Company's racing
operations.
Three Months Ended
March 31,
----------------------
2005 2004
---------- ----------
(In millions of dollars)
----------
Number of live race days:
Sam Houston Race Park................................................................... 42 48
Valley Race Park........................................................................ 86 75
Handle:
Sam Houston Race Park:
On-track handle...................................................................... $ 31.8 $ 34.0
Off-track handle..................................................................... 73.1 96.6
---------- ----------
Total.............................................................................. $ 104.9 $ 130.6
========== ==========
Valley Race Park:
On-track handle...................................................................... $ 5.6 $ 6.4
Off-track handle..................................................................... 1.5 2.8
---------- ----------
Total.............................................................................. $ 7.1 $ 9.2
========== ==========
Net sales:
Sam Houston Race Park:
Gross pari-mutuel commissions........................................................ $ 9.2 $ 10.3
Other revenues....................................................................... 1.9 2.1
---------- ----------
Total.............................................................................. 11.1 12.4
---------- ----------
Valley Race Park:
Gross pari-mutuel commissions........................................................ 1.4 1.6
Other revenues....................................................................... 0.4 0.5
---------- ----------
Total.............................................................................. 1.8 2.1
---------- ----------
Total net sales......................................................................... $ 12.9 $ 14.5
========== ==========
Operating income (loss):
Sam Houston Race Park................................................................... $ - $ 0.8
Valley Race Park........................................................................ (0.2) (0.2)
---------- ----------
Total operating income (loss) ....................................................... $ (0.2) $ 0.6
========== ==========
Income (loss) before income taxes.......................................................... $ (0.2) $ 0.6
========== ==========
Net Sales
Net sales for racing operations declined $1.6 million for the first quarter
of 2005, as compared to the same period in 2004, principally due to lower
simulcasting and live racing commissions as a result of lower average daily
attendance and reduced simulcasting wagering.
Operating Income (Loss) and Income (Loss) Before Taxes
Racing operations' operating income and income before taxes for the first
quarter of 2005 declined $0.8 million from the comparable period in 2004 due
principally to lower net sales as discussed above, partially offset by lower
costs.
Other Items Not Directly Related to Industry Segments
Three Months
Ended March 31,
---------------------
2005 2004
--------- ----------
(In millions)
----------
Operating loss........................................................................... $ (0.9) $ (5.1)
Loss before income taxes................................................................. (0.4) (3.1)
Operating Loss
The operating losses represent corporate general and administrative
expenses that are not attributable to the Company's industry segments. For the
first quarter of 2004, such losses include $2.2 million, related to an increase
in stock-based compensation expense, which is adjusted as the market value of
the Company's Common Stock changes. Additionally, the first quarter of 2004
included $0.8 million of non-recurring lease termination costs. For the first
quarter of 2005, there was a $1.6 million benefit recognized for stock-based
compensation, reflecting a reduction in the market value of the Company's Common
Stock since December 31, 2004.
Loss Before Income Taxes
The loss before income taxes decreased in the first quarter of 2005 from
the comparable period in 2004 due to lower corporate general and administrative
expenses offset by lower returns on marketable securities and other short-term
investments of $1.7 million which are impacted by changing market conditions.
Financial Condition and Investing and Financing Activities
This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See the statement in Item 2. above
for cautionary information with respect to such forward-looking statements.
Overview
The Company conducts its operations primarily through its subsidiaries.
Creditors of subsidiaries of the Company have priority with respect to the
assets and earnings of such subsidiaries over the claims of the creditors of the
Company. Certain of the Company's subsidiaries, principally Palco and Scotia
LLC, are restricted by their various debt instruments as to the amount of funds
that can be paid in the form of dividends or loaned to affiliates. Scotia LLC is
highly leveraged and has significant debt service requirements. "MAXXAM Parent"
is used in this section to refer to the Company on a stand-alone basis without
its subsidiaries.
Cash Flow
Operating Activities
Net cash used for operating activities improved from $25.0 million for the
three months ended March 31, 2004 to $6.9 million for the three months ended
March 31, 2005. The reduction in cash used in operating activities resulted
primarily from improved operating results, a reduction of forest products
inventories and higher cash collections related to real estate sales.
Investing Activities
Net cash used for investing activities was $0.1 million and $5.3 million
for the three months ended March 31, 2005 and 2004, respectively. In 2004,
capital expenditures were $14.2 million, $10.9 million of which were related to
Palco's sawmill project; comparable expenditures were not made in the first
quarter of 2005. Additionally, net sales of marketable securities and other
short-term investments were $5.3 million lower than the first quarter of 2004.
Financing Activities
Net cash provided by financing activities was $17.1 million and $27.8
million for the three months ended March 31, 2005 and 2004, respectively. This
change principally results from lower borrowings under revolving and short-term
credit facilities.
MAXXAM Parent
MAXXAM Parent believes that its existing resources will be sufficient to
fund its working capital requirements for the next year. With respect to
long-term liquidity, MAXXAM Parent believes that its existing cash and cash
resources, together with distributions from the real estate operations, should
be sufficient to meet its working capital requirements. However, there can be no
assurance that this will be the case. See "--Forest Products Operations" below
and Note 8 regarding potential adverse impacts upon MAXXAM Parent as a result of
liquidity issues in respect of Palco and Scotia LLC. Additionally, see "--Racing
Operations" below regarding the cash flow needs of SHRP, Ltd., which were
provided by MAXXAM Parent during the first quarter of 2005.
Forest Products Operations
Substantially all of MGI's consolidated assets are owned by Palco, and a
significant portion of Palco's consolidated assets are owned by Scotia LLC. The
holders of the Timber Notes have priority over the claims of creditors of Palco
with respect to the assets and cash flows of Scotia LLC. The Revolving Credit
Facility and Term Loan contain certain restrictive covenants which effectively
preclude the distribution of funds from Palco to MGI.
Due to its highly leveraged condition, Scotia LLC is more sensitive than
less leveraged companies to factors affecting its operations and financial
results, including adverse weather conditions, low log prices, governmental
regulation, environmental litigation and general economic conditions. Scotia
LLC's cash flows from operations are significantly impacted by harvest volumes
and log prices.
Regulatory and environmental matters as well as legal actions have played
and are expected to continue to play a significant role in the Company's forest
products operations. Scotia LLC has previously experienced delays in the
approval of its THPs as the result of regulatory compliance and related
litigation, and expects these difficulties to persist. Moreover, the Company
expects a recurrence of the additional delays that have recently been
experienced in harvesting on previously-approved THPs due to regulatory
oversight by the North Coast Water Board (see below). The foregoing matters have
in the past adversely affected timber harvest and timber harvesting and other
costs; these effects are expected to continue. In addition, there can be no
assurance that certain other pending legal, regulatory and environmental matters
or future governmental regulations, legislation or judicial or administrative
decisions, adverse weather conditions, or low lumber or log prices, will not
have a material adverse effect on the financial condition, results of operations
or liquidity of the Company's forest product operations. See Item 1.
"Business--Forest Products Operations--Regulatory and Environmental Matters" of
the Form 10-K and Note 8 for further discussion of these matters.
The North Coast Water Board is requiring Palco and Scotia LLC to apply
various waste discharge reporting, mitigation and erosion control requirements
in respect of timber harvesting activities in several watersheds, and may impose
additional measures in the future. The North Coast Water Board in December 2003
directed its staff to formulate WWDRs for the Freshwater and Elk River
watersheds on the Scotia LLC Timberlands. The WWDRs have not yet been
formulated, and, as a result, the North Coast Water Board has failed to release
for harvest THPs already approved by the other government agencies which review
Scotia LLC's THPs and significantly delayed the release of a substantial number
of other previously-approved THPs. The THPs approved for release by the North
Coast Water Board restrict the harvest allowed to only 75% of the harvest limit
established by the CDF for the Freshwater and Elk River watersheds. Moreover, a
hearing officer acting on behalf of the State Water Board has issued a stay
order which precludes harvest on a portion of the THPs that were released for
harvest by the North Coast Water Board. Palco and Scotia LLC are continuing
efforts to obtain clearance from the North Coast Water Board of the remaining
THPs, which constitute a significant portion of the harvest planned for the
first six months of 2005. Palco and Scotia LLC are also in the process of
appealing the decision of the State Water Board hearing officer. There can be no
assurance that these efforts will be successful. Additionally, should the
Freshwater-Elk River WWDRs not be formulated during 2005 or in the first few
months of 2006, there could be a material adverse impact on Palco's and Scotia
LLC's future cash flows from operations. See Note 8 for further discussion of
these matters.
The foregoing matters have materially adversely impacted the cash flows of
both Scotia LLC and Palco. Scotia LLC estimates that its cash flows from
operations, together with funds available under the Scotia LLC Line of Credit,
will be inadequate to pay all of the $27.9 million of interest which will be due
on the July 20, 2005 payment date for the Timber Notes, ($25.9 million net of
interest relating to Timber Notes held by Scotia LLC), which would be an event
of default under the Timber Notes Indenture. Under the new Revolving Credit
Facility and Term Loan, Palco is permitted to invest up to $5.0 million in
Scotia LLC. However, there can be no assurance that Palco will make such
investment in whole or part.
In the event of a failure to pay interest on the Timber Notes in full when
due, the Trustee under the Timber Notes Indenture or the holders of at least 25%
of the aggregate outstanding principal amount of the Timber Notes may cause all
principal, interest and other amounts related to the Timber Notes to become
immediately due and payable. Also, in the event of a failure by Palco or Scotia
LLC to perform its respective covenants or agreements under the Master Purchase
Agreement or the failure by Palco to perform its covenants or agreements under
the Services Agreement, which failure continues for 30 days after notice from
the Trustee or the holders of 25% or more of the outstanding principal amount of
the Timber Notes, the holders of a majority of the aggregate outstanding
principal amount of the Timber Notes may cause all principal, interest and other
amounts related to the Timber Notes to become immediately due and payable. In
the event of any such acceleration, the agent under the Scotia LLC Line of
Credit may also accelerate the advances then outstanding thereunder. If such
accelerations of Timber Notes and/or advances under the Scotia LLC Line of
Credit occur, the Trustee may exercise all rights under the Timber Notes
Indenture and related security documents, including applying funds to pay
accelerated amounts, and selling the Scotia LLC Timberlands and other assets and
using the proceeds thereof to pay accelerated amounts. In the event that Scotia
LLC were to seek protection by filing under the Bankruptcy Code, all amounts
related to the Timber Notes would become immediately due and payable under the
Timber Notes Indenture and all advances under the Scotia LLC Line of Credit
agreement could be accelerated. The foregoing rights of the Trustee and holders
of Timber Notes are subject to the rights of Scotia LLC under the Bankruptcy
Code.
Scotia LLC has entered into an agreement for UBS Securities LLC to assist
in seeking to restructure its obligations with respect to its outstanding Timber
Notes. There can be no assurance that Scotia LLC will be successful in its
efforts to restructure its Timber Notes.
At March 31, 2005, Palco continued to be in default under the Palco Credit
Agreement and its liquidity crisis continued. Previously-granted waivers of
default were subsequently extended through April 22, 2005. On April 19, 2005,
Palco and Britt, as borrowers, closed the five-year $30.0 million secured,
asset-based Revolving Credit Facility and the five-year $35.0 million secured
Term Loan. The Term Loan was fully funded on April 19, 2005 and the Borrowers
used approximately $10.8 million of the funds from the Term Loan to pay off
amounts previously borrowed under the Palco Credit Agreement and terminated that
facility. As of April 30, 2005, no borrowings had been made under the Revolving
Credit Facility. Palco estimates that its cash flow from operations will not
provide sufficient liquidity to fund its operations until the fourth quarter of
2006. Accordingly, Palco expects to be dependent on the funds available under
the Term Loan and Revolving Credit Facility to fund its working capital
requirements in 2005 and 2006. Borrowings under the Revolving Credit Facility
are limited to the sum of 85% of the Borrowers' eligible accounts receivable
plus 75% of the Borrowers' eligible inventories (up to a maximum of $30.0
million, subject to limitations such as the ability of the lender to establish
reasonable reserves). Additionally, both the Term Loan and the Revolving Credit
Facility contain EBITDA maintenance covenants that, if not met, could trigger a
mandatory prepayment of the borrowings. The operating cash flow estimates used
to establish the EBITDA maintenance covenants are subject to a number of
assumptions about future operating cash flow and actual results could differ
from these estimates. Accordingly, the availability of these funds is largely
dependent on Palco's ability to harvest adequate timber from the Scotia LLC
Timberlands and reduce operating costs. See Note 4 for further discussion of
these new debt facilities.
In the event of a Scotia LLC default under the Timber Note Indenture or a
future Palco liquidity shortfall, Palco and Scotia LLC could be forced to take
extraordinary actions, which may include: reducing expenditures by laying off
employees and shutting down various activities; seeking other sources of
liquidity, such as from asset sales; and seeking protection by filing under the
Bankruptcy Code. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
On February 7, 2005, Moody's lowered the ratings on the Class A-1 Timber
Notes from A1 to Baa2; the Class A-2 Timber Notes from A3 to Baa3; and the Class
A-3 Timber Notes from Baa2 to Bal. On April 7, 2005, S&P announced that it
had further lowered its ratings on all classes of the Timber Notes to CCC-. On
December 8, 2004, S&P lowered Palco's credit rating from B- to CCC+ and on
April 7, 2005, S&P announced that it had further lowered Palco's credit
rating to CCC- (which rating it affirmed on April 28, 2005). As a result of the
S&P credit actions, Palco may be required to post a security deposit for
workers compensation liabilities in July 2005 in the amount of $9.9 million. If
Palco's credit rating is raised to B- or better, or if a waiver of this
requirement is allowed under applicable law, then posting of such a security
deposit may not be necessary. However, there can be no assurance that such a
security deposit will not be required. Palco management is also evaluating
whether other potential obligations or unanticipated adverse financial
consequences may result from the S&P credit actions described above.
The liquidity issues being experienced by Scotia LLC, and those recently
experienced by Palco should they recur, could result in claims against and could
have adverse impacts on MAXXAM Parent, MGHI and/or MGI. For example, under ERISA
law, were Palco to terminate its pension plan, MAXXAM Parent and its wholly
owned subsidiaries would be jointly and severally liable for any unfunded
pension plan obligations. The unfunded obligation attributable to Palco's
pension plan as of December 31, 2004, is estimated to have been in the range of
approximately $35 million based upon annuity placement interest rate assumptions
at that time. In addition, it is possible that certain transactions could be
entered into in connection with a potential restructuring or reorganization of
Palco or Scotia LLC, such as a sale of all or a portion of the equity ownership
in Palco and/or Scotia LLC, a sale of a substantial portion of Palco's and/or
Scotia LLC's assets and/or a cancellation of some or all of Palco's and/or
Scotia LLC's indebtedness, which could require the utilization of all or a
substantial portion of, or the loss of a significant portion of, the Company's
net operating losses for federal and state income tax purposes and could require
tax payments in future periods.
The Scotia LLC Line of Credit allows Scotia LLC to borrow up to one year's
interest due on the Timber Notes. On June 20, 2003, the Scotia LLC Line of
Credit was extended to July 7, 2006. At or near the completion of such
extension, Scotia LLC intends to request that the Scotia LLC Line of Credit be
extended for an additional period of not less than 364 days. If not extended,
Scotia LLC may draw upon the full amount available. The amount drawn would be
repayable in 12 semiannual installments on each note payment date (after the
payment of certain other items, including the Aggregate Minimum Principal
Amortization Amount, as defined, then due), commencing approximately two and
one- half years following the date of the draw. At December 31, 2004, Scotia LLC
could have borrowed a maximum of $57.1 million under the Scotia LLC Line of
Credit, and there were $18.2 million in borrowings outstanding under the
facility. At March 31, 2005, the maximum availability under the Scotia LLC Line
of Credit was $55.9 million, and there were $40.4 million in borrowings
outstanding under this facility.
On the note payment date in January 2005, Scotia LLC used the funds
available under the Scotia LLC Line of Credit to pay all of the $28.5 million of
interest due ($26.3 million net of interest due in respect of Timber Notes held
by Scotia LLC). Scotia LLC also repaid $10.6 million of principal on the Timber
Notes (an amount equal to Scheduled Amortization) using funds held in the SAR
Account.
The Master Purchase Agreement between Scotia LLC and Palco (see Item 1.
"Business--Forest Products Operations--Relationships among the Palco Companies"
of the Form 10-K) contemplates that all sales of logs by Scotia LLC to Palco
will be at fair market value (based on stumpage prices) for each species and
category of logs. The Master Purchase Agreement provides that if the purchase
price equals or exceeds the SBE Price and a structuring price set forth in a
schedule to the Timber Notes Indenture, the purchase price is deemed to be at
fair market value. If the purchase price equals or exceeds the SBE Price, but is
less than the structuring price, then Scotia LLC is required to engage an
independent forestry consultant to confirm that the purchase price reflects fair
market value. In December 2004, the California State Board of Equalization
adopted the new Harvest Value Schedule for the first half of 2005. The prices
published in that schedule (which exceeded the applicable structuring prices)
reflected a 14.3% increase in the SBE Price for small redwood logs and a 12.5%
increase for small Douglas-fir logs from the prices published for the second
half of 2004.
Capital expenditures have been made by Palco during the past three years
which are expected to improve production efficiency and reduce operating costs.
During 2004, Palco opened a new (replacement) planner facility and began
construction on a new sawmill, both in Scotia, California. The project is
expected to cost $27.3 million ($20.5 million of which was expended in 2004),
with the last phase scheduled for completion in the third quarter of 2005
(subject to available cash). Funds for this project have been provided from
existing cash resources and borrowings under the Palco Credit Agreement and the
remaining funds are expected to be provided by borrowings from the Term Loan
and/or the Revolving Credit Facility. As part of the project, Palco's Carlotta
mill was permanently closed in 2004 and, in April 2005, Palco announced that it
would also close its Fortuna mill. Certain equipment from these mills is being
and will be moved to Palco's new sawmill in Scotia and management is considering
alternative uses for the properties and remaining equipment, including sales to
third parties. Capital expenditures were $2.7 million for the first quarter of
2005 and are estimated to be between $8.7 million and $16.1 million for the
remainder of 2005 (subject to available cash). Palco and Scotia LLC may purchase
additional timberlands from time to time as appropriate opportunities arise.
Palco expects that in 2005 it will be required to fund approximately $1.6
million to $1.8 million for pension and other postretirement benefits.
Palco will require funds available under the Revolving Credit Facility and
Term Loan in order to meet its working capital and capital expenditure
requirements for the next year. Furthermore, Palco's cash flows from operations
may be adversely affected by diminished availability of logs from Scotia LLC,
lower lumber prices, adverse weather conditions, pending legal, regulatory and
environmental matters or increased funding requirements for its pension plan.
See "--Results of Operations--Forest Products Operations" above, as well as Note
8, for discussion of the regulatory, environmental and legal matters affecting
harvest levels and operating costs.
With respect to long-term liquidity, until such time as Palco has adequate
cash flows from operations, there can be no assurance that Palco will be able to
meet its working capital, capital expenditure and debt service obligations.
Liquidity, capital resources and results of operations in the long-term may
continue to be adversely affected by the same factors affecting short-term cash
flows from operations, as discussed above.
Real Estate Operations
Capital expenditures and real estate improvements and development costs are
expected to be between approximately $30.0 million to $35.0 million in 2005. The
Company expects that these expenditures will be funded by existing cash and
available credit facilities.
The Company believes that the existing cash and credit facilities of its
real estate subsidiaries are sufficient to fund the working capital and capital
expenditure requirements of such subsidiaries for the next year. With respect to
the long- term liquidity of such subsidiaries, the Company believes that their
ability to generate cash from the sale of their existing real estate, together
with their ability to obtain financing and joint venture partners, should
provide sufficient funds to meet their working capital and capital expenditure
requirements. PDMPI and its subsidiaries, however, have required advances from
MAXXAM Parent in prior years to fund their operations, and PDMPI may require
such advances in the future.
Racing Operations
Capital expenditures and investments in new ventures are expected to be
between $2.0 million and $2.5 million in 2005.
Subsequent to December 31, 2004, SHRP, Ltd. borrowed $4.5 million from
MAXXAM Parent to fund its 2005 capital expenditures and improve its working
capital position. SHRP, Ltd.'s management expects that SHRP, Ltd. may require
additional advances from MAXXAM Parent to fund its operations and capital
expenditures in the future. SHRP, Ltd. is experiencing strong competition from
internet wagering and "racinos" in surrounding states. These factors will also
play a role in SHRP, Ltd.'s long-term liquidity.
In January 2004, a subsidiary of the Company applied to the Texas Racing
Commission for an additional license to construct and operate a Class 2 horse
racing facility in Laredo, Texas. The review process is only in the preliminary
stages, and there can be no assurance that the Company will obtain this
additional license as, among other things, there is a competing applicant.
Additionally, the Company is considering a variety of alternatives for
addressing (should the subsidiary be granted the Laredo license) a Racing Act
provision that a person may not own a greater than five percent interest in more
than two Texas-licensed race tracks.
Kaiser's Operations
With respect to the Company's interest in Kaiser, the Debtors have
indicated that they believe that it is likely that the equity of Kaiser's
stockholders will be cancelled without consideration. See Note 7 for further
information.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet financing, other than
operating leases entered into in the normal course of business, or
unconsolidated special purpose entities. The Company does not use derivatives
for any of its treasury or risk management activities.
Trends
Forest Products
See Note 8 and Part I, Item 2. "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Financial Condition and
Investing and Financing Activities--Forest Products Operations" for information
regarding various regulatory, environmental, litigation and other matters which
have caused and are expected to continue to cause delays in the approval of the
Company's THPs and the ability to harvest on THPs once they are approved, as
well as adverse impacts on harvest levels and timber harvesting and other costs.
Real Estate
PDMPI is considering various alternatives to accelerate sales of its
remaining 1,130 acres of undeveloped land as well as disposition of other
assets. In connection with this, PDMPI has been working with an agent to solicit
developer and investor interest in acquiring such acreage and other assets.
While some expressions of interest have been received, no assurance can be given
that these efforts will be successful.
Racing
The Texas legislature, which is currently in its regular January to June
2005 session, is considering a variety of alternatives to address a projected
budget shortfall, including enhancing state revenues through additional forms of
gaming such as video lottery terminals at existing horse and dog racing tracks,
gaming on Indian reservations, and full casinos. The Company is vigorously
pursuing any such legislation which is favorable to it. As any legislation
expanding gaming in Texas would require the approval of two-thirds of each
legislative house and a majority of the state's voters, no assurance can be
given that any such legislation will be enacted or become effective. Moreover,
it is impossible to determine what the provisions of any such legislation will
be or its effect on the Company.
Contractual Obligations
At January 1, 2005, the Company entered into an operating lease for its
Corporate offices. The lease began on January 1, 2005 and terminates on
September 30, 2015. Minimum annual rental payments under the lease are $0.1
million in 2005 and escalate to a maximum of $0.4 million in 2014.
Critical Accounting Policies and Estimates
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Critical Accounting Policies and Estimates" of the
Form 10-K for a discussion of the Company's critical accounting policies. There
have been no material changes to the Company's critical accounting policies and
estimates provided in the Form 10-Q.
New Accounting Pronouncements
See Note 2 for a discussion of new accounting pronouncements and their
potential impact on the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily under the
Scotia LLC Line of Credit and the Revolving Credit Facility and Term Loan, as
well as certain other debt facilities used to finance real estate development
activities. As of March 31, 2005, there were $52.7 million in borrowings
outstanding under all variable rate facilities. Based on the amount of
borrowings outstanding under these facilities during the three months ended
March 31, 2005, a 1.0% change in interest rates effective from the beginning of
the year would have resulted in an increase or decrease in interest expense for
the period of $0.1 million.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's reports
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Also, the Company has investments in certain
unconsolidated entities. As the Company does not control or manage these
entities, its disclosure controls and procedures with respect to such entities
are necessarily substantially more limited than those it maintains with respect
to its consolidated subsidiaries.
As of the end of the period covered by this report, our management carried
out an evaluation, under the supervision and with the participation of the
Company's management, including our Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the evaluation, our
management, including our Chief Executive Officer and Chief Financial Officer,
concluded that the Company's disclosure controls and procedures were effective
as of March 31, 2005.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 8 is incorporated herein by reference.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company may from time to time purchase shares of its Common Stock on
national exchanges or in privately negotiated transaction. No such purchases
occurred during the three months ended March 31, 2005, or through the date of
this report.
ITEM 6. EXHIBITS
a. Exhibits:
10.1 Revolving Credit Agreement, dated April 19, 2005, among Palco,
Britt, the lenders from time to time party thereto, and The CIT
Group/Business Credit, Inc. (incorporated herein by reference to
Exhibit10.1 to the Company's Current Report on Form 8-K filed on
April 25, 2005)
10.2 Term Loan Agreement, dated April 19, 2005, among Palco, Britt,
the lenders from time to time party thereto and Credit Suisse
First Boston (incorporated herein by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K filed on April 25, 2005)
10.3 Guarantee and Collateral Agreement, dated April 19, 2005, made by
Palco, Britt, MGI, Salmon Creek and Scotia Inn Inc. in favor of
The CIT Group/Business Credit, Inc. (incorporated herein by
reference to Exhibit 10.3 to the Company's Current Report on Form
8-K filed on April 27, 2005; the "April 27, 2005 Form 8-K")
10.4 Guarantee and Collateral Agreement, dated April 19, 2005, made by
Palco, Britt, MGI, Salmon Creek and Scotia Inn Inc. in favor of
Credit Suisse First Boston (incorporated herein by reference to
Exhibit 10.4 to the April 27, 2005 Form 8-K)
10.5 Deed of Trust, Security Agreement, Assignment of Rents and Leases
and Fixture Filing, dated April 19, 2005, by and from Palco to
Fidelity National Title Company, for the benefit of The CIT
Group/Business Credit, Inc., as administrative agent
(incorporated herein by reference to Exhibit 10.5 to the April
27, 2005 Form 8-K)
10.6 Deed of Trust, Security Agreement, Assignment of Rents and Leases
and Fixture Filing, dated April 19, 2005, by and from Palco to
Fidelity National Title Company, for the benefit of Credit Suisse
First Boston, as administrative agent (incorporated herein by
reference to Exhibit 10.6 to the April 27, 2005 Form 8-K)
10.7 Executive Employment Agreement, dated April 1, 2005, between the
Company and Emily Madison (incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on
April 1, 2005; the "April 1, 2005 Form 8-K")
10.8 2005 Bonus Criteria for the MAXXAM Chief Executive Officer under
the MAXXAM 1994 Executive Bonus Plan (incorporated herein by
reference to Exhibit 10.2 to the April 1, 2005 Form 8-K)
10.9 2005 Bonus Criteria for the MAXXAM President and Chief Financial
Officer under the MAXXAM 1994 Executive Bonus Plan (incorporated
herein by reference to Exhibit 10.3 to the April 1, 2005 Form
8-K)
10.10 2005 Bonus Criteria for the MAXXAM Vice Chairman and General
Counsel under the MAXXAM 1994 Executive Bonus Plan (incorporated
herein by reference to Exhibit 10.4 to the April 1, 2005 Form
8-K)
10.11 Undertaking, dated March 28, 2005, executed by the Company in
favor of Diane Dudley (incorporated herein by reference to
Exhibit 10.5 to the April 1, 2005 Form 8-K)
* 31.1 Section 302 Certification of Chief Executive Officer
* 31.2 Section 302 Certification of Chief Financial Officer
* 32.1 Section 906 Certification of Chief Executive Officer
* 32.2 Section 906 Certification of Chief Financial Officer
* Included with this filing
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who have signed this report on behalf of
the Registrant and as the principal financial and accounting officers of the
Registrant, respectively.
MAXXAM INC.
Date: May 9, 2005 By: /S/ PAUL N. SCHWARTZ
----------------------------------------
Paul N. Schwartz
President, Chief Financial Officer and Director
(Principal Financial Officer)
Date: May 9, 2005 By: /S/ M. EMILY MADISON
----------------------------------------
M. Emily Madison
Vice President, Finance
(Principal Accounting Officer)
APPENDIX A
Glossary of Defined Terms
Set forth below is a list of all terms used in this Report.
APB Opinion No. 25: Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees"
Bankruptcy Code: The United States Bankruptcy Code
Bankruptcy Court: The United States Bankruptcy Court for the District of
Delaware
Bear Creek lawsuit: An action entitled Environmental Protection Information
Association v. Pacific Lumber, Scotia Pacific Company LLC (No. C01-2821) filed
in the U.S. District Court for the Northern District of California
Borrowers: Palco and Britt, as borrowers under the Revolving Credit Facility and
Term Loan
Britt: Britt Lumber Co., Inc., a wholly owned subsidiary of Palco
California Permits: The Permits issued by California pursuant to the HCP
California Senate Bill 810: Bill which became effective January 1, 2004
providing regional water quality control boards with additional authority
related to the approval of THPs on land within impaired watersheds
Cases: The Chapter 11 proceedings of the Debtors
Cave action: An action entitled Steve Cave, et al. v. Gary Clark, et al. (No.
DR020719) filed in the Superior Court of Humboldt County, California
CDF: California Department of Forestry and Fire Protection
CESA: California Endangered Species Act
Class A Preferred Stock: The Company's Class A $.05 Non-Cumulative Participating
Convertible Preferred Stock
Common Stock: The Company's $0.50 par value common stock
Company: MAXXAM Inc., including its subsidiaries
Cook action: An action entitled Alan Cook, et al. v. Gary Clark, et al. (No.
DR020718) filed in the Superior Court of Humboldt County, California
CWA: Federal Clean Water Act
Debtors: Kaiser, KACC and the subsidiaries of KACC which have filed petitions
for reorganization
EBITDA: As defined in Section 1.01 in the Revolving Credit Agreement and Term
Loan which, among other things, excludes the results of Scotia LLC
Elk River Order: Clean up and abatement order issued to Palco by the North Coast
Water Board for the Elk River watershed
Environmental Plans: The HCP and the SYP
EPA: Federal Environmental Protection Agency
EPIC-SYP/Permits lawsuit: An action entitled Environmental Protection
Information Association, Sierra Club v. California Department of Forestry and
Fire Protection, California Department of Fish and Game, The Pacific Lumber
Company, Scotia Pacific Company LLC, Salmon Creek Corporation, et al. filed in
the Superior Court of Humboldt County, California (No. CV990445)
EPIC-USFWS/NOAA lawsuit: An action entitled Environmental Protection Information
Center v. U.S. Fish & Wildlife Service, NOAA Fisheries, et al. (No.
C04-4647) filed in U.S. Court for the Northern District of California against
the Palco Companies and two federal agencies
ERISA: the Employee Retirement Income Security Act of 1974, as amended from time
to time
FASB: Financial Accounting Standards Board
FDIC: Federal Deposit Insurance Corporation
FDIC action: An action entitled Federal Deposit Insurance Corporation, as
manager of the FSLIC Resolution Fund v. Charles E. Hurwitz (No. H-95-3956) filed
by the FDIC on August 2, 1995 in the U.S. District Court for the Southern
District of Texas
Federal Permits: The Permits issued by the federal government pursuant to the
HCP
Federated: Federated Development Company, a principal stockholder of the Company
now known as Giddeon Holdings, Inc.
Filing Date: With respect to any particular Debtor, the date on which such
Debtor filed its Case
FireRock LLC: A 50% owned joint venture which developed and manages a real
estate project in Arizona
Form 10-K: Annual Report on Form 10-K of the Company for the fiscal year ended
December 31, 2004
FSP FAS 106-2: FASB Staff Position FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003"
Harvest Value Schedule: A schedule setting forth SBE Prices which is published
biannually by the California State Board of Equalization for purposes of
computing yield taxes on timber sales
HCP: The habitat conservation plan covering multiple species approved in March
1999 in connection with the consummation of the Headwaters Agreement
Headwaters Agreement: The agreement among Palco, Scotia LLC, Salmon Creek, the
United States and California pursuant to which the Palco Companies transferred
to the United States government 5,600 acres of timberlands in exchange for $300
million, approximately 7,700 acres of timberlands, and federal and state
government-approved habitat conservation and sustained yield plans
Humboldt DA action: A civil suit entitled The People of the State of California
v. Pacific Lumber, Scotia Pacific Holding Company and Salmon Creek Corporation
(No. DR030070) filed in the Superior Court of Humboldt County, California, by
the District Attorney of Humboldt County
KACC: Kaiser Aluminum & Chemical Corporation, Kaiser's principal operating
subsidiary
Kahn lawsuit: An action entitled Alan Russell Kahn v. Federated Development Co.,
MAXXAM Inc., et. al. (Civil Action 18623NC) filed in the Delaware Court of
Chancery
Kaiser: Kaiser Aluminum Corporation, a subsidiary of the Company engaged in
aluminum operations
Kaiser Shares: 50,000,000 shares of the common stock of Kaiser owned by the
Company and MGHI
LIBOR: London Inter Bank Offering Rate
Master Purchase Agreement: The agreement between Palco and Scotia LLC that
governs all purchases of logs by Palco from Scotia LLC
MAXXAM: MAXXAM Inc., including its subsidiaries
MAXXAM Parent: MAXXAM Inc., excluding its subsidiaries
Moody's: Moody's Investor Service
MGHI: MAXXAM Group Holdings Inc., a wholly owned subsidiary of the Company
MGI: MAXXAM Group Inc., a wholly owned subsidiary of MGHI
MPC: MAXXAM Property Company, a wholly owned subsidiary of the Company
NJDEP: New Jersey Department of Environmental Protection
North Coast Water Board: California North Coast Regional Water Quality Control
Board
Option A Plan: Palco's plan for complying with California's sustained yield
requirements, which has been approved by the CDF
Original Debtors: Kaiser, KACC and the 15 subsidiaries of KACC that filed
petitions for reorganization on February 12, 2002
OTS: The United States Department of Treasury's Office of Thrift Supervision
OTS action: A formal administrative proceeding initiated by the OTS against the
Company and others on December 26, 1995
Palco: The Pacific Lumber Company, a wholly owned subsidiary of MGI
Palco Companies: Palco, Scotia LLC and Salmon Creek, collectively
Palco Credit Agreement: January 2004 revolving credit facility between Palco and
a bank which provided for borrowings up to $30.0 million, based upon certain
collateral balances, which was terminated in connection with the closing of the
Revolving Credit Facility and Term Loan
Palco Timberlands: The Scotia LLC Timberlands and the timberlands owned by Palco
and Salmon Creek
Palmas: Palmas del Mar, a master-planned residential community and resort
located on the southeastern coast of Puerto Rico near Humacao
PDMPI: Palmas del Mar Properties, Inc., a wholly owned subsidiary of the Company
Permits: The incidental take permits issued by the United States and California
pursuant to the HCP
Prescription Drug Act: Medicare Prescription Drug, Improvement, and
Modernization Act of 2003
PSLRA: Private Securities Litigation Reform Act of 1995
Racing Act: The Texas Racing Act and related regulations
Respondents: The Company, Federated, Mr. Charles Hurwitz and the other
respondents in the OTS action
Revolving Credit Agreement: The agreement evidencing the Revolving Credit
Facility
Revolving Credit Facility: $30 million revolving credit facility evidenced by
the Revolving Credit Agreement dated as of April 19, 2005 among Palco and Britt,
as borrowers, and Credit Suisse First Boston
Rights: The Series A and B Rights
RI/RA: Remedial investigation and remedial action
S&P: Standard & Poor's Rating Service
Salmon Creek: Salmon Creek LLC, a wholly owned subsidiary of Palco
Sam Houston Race Park: Class 1 horse racing facility in Houston, Texas operated
by SHRP, Ltd.
Sanctions Motion: A counterclaim and motion for sanctions filed by the
Respondents on November 8, 2002, in connection with the FDIC action
SAR Account: Funds held in a reserve account titled the Scheduled Amortization
Reserve Account and used to support principal payments on the Timber Notes
SBE Price: The applicable stumpage price for a particular species and size of
log, as set forth in the most recent Harvest Value Schedule
Scheduled Amortization: The amount of principal which Scotia LLC must pay
through each Timber Note payment date in order to avoid prepayment or deficiency
premiums
Scotia LLC: Scotia Pacific Company LLC, a limited liability company wholly owned
by Palco
Scotia LLC Line of Credit: The agreement between a group of lenders and Scotia
LLC pursuant to which Scotia LLC may borrow in order to pay up to one year's
interest due on the Timber Notes
Scotia LLC Timber: The timber in respect of the Scotia LLC Timberlands and the
Scotia LLC Timber Rights
Scotia LLC Timberlands: Approximately 204,000 acres of timberlands owned by
Scotia LLC
Scotia LLC Timber Rights: Scotia LLC's exclusive right to harvest on
approximately 12,200 acres of timberlands owned by Palco and Salmon Creek
Services Agreement: The agreement between Palco and Scotia LLC regarding
services to be provided to Scotia LLC by Palco
SEC: The Securities and Exchange Commission
SFAS: Statement of Financial Accounting Standards
SFAS No. 123(r): SFAS No. 123 (revised 2004), "Share-Based Payments"
SFAS No. 151: SFAS No. 151, "Inventory Costs"
SFAS No. 153: SFAS No. 153, "Exchange of Nonmonetary Assets," an amendment of
APB Opinion No. 29
SHRP, Ltd.: Sam Houston Race Park, Ltd., a wholly owned subsidiary of the
Company
State Water Board: California State Water Resources Control Board
SYP: The sustained yield plan approved in March 1999, as part of the Headwaters
Agreement
take: Adverse impacts on species which have been designated as endangered or
threatened
Term Loan: $35.0 million term loan evidenced by the Term Loan Agreement dated as
of April 19, 2005 among Palco and Britt, as borrowers, and The CIT
Group/Business Credit, Inc.
Texas Racing Commission: The Racing Commission of the State of Texas
THP: Timber harvesting plan required to be filed with and approved by the CDF
prior to the harvesting of timber
THP No. 520 lawsuit: An action entitled The Pacific Lumber Company, et al. v.
California State Water Resources Control Board (No. DR010860) filed in the
Superior Court of Humboldt County, California
Timber Notes: Scotia LLC's 6.55% Series B Class A-1 Timber Collateralized Notes,
7.11% Series B Class A-2 Timber Collateralized Notes and 7.71% Series B Class
A-3 Timber Collateralized Notes due July 20, 2028
Timber Notes Indenture: The indenture governing the Timber Notes
TMDLs: Total maximum daily load limits
Trustee: The trustee under the Timber Notes Indenture
USAT: United Savings Association of Texas
USWA lawsuit: An action entitled United Steelworkers of America, AFL-CIO, CLC,
and Donald Kegley v. California Department of Forestry and Fire Protection, The
Pacific Lumber Company, Scotia Pacific Company LLC and Salmon Creek Corporation
(No. CV990452) filed in the Superior Court of Humboldt County, California
WWDRs: Watershed-wide discharge requirements