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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION
DECEMBER 31, 2003 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)
5847 SAN FELIPE, SUITE 2600 77057
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (713) 975-7600
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.50 par value............................... American
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES |_| NO |X|
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: $52.8 million.
Number of shares of common stock outstanding at March 19, 2004: 5,976,466
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of Registrant's definitive proxy statement, to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the close of the Registrant's fiscal year, are incorporated by
reference under Part III.
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TABLE OF CONTENTS
PART I
Item 1. Business
General
Forest Products Operations
Real Estate Operations
Racing Operations
Kaiser Aluminum
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Independent Auditors' Report
Report of Independent Public Accountants
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statement of Cash Flows
Consolidated Statement of Stockholders' Deficit
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 9A. Controls and Procedures
PART III
Items 10-14. To be filed with the Registrant's definitive proxy statement
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
Index of Exhibits
Glossary of Defined Terms
PART I
ITEM 1. BUSINESS
GENERAL
MAXXAM Inc. and its subsidiaries are collectively referred to herein as
the "COMPANY" or "MAXXAM" unless otherwise indicated or the context indicates
otherwise. The Company conducts the substantial portion of its operations
through its subsidiaries, which operate in three principal industries.
o Forest products, through MAXXAM Group Inc. ("MGI") and MGI's wholly owned
subsidiary, The Pacific Lumber Company ("PALCO"), and Palco's wholly owned
subsidiaries, Scotia Pacific Company LLC ("SCOTIA LLC") and Britt Lumber
Co., Inc. ("BRITT"). MGI operates in several principal aspects of the
forest products industry -- the growing and harvesting of redwood and
Douglas-fir timber, the milling of logs into lumber and the manufacture of
lumber into a variety of finished products. Housing, construction and
remodeling are the principal markets for the Company's lumber products.
o Real estate investment and development, through MAXXAM Property Company
("MPC") and other wholly owned subsidiaries of the Company. These
subsidiaries are engaged in the business of residential and commercial
real estate investment and development, primarily in Arizona, California,
Puerto Rico and Texas, including associated golf course or resort
operations in certain locations, and also own several commercial real
estate properties.
o Racing operations, through Sam Houston Race Park, Ltd. ("SHRP, LTD."), a
Texas limited partnership, wholly owned by the Company. SHRP, Ltd. owns
and operates a Class 1 pari-mutuel horse racing facility in the greater
Houston metropolitan area, and a pari-mutuel greyhound racing facility in
Harlingen, Texas.
In addition to the above, the Company owns approximately 62% of Kaiser
Aluminum Corporation ("KAISER"), an integrated aluminum producer. Kaiser and a
number of its subsidiaries have filed for reorganization under Chapter 11 of the
United States Bankruptcy Code. See "--Aluminum Operations--General and
Reorganization Proceedings" and Notes 1 and 12 to the Consolidated Financial
Statements contained herein. Except as otherwise indicated, all references
herein to "Notes" represent the Notes to the Consolidated Financial Statements
contained herein.
This Annual Report on Form 10-K contains statements which
constitute"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 ("PSLRA"). These statements appear in a
number of places (see Item 1."Business--Forest Products Operations--Timber and
Timberlands" and "--Regulatory and Environmental Factors;" most sections under
Item 3. "Legal Proceedings;" and several sections under Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations"). Such
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "estimates," "will," "should," "plans" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
significant risks and uncertainties, and that actual results may vary materially
from the forward-looking statements as a result of various factors. These
factors include the effectiveness of management's strategies and decisions,
general economic and business conditions, developments in technology, new or
modified statutory or regulatory requirements, litigation developments, and
changing prices and market conditions. This Report identifies 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.
FOREST PRODUCTS OPERATIONS
GENERAL
The Company engages in forest products operations through MGI, Palco,
Britt and Scotia LLC. Palco, which has been in continuous operation for over 130
years, engages in several principal aspects of the forest products industry--the
growing and harvesting of redwood and Douglas-fir timber, the milling of logs
into lumber products and the manufacturing of lumber into a variety of
value-added finished products. Britt manufactures redwood fencing and decking
products from small diameter logs, a substantial portion of which Britt acquires
from Palco.
During 2001, comprehensive external and internal reviews were conducted by
Palco with respect to its business operations. These reviews were an effort to
identify ways in which Palco could operate on a more efficient and cost
effective basis. Based upon the results of 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 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 additional
cost savings. Subsequent to December 31, 2003, Palco opened a new planer
facility and began construction on a $25.0 million sawmill project in Scotia.
See "--Production Facilities."
TIMBER AND TIMBERLANDS
This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See this section and
"Business--General" above for cautionary information with respect to such
forward-looking statements.
Palco owns and manages, directly or through subsidiaries, approximately
217,000 acres of virtually contiguous commercial timberlands located in Humboldt
County along the northern California coast, an area which has very favorable
soil and climate conditions for growing timber. These timberlands, which contain
approximately 66% redwood, 30% Douglas-fir and 4% other conifer timber (by
volume), are located in close proximity to Palco's and Britt's sawmills, and
contain an extensive network of roads. Approximately 204,000 acres of Palco's
timberlands are owned by Scotia LLC (the "SCOTIA LLC TIMBERLANDS"), and Scotia
LLC has the exclusive right to harvest (the "SCOTIA LLC TIMBER RIGHTS")
approximately 12,200 acres of timberlands owned directly by Palco. The timber in
respect of the Scotia LLC Timberlands and the Scotia LLC Timber Rights is
collectively referred to as the "SCOTIA LLC TIMBER." The Scotia LLC Timberlands
and the timberlands of Palco are collectively referred to as the "PALCO
TIMBERLANDS." Substantially all of Scotia LLC's assets are pledged as security
for 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 (collectively, the "TIMBER NOTES"). The Indenture
governing the Timber Notes is referred to herein as the "TIMBER NOTES
INDENTURE." Palco harvests and purchases from Scotia LLC virtually all of the
logs harvested from the Scotia LLC Timber. See "--Relationship with Scotia LLC"
below for a description of this and other relationships between Palco and Scotia
LLC.
In March 1999, Palco, Scotia LLC, and Salmon Creek LLC, another Palco
subsidiary (collectively, the "PALCO COMPANIES"), consummated the Headwaters
Agreement (the "HEADWATERS AGREEMENT") with the United States and California.
Pursuant to the agreement, approximately 5,600 acres of timberlands owned by the
Palco Companies (the "HEADWATERS TIMBERLANDS") were transferred to the United
States in exchange for (a) an aggregate of $300.0 million, (b) approximately
7,700 acres of timberlands, and (c) approval by the federal and state
governments of habitat conservation and sustained yield plans (the
"ENVIRONMENTAL PLANS") in respect of substantially all of the Palco Timberlands.
California also agreed to offer to purchase other timberlands owned by Palco and
Scotia LLC (which purchases were subsequently consummated -- see Note 4).
Timber generally is categorized by species and the age of a tree when it
is harvested. "OLD GROWTH" trees are often defined as trees which have been
growing for approximately 200 years or longer and "YOUNG GROWTH" trees are those
which have been growing for less than 200 years. The forest products industry
grades lumber into various classifications according to quality. The two broad
categories into which all grades fall based on the absence or presence of knots
are called "upper" and "common" grades, respectively. Old growth trees have a
higher percentage of upper grade lumber than young growth trees.
Palco engages in extensive efforts to supplement the natural regeneration
of timber and increase the amount of timber on its timberlands. Palco is
required to comply with California forestry regulations regarding reforestation,
which generally require that an area be reforested to specified standards within
an established period of time. Pursuant to the services agreement described
below (see "--Relationship with Scotia LLC"), Palco conducts regeneration
activities on the Scotia LLC Timberlands for Scotia LLC. Reforestation of
redwood timber generally is accomplished through redwood sprouts from harvested
trees and the planting of redwood seedlings at levels designed to optimize
growth. Douglas-fir timber is regenerated almost entirely by planting seedlings.
During 2003, Palco planted an estimated 1,200,000 redwood and Douglas-fir
seedlings.
California law requires large timberland owners, including Palco, to
demonstrate that their timber operations will not decrease the sustainable
productivity of their timberlands. The applicable regulations require timber
companies to project timber growth and harvest on their timberlands over a
100-year planning period and to demonstrate that their projected average annual
harvest for any decade within the 100-year planning period will not exceed the
average annual growth level during the last decade of the 100-year planning
period. A timber company may comply with this requirement by submitting a
sustained yield plan to the California Department of Forestry and Fire
Protection ("CDF") for review and approval. Timber companies which do not have a
sustained yield plan are allowed to follow an alternative procedure.
Palco is also subject to federal and state laws providing for the
protection and conservation of wildlife species which have been designated as
endangered or threatened, certain of which are found on the Palco Timberlands.
These laws generally prohibit certain adverse impacts on such species (referred
to as a "TAKE"), except for incidental take which does not jeopardize the
continued existence of the affected species and which are made in accordance
with an approved habitat conservation plan and related incidental take permit. A
habitat conservation plan analyzes the impact of the incidental take and
specifies measures to monitor, minimize and mitigate such impact. As part of the
Headwaters Agreement, the federal and state governments approved the
Environmental Plans, consisting of a sustained yield plan (the "SYP") and a
multi-species habitat conservation plan (the "HCP") in respect of substantially
all of the Palco Timberlands. However, a California state court has, in
connection with two lawsuits filed against Palco, invalidated the SYP and the
incidental take permits issued by California in connection with the
Environmental Plans (the "CALIFORNIA PERMITS"). As a result of these cases,
Palco has since October 2002 been obtaining review and approval of its timber
harvesting plans ("THPS") under the alternative procedure referred to above and
expects to follow this procedure for the foreseeable future. See "--Regulatory
and Environmental Factors," Item 3. "Legal Proceedings --Forest Products
Litigation," and Note 13.
In May 2002, Palco completed its first timber cruise since 1986. The
results of the timber cruise provided Palco with an estimate of the volume of
merchantable timber on the Palco Timberlands. The new cruise data reflected a
0.1 million MBF decrease in estimated overall timber volume as compared to the
estimated volumes reported as of December 31, 2001 using the 1986 cruise data
(adjusted for harvest and estimated growth). The new cruise data indicates that
there is significantly less old growth timber than estimated as of December 31,
2001, using the 1986 cruise data. There was also an estimated increase in young
growth timber volume almost equal to the estimated decrease in old growth timber
volume. This change in mix could adversely affect the Company's revenues.
However, because there are many variables that affect revenues and
profitability, the Company cannot quantify the effect of the revised estimate on
current and future cash flows. The new timber volumes are now being utilized in
various aspects of Palco's operations, including estimating volumes on THPs and
determining depletion expense.
HARVESTING PRACTICES
The ability of Palco to harvest timber depends in large part upon its
ability to obtain regulatory approval of THPs. Prior to harvesting timber in
California, companies are required to obtain the CDF's approval of a detailed
THP for the area to be harvested. A THP must be submitted by a Registered
Professional Forester and must include information regarding the method of
proposed timber operations for a specified area, whether the operations will
have any adverse impact on the environment and, if so, the mitigation measures
to be used to reduce any such impact. The CDF's evaluation of THPs incorporates
review and analysis of such THPs by several California and federal agencies and
public comments received with respect to such THPs. The number of Palco's
approved THPs and the amount of timber covered by such THPs varies significantly
from time to time, depending upon the timing of agency review and other factors.
Timber covered by an approved THP is typically harvested within a one-year
period from the date that harvesting first begins. The Timber Notes Indenture
requires Scotia LLC to use its best efforts (consistent with prudent business
practices) to maintain a number of pending THPs which, together with THPs
previously approved, would cover rights to harvest a quantity of Scotia LLC
Timber adequate to pay interest and principal amortization based on the Minimum
Principal Amortization schedule (as set forth in the Timber Notes Indenture) for
the Timber Notes for the next succeeding twelve-month period. See "--Regulatory
and Environmental Factors," Item 3. "Legal Proceedings--Forest Products
Litigation," and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for various legal, regulatory,
environmental and other challenges being faced by Palco in connection with
timber harvesting and other operations on its timberlands.
Palco maintains a detailed geographical information system covering its
timberlands (the "GIS"). The GIS covers numerous aspects of Palco's timber
properties, including timber type, site productivity class, wildlife and
botanical data, geological information, roads, rivers and streams. Pursuant to
the Services Agreement (defined below), Palco, to the extent necessary, provides
Scotia LLC with personnel and technical assistance in updating, upgrading and
improving the GIS and the other computer systems owned by Scotia LLC. By
carefully monitoring and updating this data base and conducting field studies,
Scotia LLC's foresters are better able to develop detailed THPs addressing the
various regulatory requirements. Palco also utilizes a Global Positioning System
("GPS") which can provide precise location of geographic features through
satellite positioning. Use of the GPS greatly enhances the quality and
efficiency of the GIS data.
Palco employs a variety of well-accepted methods of selecting trees for
harvest designed to achieve optimal growth and regeneration. These methods,
referred to as "silvicultural systems" in the forestry profession, range from
very light thinnings (aimed at enhancing the growth rate of retained trees) to
clear cutting, which results in the harvest of nearly all trees in an area (with
the exception of sub-merchantable trees and trees retained for wildlife
protection and future stand enhancement) and replacement with a new forest
stand. In between are a number of varying levels of partial harvests which can
be employed.
PRODUCTION FACILITIES
Palco operates two highly mechanized sawmills and related facilities
located in Fortuna and Carlotta, California. Palco's sawmills historically have
been supplied almost entirely from timber harvested from Palco's timberlands,
but are supplemented from time to time by logs purchased from third parties.
Palco has over the years implemented numerous technological advances that have
increased the operating efficiency of its production facilities and the recovery
of finished products from its timber. Palco (excluding Britt, which became a
subsidiary of Palco in early 2004) produced approximately 213, 194 and 160
million board feet of lumber in 2003, 2002 and 2001, respectively. The Fortuna
sawmill produces primarily common grade lumber. The Carlotta sawmill produces
both common and upper grade redwood lumber. As part of Palco's strategic review
of its operations, Sawmills "A" and "B" in Scotia, California, were closed in
2001. See "--General."
In January 2004, Palco completed a new $5 million planer project in
Scotia. The new high speed state-of-the-art system will process rough sawn
boards into finished lumber much more efficiently than older planers at the
Fortuna and Carlotta mills, which the new system replaced. In mid-February 2004,
Palco announced a $25 million mill improvement project, including a new
state-of-the-art sawmill to be located in Scotia. Funds for this project will
come from existing cash resources and borrowings under Palco's new credit
facility. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and Investing and
Financing Activities--Overview." The mill improvement project will be completed
in several phases during 2004 and early 2005. The new sawmill will allow more
efficient processing of smaller second growth logs (up to 24" in diameter) and
reduce operating and other costs. As part of the mill improvement project, the
equipment from the Carlotta mill will be moved to the new mill in Scotia and
used to process logs larger than 24" in diameter. After this equipment is moved,
the Carlotta mill will be permanently closed, and management is considering
alternative uses for the property.
Britt's primary business is the processing of small diameter redwood logs
into fencing products for sale to retail and wholesale customers. Britt
purchases, primarily from Palco but also from other timberland owners, small
diameter (6 to 15 inch) redwood logs of varying lengths. Britt processes these
logs at its mill into a variety of fencing products, including "dog-eared" 1" by
6" fence stock in six foot lengths, 4" by 4" fence posts in 6 through 12 foot
lengths, and other lumber products in 6 through 12 foot lengths. Britt's mill
and related remanufacturing facility are located in Arcata, California. Britt
produced approximately 76, 74 and 74 million board feet of lumber in 2003, 2002
and 2001, respectively.
Palco operates a finishing and remanufacturing plant in Scotia which
processes rough lumber into a variety of finished products such as trim, fascia,
siding and paneling. Remanufacturing enhances the value of some grades of lumber
by assembling knot-free pieces of narrower and shorter lumber into wider or
longer pieces in Palco's state-of-the-art end and edge glue plant. The result is
a standard sized upper grade product which can be sold at a significant premium
over common grade products. Palco has also installed a lumber remanufacturing
facility at its mill in Fortuna which processes low grade redwood common lumber
into value-added, higher grade redwood fence and related products.
Palco dries a substantial portion of its lumber before it is sold. Air or
kiln-dried lumber generally commands higher prices than "green" lumber, which is
lumber sold before it has been dried. Drying also allows Palco to compete in
additional markets (due to lower shipping costs resulting from the moisture and
weight reduction which occurs in the drying process). Palco owns and can operate
up to 35 kilns having an annual capacity of approximately 95 million board feet.
Palco owns and operates a cogeneration power plant which is fueled by the
wood residue from logging and lumber production operations. The operations of
Palco and Britt supplied 61% of the fuel in 2003. The power plant is capable of
producing up to 35 megawatts per hour and generates substantially all of the
energy requirements of Scotia, California, the town adjacent to Palco's
timberlands where several of its facilities are located and where a number of
its employees live. Palco sells surplus power to Pacific Gas and Electric
Company. In 2003, the sale of surplus power accounted for approximately 6% of
Palco's total revenues.
PRODUCTS
The following table sets forth the distribution of MGI's lumber production
(on a net board foot basis) and revenues by product line:
YEAR ENDED DECEMBER 31, 2003 YEAR ENDED DECEMBER 31, 2002
--------------------------------------------- ----------------------------------------
% OF TOTAL % OF TOTAL
LUMBER % OF TOTAL LUMBER % OF TOTAL
PRODUCTION LUMBER % OF TOTAL PRODUCTION LUMBER % OF TOTAL
PRODUCT VOLUME REVENUES REVENUES VOLUME REVENUES REVENUES
- ----------------------------------- ------------- ------------ ------------ ----------- ----------- -----------
Upper grade redwood lumber......... 9% 18% 16% 8% 21% 18%
Common grade redwood lumber........ 72% 70% 62% 81% 71% 60%
------------- ------------ ------------ ----------- ----------- -----------
Total redwood lumber............ 81% 88% 78% 89% 92% 78%
------------- ------------ ------------ ----------- ----------- -----------
Upper grade Douglas-fir lumber..... 1% 3% 3% 2% 4% 3%
Common grade Douglas-fir lumber.... 15% 8% 7% 9% 4% 4%
------------- ------------ ------------ ----------- ----------- -----------
Total Douglas-fir lumber........ 16% 11% 10% 11% 8% 7%
------------- ------------ ------------ ----------- ----------- -----------
Other grades of lumber............. 3% 1% 1% 0% 0% 0%
------------- ------------ ------------ ----------- ----------- -----------
Total lumber................. 100% 100% 89% 100% 100% 85%
============= ============ ============ =========== =========== ===========
Logs............................... 3% 7%
============ ===========
Wood chips......................... 2% 1%
============ ===========
In 2003, MGI sold 298.7 million board feet of lumber. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Forest Products Operations" for additional
information. Lumber products vary greatly by the species and quality of the
timber from which they are produced. Lumber is sold not only by grade (such as
"upper" grade versus "common" grade), but also by board size and the drying
process associated with the lumber.
Redwood lumber has historically been MGI's largest product category.
Redwood is commercially available only along the northern coast of California
and possesses certain unique characteristics that permit it to be sold at a
premium to many other wood products. Such characteristics include its natural
beauty, superior ability to retain paint and other finishes, dimensional
stability and innate resistance to decay, insects and chemicals. Typical
applications include exterior siding, trim and fascia for both residential and
commercial construction, outdoor furniture, decks, planters, retaining walls and
other specialty applications. Redwood also has a variety of industrial
applications because of its chemical resistance and because it does not impart
any taste or odor to liquids or solids.
Upper grade redwood lumber, which is derived primarily from large diameter
logs and is characterized by an absence of knots and other defects, is used
primarily in distinctive interior and exterior applications. The overall supply
of upper grade lumber has been diminishing due to increasing environmental and
regulatory restrictions and other factors. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
Operations--Forest Products Operations--Industry Overview and Selected
Operational Data." Common grade redwood lumber, historically MGI's largest
volume product, has many of the same aesthetic and structural qualities of
redwood uppers, but has some knots, sapwood and a coarser grain. Such lumber is
commonly used for construction purposes, including outdoor structures such as
decks, hot tubs and fencing.
Douglas-fir lumber is used primarily for new construction and some
decorative purposes and is widely recognized for its strength, hard surface and
attractive appearance. Douglas-fir is grown commercially along the west coast of
North America and in Chile and New Zealand. Upper grade Douglas-fir lumber is
derived primarily from old growth Douglas-fir timber and is used principally in
finished carpentry applications. Common grade Douglas-fir lumber is used for a
variety of general construction purposes and is largely interchangeable with
common grades of other whitewood lumber.
MGI does not have any significant contractual relationships with third
parties relating to the purchase of logs. During 2003, MGI purchased
approximately 8.6 million board feet of logs from third parties. Palco produces
softwood chips from the wood residue from its milling operations. These chips
are sold to third parties for the production of wood pulp and paper products.
Subject principally to economic feasibility, Palco also produces and sells to
third parties wood chips from hardwood trees.
BACKLOG AND SEASONALITY
MGI's backlog of sales orders at December 31, 2003 was $35.2 million, of
which it is estimated that $12.8 million will be shipped in the first quarter of
2004. The sales backlog at December 31, 2002, was $42.7 million, of which $13.5
million was shipped in the first quarter of 2003. MGI has historically
experienced lower first quarter sales due largely to the general decline in
construction-related activity during the winter months. As a consequence, MGI's
results in any one quarter are not necessarily indicative of results to be
expected for the full year. See "--Regulatory and Environmental Factors" below
and Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Forest Products
Operations--Industry Overview and Selected Operational Data."
MARKETING
The housing, construction and remodeling markets are the primary markets
for MGI's lumber products. MGI's goal is to maintain a wide distribution of its
products geographically. MGI's accounts are primarily wholesale, followed by
industrial end users, manufacturers, retailers and exporters. Upper grades of
redwood and Douglas-fir lumber are sold throughout the entire United States, as
well as to export markets. Common grades of redwood lumber are sold principally
west of the Mississippi River, with California accounting for approximately 79%
of common redwood sales in 2003. Common grades of Douglas-fir lumber are sold
primarily in California. In 2003, MGI's largest three customers accounted for
approximately 10%, 7% and 5%, respectively, of MGI's total net lumber sales.
Exports of lumber accounted for approximately 3% of MGI's total net lumber sales
in 2003. MGI markets its products through its own sales staff which focuses
primarily on domestic sales.
MGI actively follows trends in the housing, construction and remodeling
markets in order to maintain an appropriate level of inventory and assortment of
products. Due to its high quality products, strong brand recognition,
competitive prices and long history, MGI believes it has a strong degree of
customer loyalty.
COMPETITION
MGI's lumber is sold in highly competitive markets. Competition is
generally based upon a combination of price, service, product availability and
product quality. MGI's products compete not only with other wood products but
with metals, masonry, plastic and other construction materials made from
non-renewable resources. The level of demand for MGI's products is dependent on
such broad factors as overall economic conditions, interest rates and
demographic trends. In addition, competitive considerations, such as total
industry production and competitors' pricing, as well as the price of other
construction products, affect the sales prices for MGI's lumber products.
Competition in the common grade redwood and Douglas-fir lumber market is
intense, with MGI competing with numerous large and small lumber producers. MGI
primarily competes with the northern California mills of Simpson, Redwood Empire
and Mendocino Redwood.
EMPLOYEES
As of March 1, 2004, MGI had approximately 920 employees.
RELATIONSHIP WITH SCOTIA LLC
Scotia LLC's foresters, wildlife and fisheries biologists, geologists,
botanists and other personnel are responsible for providing a number of forest
stewardship techniques, including protecting the timber located on the Scotia
LLC Timberlands from forest fires, erosion, insects and other damage, overseeing
reforestation activities and monitoring environmental and regulatory compliance.
Scotia LLC's personnel are also responsible for preparing THPs and updating the
information contained in the GIS. See "--Harvesting Practices" above for a
description of the GIS updating process and the THP preparation process.
Scotia LLC and Palco are parties to several agreements, including a master
purchase agreement (the "MASTER PURCHASE AGREEMENT") and a services agreement
(the "SERVICES AGREEMENT"), relating to the conduct of their operations. The
Master Purchase Agreement governs the sale to Palco by Scotia LLC of logs
harvested from the Scotia LLC Timber. Under the Services Agreement, Palco
provides operational, management and related services to Scotia LLC with respect
to the Scotia LLC Timberlands. Scotia LLC and Palco are also parties to
agreements providing for reciprocal rights of ingress and egress through their
respective properties, the indemnification of Scotia LLC by Palco for
environmental liabilities incurred in connection with the Scotia LLC
Timberlands, and the provision of services by Scotia LLC to Palco.
REGULATORY AND ENVIRONMENTAL FACTORS
This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See this section and
"Business--General" above for cautionary information with respect to such
forward-looking statements.
General
Palco's business is subject to the Environmental Plans and a variety of
California and federal laws and regulations dealing with timber harvesting,
threatened and endangered species and habitat for such species, and air and
water quality. Compliance with such laws and regulations also plays a
significant role in Palco's business. The California Forest Practice Act (the
"FOREST PRACTICE ACT") and related regulations adopted by the California Board
of Forestry and Fire Protection (the "BOF") set forth detailed requirements for
the conduct of timber harvesting operations in California. These requirements
include the obligation of timber companies to obtain regulatory approval of
detailed THPs containing information with respect to areas proposed to be
harvested. See "--Harvesting Practices" above. California law also requires
large timberland owners, including Palco, to demonstrate that their proposed
timber operations constitute the maximum sustainable production of their
timberlands over time. See "--Timber and Timberlands" above. The federal
Endangered Species Act (the "ESA") and California Endangered Species Act (the
"CESA") provide in general for the protection and conservation of specifically
listed wildlife and plants. These laws generally prohibit the take of certain
species, except for incidental take pursuant to otherwise lawful activities
which do not jeopardize the continued existence of the affected species and
which are made in accordance with an approved habitat conservation plan and
related incidental take permits. A habitat conservation plan, among other
things, specifies measures to minimize and mitigate the potential impact of the
incidental take of species and to monitor the effects of the activities covered
by the plan. Palco is also subject to the California Environmental Quality Act
(the "CEQA"), which provides for protection of the state's air and water quality
and wildlife, and the California Porter-Cologne Water Quality Control Act and
federal Clean Water Act (the "CWA"), which require that Palco conduct its
operations so as to reasonably protect the water quality of nearby rivers and
streams. Compliance with such laws, regulations and judicial and administrative
interpretations, together with other regulatory and environmental matters, have
resulted in restrictions on the scope and timing of Palco's timber operations
(such as recent actions of the regional water board and its staff--see "--Water
Quality" below), increased operational costs, and engendered litigation and
other challenges to its operations.
The Environmental Plans
The Environmental Plans, consisting of the HCP and the SYP, were approved
by the federal and state governments upon the consummation of the Headwaters
Agreement. In connection with approval of the Environmental Plans, incidental
take permits (the "PERMITS") were issued with respect to certain threatened,
endangered and other species found on the timberlands covered by the
Environmental Plans. The Permits were to cover the 50-year term of the HCP and
allow incidental take of 17 different species covered by the HCP, including nine
species which are found on the Palco Timberlands that have been listed under the
ESA and/or the CESA (see Item 3. "Legal Proceedings--Forest Products Litigation"
for the status of two lawsuits pursuant to which a California state trial court
has invalidated the SYP and the California Permits). The agreements which
implement the Environmental Plans also provide for various remedies (including
the issuance of written stop orders and liquidated damages) in the event of a
breach by the Palco Companies of these agreements or the Environmental Plans.
Under the HCP, harvesting activities are prohibited or restricted on
certain areas of the Palco Timberlands. Some of these restrictions continue for
the entire 50-year term of the HCP. For example, several areas (consisting of
substantial quantities of timber, including old growth redwood and Douglas-fir
timber) are designated as habitat conservation areas for the marbled murrelet, a
coastal seabird, and certain other species. Harvesting in certain other areas of
the Palco Timberlands is currently prohibited while these areas are evaluated
for the potential risk of landslide. Further, additional areas alongside streams
have been designated as buffers, in which harvesting is prohibited or
restricted, to protect aquatic and riparian habitat. Restrictions on harvest in
streamside buffers and potential landslide prone acres may be adjusted up or
down, subject to certain minimum and maximum buffers, based upon the ongoing
watershed analysis process described below. The adaptive management process
described below may also be used to modify most of these restrictions.
The first analysis of a watershed, Freshwater, was released in June 2001.
This analysis was used by the Palco Companies and the government agencies to
develop proposed harvesting prescriptions. Prescriptions for the Van Duzen
watershed were approved in January 2004. Prescriptions for a third watershed
(Lower Eel - Eel Delta) were approved in March 2004. The Freshwater, Van Duzen
and Lower Eel prescriptions each resulted in a reduction in the size of the
streamside buffers set forth in the Environmental Plans and also provide for
geologic reviews in order to conduct any harvesting activities on potential
landslide-prone areas. This effectively reduced both the size and operational
restrictions in respect of landslide-prone areas. At least one additional
watershed analysis study is expected to be completed in 2004. The HCP required
the Palco Companies, together with the government agencies, to establish a
schedule resulting in completion of the initial watershed analysis process for
all covered lands within five years. However, due largely to the number of
agencies involved and the depth and complexity of the analyses, the process has
thus far proven to require more time than originally anticipated. Accordingly,
the Palco Companies have been working with the government agencies to establish
an appropriate timeline and to streamline the process for implementation of
watershed analysis on the remaining portions of Palco Timberlands to ensure that
such studies are time and cost efficient, and that such studies continue to
provide scientific results necessary to evaluate potential changes to the
harvesting restrictions on those lands. Palco expects to shortly receive an
extension of the five-year deadline.
The HCP imposes certain restrictions on the use of roads on the
timberlands covered by the HCP during several months of the year and during
periods of wet weather. However, Palco has conducted, and expects to be able to
continue to conduct, some harvesting during these periods. An adaptive
management change approved in 2003 for the road restrictions has improved
Palco's ability to construct and use its roads in ways that are consistent with
the operational needs of the Palco Companies. The HCP also requires that 75
miles of roads be stormproofed (i.e., reconstructed to reduce sediment
generation) on an annual basis and that certain other roads must be improved or
repaired. The nature of this work requires that it be performed in the dry
periods of the year. To date, over 415 miles of roads have been stormproofed.
The HCP contains an adaptive management provision, which both the state
and federal governments have clarified will be implemented on a timely and
efficient basis, and in a manner which will be both biologically and
economically sound. This provision allows the Palco Companies to propose changes
to many of the HCP prescriptions based on, among other things, economic
considerations. The regulatory agencies have also clarified that in applying
this adaptive management provision, to the extent the changes proposed do not
result in the jeopardy of a particular species, the regulatory agencies will
consider the practicality of the suggested changes, including the cost and
economic feasibility and viability. The Palco Companies and the agencies have
implemented various adaptive management changes related to wildlife and rare
plants, and other changes relating to roads and streamside buffers. These
adaptive management changes have increased Palco's ability to conduct harvesting
operations and/or reduce operating costs while still meeting the obligations of
the Environmental Plans.
Water Quality
Under the CWA, the Environmental Protection Agency (the "EPA") is required
to establish total maximum daily load limits ("TMDLS") in water courses that
have been declared to be "water quality impaired." The EPA and the North Coast
Regional Water Quality Control Board ("NORTH COAST WATER BOARD") are in the
process of establishing TMDLs for many northern California rivers and certain of
their tributaries, including nine water courses that flow within the Palco
Timberlands. The Company expects this process to continue into 2010. In December
1999, the EPA issued a report dealing with TMDLs on two of the nine water
courses. The agency indicated that the requirements under the HCP would
significantly address the sediment issues that resulted in TMDL requirements for
these water courses. The North Coast Water Board has begun the process of
establishing the TMDL requirements applicable to two other water courses on the
Palco Timberlands, with a targeted completion of spring 2005 for these two water
courses. Palco's scientists are actively working with North Coast Water Board
staff to ensure these TMDLs recognize and incorporate the environmental
protection measures of the HCP. The final TMDL requirements applicable to the
Palco 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.
The North Coast Water Board has issued orders for Palco's Elk River and
Freshwater watersheds requiring the Palco Companies to submit "Reports of Waste
Discharge" in order to conduct winter harvesting activities in these two
watersheds. After consideration of these reports, the North Coast Water Board
imposed requirements on the Palco Companies to implement additional mitigation
and erosion control practices in these watersheds for the 2002-2003 and
2003-2004 winter operating periods. The North Coast Water Board is requiring
that new watershed waste discharge requirements be developed for the Elk River
and Freshwater watersheds. The North Coast Water Board has also specified that
until these new requirements are developed, Palco must apply additional
mitigation and erosion control practices in these two watersheds and three
additional watersheds (Bear, Jordan and Stitz Creek). Palco and the North Coast
Water Board are currently in discussions to determine what these measures will
be. The requirements imposed to date by the North Coast Water Board have
modestly increased operating costs; additional requirements imposed in the
future could further increase costs and cause delays in THP approvals or lower
harvest levels. In addition, the North Coast Water Board has issued a clean up
and abatement order (the "ELK RIVER ORDER") for the Elk River watershed, which
is aimed at addressing existing sediment production sites 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, as well as additional orders in respect of the other watersheds
(should they be issued), could result in significant costs to Palco beginning in
2004 and extending over a number of years. The Palco Companies' appeal of the
Elk River Order to the State Water Resources Control Board (the "STATE WATER
BOARD") was denied. Palco is in the process of appealing the decision of the
State Water Board in state court. Palco is not able to readily move its
harvesting activities between watersheds due to, among other things, historic
harvest patterns, adjacency restrictions, and the age classes of trees.
In October 2003, California enacted Senate Bill 810, which provides
regional water quality control boards with additional authority related to the
approval of THPs. Under this law, which became effective on January 1, 2004, a
THP "may not be approved if the appropriate regional water quality control board
finds, based on substantial evidence, that the timber operations proposed in the
plan will result in a discharge into a watercourse that has been classified as
impaired due to sediment...that causes or contributes, to a violation of the
regional water quality control plan." 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 Palco
Timberlands are classified as impaired, implementation of this law could result
in delays in obtaining approval of THPs, lower harvest levels and increased
costs and additional protection measures beyond those contained in the HCP. See
also Item 3. "Legal Proceedings--Forest Products Litigation" for a description
of the THP No. 520 lawsuit.
Impact of Future Legislation
Laws, regulations and related judicial decisions and administrative
interpretations dealing with MGI's business are subject to change and new laws
and regulations are frequently introduced concerning the California timber
industry. From time to time, bills are introduced in the California legislature
and the U.S. Congress which relate to the business of MGI, including the
protection and acquisition of old growth and other timberlands, threatened and
endangered species, environmental protection, air and water quality and the
restriction, regulation and administration of timber harvesting practices. In
addition to existing and possible new or modified statutory enactments,
regulatory requirements and administrative and legal actions, the California
timber industry remains subject to potential California or local ballot
initiatives, and federal and California judicial decisions which could affect
timber harvesting practices. It is not possible to assess the effect of such
future legislative, judicial and administrative developments on MGI or its
business.
Timber Operators License
In order to conduct logging operations, road building, stormproofing and
certain other activities, a company must obtain a Timber Operator's License from
the CDF. In December 2003, Palco was granted a Timber Operator's License for
2004-2005.
REAL ESTATE OPERATIONS
GENERAL
The Company, principally through its wholly owned subsidiaries, invests in
and develops residential and commercial real estate primarily in Puerto Rico,
Arizona, California, and Texas. Real estate properties and receivables as of
December 31, 2003 are as follows:
BOOK VALUE AS
OF DECEMBER 31,
2003
----------------
(IN MILLIONS)
Palmas del Mar (Puerto Rico):
Undeveloped land and parcels held for sale................................. 1,183 acres $ 31.9
Property, plant and equipment, receivables and other, net.................. 10.4
----------------
Total................................................................... 42.3
Resort operations - Palmas Country Club(1)................................. 26.8
--------------
Total................................................................. 69.1
----------------
Fountain Hills (Arizona):
Residential, commercial and industrial developed lots...................... 45 lots 3.9
Undeveloped residential land............................................... 937 acres 11.0
Property, plant, equipment and receivables, net............................ 1.4
----------------
Total................................................................... 16.3
----------------
Mirada (California):
Residential developed lots and lots under development...................... 61 lots 23.7
Undeveloped land........................................................... 57 acres 10.3
Property, plant, equipment and receivables, net............................ 0.8
----------------
Total................................................................... 34.8
----------------
Commercial lease properties:
Property, plant and equipment, net:
Lake Pointe Plaza (Texas)............................................... 118.2
Cooper Cameron building (Texas)......................................... 31.3
Motel 6 facilities (10 states).......................................... 49.6
Other................................................................... 3.3
----------------
Total................................................................. 202.4
----------------
Other, principally receivables................................................ 4.7
----------------
Total real estate properties and receivables.......................... $ 327.3
================
- ---------------
(1) Palmas Country Club operations include two 18-hole golf courses, a 20
court tennis facility, a member clubhouse, and a beach club. Amounts
shown are net of accumulated depreciation.
BOOK VALUE AS
OF DECEMBER 31,
2003
---------------
(IN MILLIONS)
Joint Ventures:
FireRock, LLC(1):
Residential developed lots and lots under development................... 52 lots $ 3.9
Golf course, clubhouse and other club facilities........................ 16.5
Other property, plant and equipment, net................................ 3.6
---------------
Total................................................................. $ 24.0
===============
Investment in FireRock, LLC............................................. $ 6.1
===============
- ------------------
(1) 50% owned.
Revenues from real estate operations were as follows (see Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Real Estate Operations" for additional
details on 2003, 2002 and 2001 results):
YEARS ENDED
DECEMBER 31,
-------------------------
2003 2002
----------- ------------
Palmas del Mar:
Real estate sales.................................................................... $ 16.3 $ 14.2
Commercial, resort operations and other.............................................. 8.2 11.1
----------- ------------
Total............................................................................. 24.5 25.3
----------- ------------
Fountain Hills:
Real estate sales.................................................................... 19.3 8.7
Commercial operations and other...................................................... 4.0 3.7
----------- ------------
Total............................................................................. 23.3 12.4
----------- ------------
Mirada:
Real estate sales.................................................................... 5.3 0.2
Commercial operations and other...................................................... 0.3 -
----------- ------------
Total............................................................................. 5.6 0.2
----------- ------------
Commercial lease properties:
Lake Pointe Plaza.................................................................... 8.6 8.6
Cooper Cameron building.............................................................. 2.3 0.3
Motel 6 facilities................................................................... 4.8 0.4
Other................................................................................ 0.2 -
----------- ------------
Total......................................................................... 15.9 9.3
----------- ------------
Other:
Real estate sales.................................................................... 8.8 1.5
Commercial operations and other...................................................... 0.2 0.2
----------- ------------
Total............................................................................. 9.0 1.7
----------- ------------
Total........................................................................... $ 78.3 $ 48.9
=========== ============
FireRock, LLC(1):
Real estate sales.................................................................... $ 14.2 $ 16.4
Golf course operations .............................................................. 2.5 2.5
----------- ------------
Total............................................................................. $ 16.7 $ 18.9
=========== ============
- -----------------
(1) 50% owned.
PALMAS DEL MAR
Palmas del Mar, a master-planned residential community and resort located
on the southeastern coast of Puerto Rico near Humacao ("PALMAS"), was acquired
by a subsidiary of the Company in 1984. Originally over 2,700 acres, Palmas now
has approximately 1,180 acres of undeveloped land remaining. The Company
conducts its operations at Palmas through Palmas del Mar Properties, Inc.
("PDMPI") and PDMPI's subsidiaries. PDMPI is planning the development and/or
sale of certain of the remaining acreage at Palmas. PDMPI is also considering
various alternatives to accelerate sales of its remaining acreage as well as
disposition of other assets. Resort operations include a timeshare operation and
a country club with two golf courses and tennis and beach club facilities.
Certain other amenities, including a hotel, marina, equestrian center and
various restaurants, are owned and operated by third parties.
FOUNTAIN HILLS
In 1968, a subsidiary of the Company purchased and began developing
approximately 12,100 acres of real property at Fountain Hills, Arizona, which is
located near Phoenix and adjacent to Scottsdale, Arizona. The year-round
population of Fountain Hills is over 21,000. Development of Fountain Hills is
substantially complete, and the Company is planning the sale or development of
the remaining acreage. Future sales are expected to consist mainly of fully
developed lots. The principal undeveloped acreage is comprised of Eagle's Nest,
a 506-acre custom lot development planned to include 245 lots, and Adero Canyon,
a 431-acre custom lot development planned to include 171 lots. The Company has
formulated its development plans with respect to these projects and arranged
financing in respect of the Eagle's Nest project. Financing of the Adero Canyon
development will be accomplished either through new or existing credit
facilities or joint venture arrangements. The local utility which supplies water
to the Fountain Hills project has received notice from the Arizona Department of
Water Resources that the demand for water in the utility's service area exceeds
certain statutory requirements. As a result, development of the Eagle's Nest
project has been delayed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Trends" for further information regarding
the status of this matter.
In 1994, a subsidiary of the Company entered into a joint venture to
develop a 950-acre area in Fountain Hills known as SunRidge Canyon. Lot sales
concluded in 2002 and in December 2003, the Company sold its 50% interest in the
joint venture to the other participant for $1.0 million, resulting in a gain of
$0.8 million.
In 1998, a subsidiary of the Company entered into and holds a 50% interest
in a joint venture to develop an 808 acre area in Fountain Hills known as
FireRock Country Club. The development is a residential, golf-oriented, upscale
master-planned community consisting of three phases of custom lots, three
multifamily parcels and a private country club. The club's championship-level
private 18-hole golf course opened in 2000. The multifamily parcels were sold in
2001 and 2002. Construction of the custom lot portion of the project is
virtually complete, and sell-out of the lots is nearing completion.
MIRADA
In 1991, a subsidiary of the Company acquired Mirada, a 220-acre luxury
resort-residential project located in Rancho Mirage, California. Mirada is a
master-planned community in the Santa Rosa Mountains, 650 feet above the
Coachella Valley floor. Three of the six parcels within the project have been
developed, one of which is the first phase of a custom lot subdivision of 46
estate lots. The Lodge at Rancho Mirage, formerly the Ritz-Carlton Rancho Mirage
Hotel, which is owned and operated by a third party, was developed on the second
parcel. The third parcel is a recently completed custom lot subdivision
comprised of 63 estate lots. The three remaining parcels encompass approximately
57 acres. Under a development agreement with the City of Rancho Mirage which
extends until 2011, this acreage may be developed with a variety of residential
and commercial uses. The Company has obtained final regulatory and environmental
approvals for development of all three of its remaining parcels within Mirada
and is formulating plans for development and/or marketing of these parcels.
COMMERCIAL LEASE PROPERTIES
In June 2001, subsidiaries of the Company acquired Lake Pointe Plaza, an
office complex located in Sugar Land, Texas, for a purchase price of $131.3
million. The transaction was financed by the subsidiaries through the issuance
of $117.3 million of non-recourse notes and the balance from a cash payment of
$14.0 million. The property was acquired subject to two leases to existing
tenants. All of the remaining space, representing a majority of the premises,
was simultaneously leased to an affiliate of the seller. The office complex is
fully leased for a period of 20 years under these three leases. See Note 4 for
further information.
In November 2002, a subsidiary of the Company acquired the Cooper Cameron
building, an office building located in Houston, Texas, for a purchase price of
$32.7 million. The transaction was financed by the subsidiary through a cash
payment of $3.0 million and the issuance of $29.7 million in non-recourse notes.
At the time of the acquisition, the subsidiary simultaneously leased the
property back to the seller for a period of 22 years. See Note 4 for further
information.
In December 2002, a subsidiary of the Company, acquired two business
trusts which own a portfolio of sixteen motel properties located in ten
different states. The purchase price consisted of a cash payment of $3.5
million. The properties secure certain non-recourse notes with an outstanding
principal balance of $49.4 million. The properties were acquired subject to an
existing lease agreement under which the properties are fully leased through
April 2019, and under which all obligations are guaranteed by the parent company
of the current tenant. See Note 4 for further information.
MARKETING
The Company is engaged in marketing and sales programs of varying
magnitudes at its real estate developments. The Company intends to continue
selling undeveloped acreage and semi-developed parcels, generally to builders
and developers, and fully developed lots to individuals and builders. All sales
are made directly to purchasers through the Company's wholly owned brokerage
operations and its marketing personnel, as well as through independent
contractors such as real estate brokers who are compensated by means of
customary real estate brokerage commissions. The Company may also continue to
enter into joint ventures with third parties similar to those entered into in
connection with the SunRidge Canyon and FireRock Country Club developments.
COMPETITION AND REGULATION AND OTHER INDUSTRY FACTORS
There is intense competition among companies in the real estate investment
and development business. Sales and payments on real estate sales obligations
depend, in part, on available financing and/or disposable income and, therefore,
are affected by changes in general economic conditions and other factors. The
real estate development and commercial real estate businesses are subject to
other risks such as shifts in population, fluctuations in the real estate
market, and unpredictable changes in the desirability of residential, commercial
and industrial areas. The resort and time-share business of Palmas competes with
similar businesses in the Caribbean, Florida and other vacation/holiday
destinations. The golfing operation at the FireRock Country Club development
competes with similar businesses in the areas in and surrounding Phoenix,
Arizona.
The Company's real estate operations are subject to comprehensive federal,
state and local regulation. Applicable statutes and regulations may require
disclosure of certain information concerning real estate developments and credit
policies of the Company and its subsidiaries. Periodic approval is required from
various agencies in connection with the design of developments, the nature and
extent of improvements, construction activity, land use, zoning, and numerous
other matters. Failure to obtain such approval, or periodic renewal thereof,
could adversely affect the real estate development and marketing operations of
the Company and its subsidiaries. See "--General--Fountain Hills" above. Various
jurisdictions also require inspection of properties by appropriate authorities,
approval of sales literature, disclosure to purchasers of specific information,
bonding for property improvements, approval of real estate contract forms and
delivery to purchasers of a report describing the property.
EMPLOYEES
As of March 1, 2004, the Company's real estate operations had
approximately 70 employees.
RACING OPERATIONS
GENERAL
SHRP, Ltd. owns and operates Sam Houston Race Park, a Texas Class 1 horse
racing facility located within the greater Houston metropolitan area and Valley
Race Park, a greyhound racing facility located in Harlingen, Texas. In January
2004, a subsidiary of the Company applied to the Texas Racing Commission (the
"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.
RACING OPERATIONS AND FACILITIES
Sam Houston Race Park and Valley Race Park offer pari-mutuel wagering on
live thoroughbred, quarter horse and greyhound racing during meets approved by
the Racing Commission on a yearly basis and on simulcast horse and greyhound
racing throughout the year. Under the Texas Racing Act and related regulations
(collectively, the "RACING ACT"), commission revenues for both facilities are a
designated portion of the pari-mutuel handle. Revenues are also earned on live
and simulcast racing as both a guest and host track (i.e. both facilities
receive broadcasts of live racing conducted from other racetracks under various
guest simulcast agreements and broadcast live racing conducted at Sam Houston
Race Park and Valley Race Park to other race tracks and off track wagering sites
under various host simulcast agreements). Sam Houston Race Park and Valley Race
Park also derive revenues from food and beverages sales, admission and parking
fees, group sales, and advertising sales.
REGULATION OF RACING OPERATIONS
The ownership and operation of horse and greyhound racetracks in Texas are
subject to significant regulation by the Racing Commission under the Racing Act.
The Racing Act provides, among other things, for the allocation of wagering
proceeds among betting participants, purses, racetracks, the state of Texas and
for other purposes, and empowers the Racing Commission to license and regulate
substantially all aspects of horse and greyhound racing in the state. The Racing
Commission must approve the number of live race days that may be offered each
year, as well as all simulcast agreements. Class 1 horse racetracks in Texas are
entitled to conduct at least seventeen weeks of live racing for each breed of
horses (thoroughbreds and quarter horses), while greyhound tracks are entitled
to conduct live racing nearly year round.
MARKETING AND COMPETITION
SHRP, Ltd.'s management believes that the majority of Sam Houston Race
Park's patrons reside within a 25-mile radius, which includes most of the
greater Houston metropolitan area, and that a secondary market of occasional
patrons exists outside the 25-mile radius but within a 50-mile radius of the
facility. Sam Houston Race Park uses a number of marketing strategies in an
attempt to reach these people and make them more frequent visitors to Sam
Houston Race Park. These strategies include newspaper, television, radio and
direct mail advertising to develop awareness, and conducting promotions such as
giveaways and contests to increase customer traffic. Valley Race Park employs
similar strategies to attract patrons. Both race parks also rent out facilities
and grounds for group events, which are often unrelated to racing but which
increase revenues and expose the facility to potential customers. Sam Houston
Race Park had 127 days of live racing during 2003, and currently has 169 days of
live racing scheduled for 2004 (the extra days in 2004 were added to accommodate
requests from the racing industry to alleviate 2004 scheduling issues at the two
other Texas Class 1 horse tracks). Valley Race Park had 129 live racing
performances (over 110 days) during 2003, and currently has 130 live racing
performances (over 92 days) scheduled for 2004.
Sam Houston Race Park competes with other forms of wagering and
entertainment, including a Louisiana "racino" (horse or dog tracks with slot
machines or other forms of gaming) located approximately 120 miles from Houston,
increasing use of the Internet for horse wagering and general gaming, casinos
located approximately 140 miles from Houston, a greyhound racetrack located 55
miles away, a wide range of sporting events and other entertainment activities
in the Houston area, the Texas State Lottery, and charitable bingo. Live racing
also faces increasing competitive pressure from simulcast signals broadcast by
racinos, which are able to offer larger purses and competitive fields. Sam
Houston Race Park could in the future also compete with other forms of gambling
in Texas, including casino gambling on Indian reservations or otherwise. While
Sam Houston Race Park believes that the location of Sam Houston Race Park is a
competitive advantage over the other more distant gaming ventures mentioned
above, the most significant challenges for Sam Houston Race Park are to maintain
its customer base in spite of the above competitive pressures and to develop and
educate new racing fans in a market where pari-mutuel wagering had been absent
from the 1930's to 1994. Other competitive factors faced by Sam Houston Race
Park include the allocation of sufficient live race days by the Racing
Commission and attraction of a sufficient number and quality of race horses to
run at Sam Houston Race Park, particularly in view of the larger purses able to
be offered by racinos. Competitive factors faced by Valley Race Park include the
Texas State Lottery, charitable bingo and Internet-based gaming, as well as the
attraction of sufficient greyhounds to run live racing, along with the ability
of Valley Race Park to market its simulcast signal due to its brief live racing
season.
The Texas legislature, which convenes its regular session every other
year, considered a variety of alternatives during the January-June 2003 session
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, keno, and full
casinos. While the Texas legislature did not enact any of this legislation, the
Company, in conjunction with the Texas racing industry, intends to continue
pursuing legislation to expand the form of gaming available at horse and dog
racing tracks (including at any special legislative session which might be
held). No assurance can be given that these efforts will be successful.
EMPLOYEES
As of March 1, 2004, the Company's racing operations had approximately 550
year-round employees and approximately 200 seasonal employees.
KAISER ALUMINUM
GENERAL AND REORGANIZATION PROCEEDINGS
The Company owns approximately 62% of Kaiser, which operates in several
principal aspects of the aluminum industry--the mining of bauxite, the refining
of bauxite into alumina, the production of primary aluminum from alumina, and
the manufacture of fabricated (including semi-fabricated) aluminum products.
Kaiser, its principal operating subsidiary, Kaiser Aluminum & Chemical
Corporation ("KACC"), and a number of KACC's subsidiaries (collectively, the
"DEBTORS") have filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Code (the "CASES"). The Cases are being jointly administered, with the Debtors
managing their businesses in the ordinary course as debtors-in- possession
subject to the control and supervision of the Bankruptcy Court (the "BANKRUPTCY
COURT"). See Note 12 for additional information regarding the status of the
Debtors' reorganization proceedings.
The Company and its subsidiary, MAXXAM Group Holdings Inc. ("MGHI"),
collectively own 50,000,000 shares of the common stock of Kaiser (the "KAISER
SHARES"). See Note 12 for the description of an agreement which the Company and
MGHI have with Kaiser regarding disposition of the Kaiser Shares. The Debtors
have indicated that they believe that the equity of Kaiser's stockholders,
including the Company, will likely be cancelled without consideration.
MISCELLANEOUS
For further information concerning Kaiser, see Item 3. "Legal
Proceedings--Kaiser Litigation," Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Results of Operations--
Consolidated Operations--Deconsolidation of Kaiser," and Note 12.
SEGMENT INFORMATION
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations" and Note 3 for additional
information regarding revenues, income or loss, and total assets of the
Company's three segments, as well as revenues from the principal products
offered by each.
EMPLOYEES
At March 1, 2004, MAXXAM and its subsidiaries had approximately 1,770
year-round and seasonal employees (excluding those employed by Kaiser), none of
whom are covered by a collective bargaining agreement.
ITEM 2. PROPERTIES
For information concerning the principal properties of the Company, see
Item 1. "Business."
ITEM 3. LEGAL PROCEEDINGS
GENERAL
Several sections in this Item contain statements which constitute
"forward-looking statements" within the meaning of the PSLRA. See this Item and
Item 1. "Business--General" for cautionary information with respect to such
forward- looking statements.
The following describes certain legal proceedings in which the Company or
its subsidiaries are involved. The Company and certain of its subsidiaries are
also involved in various claims, lawsuits and other proceedings not discussed
herein which relate to a wide variety of matters. Uncertainties are inherent in
the final outcome of those and the below-described matters, and it is presently
impossible to determine the actual costs that ultimately may be incurred.
Certain present and former directors and officers of the Company are
defendants in certain of the actions described below. The Company's bylaws
provide for indemnification of its officers and directors to the fullest extent
permitted by Delaware law. The Company is obligated to advance defense costs to
its officers and directors, subject to the individual's obligation to repay such
amount if it is ultimately determined that the individual was not entitled to
indemnification. In addition, the Company's indemnity obligation can under
certain circumstances include amounts other than defense costs, including
judgments and settlements.
MAXXAM INC. LITIGATION
This section describes certain legal proceedings in which MAXXAM Inc. (and
in some instances, certain of its subsidiaries) is involved. The term "Company,"
as used in this section, refers to MAXXAM Inc., except where reference is made
to the Company's consolidated financial position, results of operations or
liquidity.
USAT MATTERS
On December 26, 1995, the United States Department of Treasury's Office of
Thrift Supervision ("OTS") initiated a formal administrative proceeding (the
"OTS ACTION") against the Company and others alleging, among other things,
misconduct by the Company and certain of its affiliated persons (collectively,
the "RESPONDENTS") and others with respect to the failure of United Savings
Association of Texas ("USAT"). The OTS sought damages ranging from $326.6
million to $821.3 million under various theories. Following 110 days of
proceedings before an administrative law judge during 1997-1999, and over two
years of post-trial briefing, on September 12, 2001, the administrative law
judge 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 and with no admission of wrongdoing on the part of the Respondents. The
Respondents also agreed to accept for three years certain restrictions with
respect to insured financial institutions (including not becoming a controlling
shareholder or otherwise serving as an institution-affiliated party). The
Company does not believe that these restrictions are significant as it has no
present or contemplated intention to engage in any of these activities.
On August 2, 1995, the Federal Deposit Insurance Corporation ("FDIC")
filed a civil action entitled Federal Deposit Insurance Corporation, as manager
of the FSLIC Resolution Fund v. Charles E. Hurwitz (the "FDIC ACTION") in the
U.S. District Court for the Southern District of Texas (No. H-95-3956). The
original complaint was against Mr. Charles E. Hurwitz (Chairman and Chief
Executive Officer of the Company) and alleged damages in excess of $250.0
million based on the allegation that Mr. Hurwitz was a controlling shareholder,
de facto senior officer and director of USAT, and was involved in certain
decisions which contributed to the insolvency of USAT. The FDIC action has been
dismissed as a result of the settlement of the OTS action. This dismissal does
not affect the motion for sanctions described in the following paragraph.
On May 31, 2000, the Respondents filed a counterclaim to the FDIC action
in the U.S. District Court in Houston, Texas (No. H95-3956). On November 8,
2002, the Respondents filed an amended counterclaim and an amended motion for
sanctions (collectively, the "SANCTIONS MOTION"). The Sanctions Motion states
that the FDIC illegally paid the OTS to bring claims against the Respondents and
that the FDIC illegally sued for an improper purpose. 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 December 31,
2003, such fees were in excess of $40.0 million. The Respondents are pursuing
this claim vigorously.
In September 1997, the Company filed suit against a group of its insurers
after unsuccessful negotiations with certain of the insurers regarding coverage,
under the terms of certain directors and officers liability policies, of
expenses incurred in connection with the OTS and FDIC actions. The insurers
requested arbitration and as a result the lawsuit was dismissed in April 1998.
Following binding arbitration, the arbitration panel in February 2003 awarded
the Company $6.5 million plus interest. The matter was subsequently settled for
$8.0 million.
On January 16, 2001, an action was filed against the Company, Federated
Development Company (the predecessor of a principal shareholder of the Company;
"FEDERATED") and certain of the Company's directors in the Court of Delaware
Chancery Court entitled Alan Russell Kahn v. Federated Development Co., MAXXAM
Inc., et al., Civil Action 18623NC (the "KAHN LAWSUIT"). 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 have 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 position, results of operations or liquidity.
FOREST PRODUCTS LITIGATION
A California state court has invalidated the SYP in connection with two
lawsuits filed against the Palco Companies and described below, which decision
has been appealed. Other pending lawsuits could affect Palco's ability to
implement the HCP, implement certain of Palco's approved THPs, or carry out
certain other operations, as discussed below. One such lawsuit was resolved
during 2003 (see below). Certain of the remaining pending cases are described
below.
In March 1999, 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. (the
"EPIC-SYP/PERMITS LAWSUIT") was filed in Superior Court in Humboldt County,
California (No. CV-990445). This action alleged, among other things, various
violations of the CESA and the CEQA, 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
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 (the "USWA
LAWSUIT") was filed in Superior Court in Humboldt County, California (No.
CV-990452) challenging the validity and legality of the SYP. The
EPIC-SYP/Permits and USWA lawsuits were consolidated for trial. On October 31,
2003, the Court entered a judgment invalidating the SYP and the California
Permits due to several deficiencies in agency procedures and the failure of
Palco 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 these specific THPs. As a result of this case, Palco has since
October 2002 been obtaining review and approval of new THPs under a procedure
provided for in the forest practice rules that does not depend upon the SYP and
the California Permits, and expects to follow this procedure for the foreseeable
future. On November 19, 2003, Palco appealed the October 31, 2003, decision. On
January 29, 2004, the plaintiffs in these lawsuits filed claims against the
defendants totaling $5.8 million for reimbursement of attorneys fees and other
expenses incurred in connection with these matters.
In July 2001, an action entitled Environmental Protection Information
Center v. The Pacific Lumber Company, Scotia Pacific Company LLC (No. C01-2821)
was filed in the U.S. District Court for the Northern District of California
(the "BEAR CREEK LAWSUIT") and later amended to add the EPA as a defendant. The
lawsuit alleges that Palco's harvesting and other forestry activities under
certain of its 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 defendant's 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 Palco's timber operations, it may have some or all of the
following effects: impose additional permitting requirements, delay approvals of
THPs, increase harvesting costs, and add 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 the Company's
belief that the requirements under the HCP are adequate to ensure that sediment
and pollutants from its harvesting activities 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. Palco has filed a motion requesting that the Court permit an intermediate
appeal of its October 14 ruling.
On November 20, 2002, an action entitled Humboldt Watershed Council, et al
v. North Coast Regional Water Quality Control Board, et al. (No. CPF02-502062)
(the "HWC 2002 LAWSUIT"), naming Palco as real party in interest, was filed in
the Superior Court for the County of San Francisco. The suit sought to enjoin
Palco's timber operations in the Elk River and Freshwater watersheds until and
unless the regional and state water boards imposed on those operations waste
discharge requirements that met standards demanded by the plaintiff. In August
2003, this case was dismissed by the Court at the request of the plaintiff.
On November 20, 2002, two similar actions entitled Alan Cook, et al. v.
Gary Clark, et al. (the "COOK ACTION") and Steve Cave, et al. v. Gary Clark, et
al. (the "CAVE ACTION") were filed in the Humboldt County Superior Court (No.'s
DR020718 and DR 020719, respectively), which also name Palco 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 Palco 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 Palco Timberlands). The Company does not believe the
resolution of these actions should result in a material adverse effect on its
financial condition, results of operations or liquidity.
On February 25, 2003, the District Attorney of Humboldt County filed a
civil suit entitled The People of the State of California v. The Pacific Lumber
Company, Scotia Pacific Holding Company and Salmon Creek Corporation in the
Superior Court of Humboldt County (No. DR030070) (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 the Palco
Companies being able to harvest significantly more trees under the Environmental
Plans than would have otherwise been the case. The suit seeks 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. A hearing on Palco's motions for sanctions and
dismissal of the case was held on July 28, 2003, and Palco is awaiting the
Court's decision. The Company believes that this suit is without merit; however,
there can be no assurance that the Palco Companies will prevail or that an
adverse outcome would not be material to the Company's consolidated financial
position, results of operations and/or liquidity.
On December 17, 2003, an action entitled Humboldt Watershed Council, et
al. v. North Coast Regional Water Quality Board, et al. (the "HWC 2003
LAWSUIT"), naming Palco as real party in interest, was filed in the Humboldt
County Superior Court (No. CV030961). The plaintiffs allege that the North Coast
Water Board should have required waste discharge reports in respect of all
timber harvesting activities in the Freshwater and Elk River watersheds, and are
seeking to have this requirement imposed on Palco. The Company does not believe
that the resolution of this action should result in a material adverse effect on
its financial condition, results of operations or liquidity.
On November 16, 2001, Palco filed a case entitled The Pacific Lumber
Company, et al. v. California State Water Resources Control Board (No. DR010860)
in the Humboldt County Superior Court (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. When the staff of the North Coast Water Board
attempted to impose these mitigation measures in spite of the CDF's decision,
Palco appealed to the State Water Board, which imposed certain of the requested
mitigation measures and rejected others. Palco filed the THP No. 520 lawsuit
challenging the State Water Board's decision, and in January 2003, the Superior
Court granted Palco's 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 intends
to seek review of the appellate court's decision by the California Supreme
Court.
KAISER LITIGATION
See Note 12 for a discussion of Kaiser's reorganization proceedings.
Kaiser is a defendant in a number of lawsuits, some of which involve claims of
multiple persons, in which the plaintiffs allege that certain of their injuries
were caused by, among other things, exposure to asbestos during, and as a result
of, their employment or association with Kaiser or exposure to products
containing asbestos produced or sold by Kaiser. A variety of other lawsuits and
claims are pending against Kaiser. Generally, claims against Kaiser arising from
actions or omissions prior to the dates on which the Debtors filed their Cases
will be settled in connection with Kaiser's plan of reorganization.
OTHER MATTERS
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 position,
results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, $.50 par value ("COMMON STOCK"), is traded on
the American Stock Exchange. The stock symbol is MXM. The following table sets
forth, for the calendar periods indicated, the high and low sales prices per
share of the Company's Common Stock as reported on the American Stock Exchange
Consolidated Composite Tape.
2003 2002
------------------------------------------------
HIGH LOW HIGH LOW
---------- ----------- ---------- ----------
First quarter................................................... $ 9.61 $ 8.20 $ 17.80 $ 9.40
Second quarter.................................................. 15.31 8.84 13.35 10.50
Third quarter................................................... 16.16 12.90 11.05 7.00
Fourth quarter.................................................. 19.73 14.65 10.90 6.04
The following table sets forth the number of record holders of each class
of publicly owned securities of the Company at March 1, 2004:
NUMBER OF
RECORD
TITLE OF CLASS HOLDERS
- ------------------------------------------------------------------------------------------------ -----------
Common Stock.................................................................................... 2,860
Class A $.05 Non-cumulative Participating Convertible Preferred Stock........................... 20
The Company has not declared any cash dividends on its capital stock and
has no present intention to do so.
ITEM 6. SELECTED FINANCIAL DATA
The following summary of consolidated financial information for each of
the five years ended December 31, 2003 is not reported upon herein by
independent public accountants and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto which are contained in
Item 8 herein.
YEARS ENDED DECEMBER 31,
------------------------------------------------------
2003 2002(1) 2001 2000 1999
---------- ---------- ---------- ----------- ---------
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS:
Net sales..................................................... $ 336.6 $ 468.5 $ 2,039.8 $ 2,468.9 $2,369.9
Income (loss) before income taxes and minority interests(2)... (10.6) (95.3) 41.6 66.6 94.5
Net income (loss)............................................. (11.6) (84.0) (456.0) 33.9 73.6
CONSOLIDATED BALANCE SHEET AT END OF PERIOD:
Total assets.................................................. 1,060.8 1,107.3 3,935.3 4,504.0 4,393.1
Long-term debt, less current maturities....................... 953.5 982.3 1,706.8 1,882.8 1,956.8
Stockholders' equity (deficit) (3)............................ (601.9) (582.5) (475.6) 49.1 27.8
PER SHARE INFORMATION:
Basic net income (loss) per share............................. $ (1.79) $ (12.87) $ (69.28) $ 4.47 $ 9.58
========== ========== ========== =========== =========
Diluted net income (loss) per share........................... $ (1.79) $ (12.87) $ (69.28) $ 4.47 $ 9.49
========== ========== ========== =========== =========
- ------------------------------------
(1) Results for the Company's aluminum operations have been in cluded for the
period from January 1, 2002, through February 11, 2002 and for the three
years ended December 31, 2001. Such results have been excl uded for the
subsequent periods. See Note 1 for a discussion of the Cha pter 11 filings
by the Debtors (which commenced February 12, 2002).
(2) Income (loss) before income taxes and minority interests i ncludes the
following items:
o 2003 includes a gain on the sale of acreage in the Griz zly Creek grove
of $16.8 million (see Note 4), $8.0 million of insuranc e recoveries
related to the OTS and FDIC actions (see Note 13), as w ell as a $1.4
million charge to write-down the Company's casino-relat ed assets to
estimated fair value (see Note 3).
o 2002 includes other items of $0.5 million attributable to Kaiser for the
period from January 1, 2002, through February 11, 2002 (see Note 3).
o 2001 includes the following related to Kaiser: additional valuation
allowances related to Kaiser's deferred tax assets of $505.4 million
(see Note 10), business interruption insurance recoveries of $36.6
million (see Note 3), a gain of $163.6 million on the sale of an
approximate 8.3% interest in QAL (see Note 4), a charge of $57.2 million
for asbestos-related claims, and net gains on power sales and several
other non-recurring items totaling $163.6 million (see Note 3). 2001
results include the following related to forest products: a gain of
$16.7 million on the sale of acreage in the Grizzly Creek grove (see
Note 4).
o 2000 includes the following related to Kaiser: estimated business
interruption insurance recoveries of $110.0 million and several other
non-recurring items totaling $48.9 million (see Note 3). 2000 results
include the following related to forest products: a gain on the sale of
the Owl Creek grove of $60.0 million.
o 1999 includes the following related to Kaiser: a gain on the involuntary
conversion at its Gramercy, Louisiana, facility of $85.0 million, a
charge of $53.2 million for asbestos-related claims and a gain of $50.5
million on the sale of AKW L.P. 1999 results include the following
related to forest products: a gain of $239.8 million on the sale of the
Headwaters Timberlands.
(3) MAXXAM Inc. did not declare or pay any cash dividends during the five year
period ended December 31, 2003.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto appearing in Item 8.
RESULTS OF OPERATIONS
This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See Item 1. "Business--General" and
below for cautionary information with respect to such forward-looking
statements.
The Company operates in three industries: forest products, through MGI and
its wholly owned subsidiaries, principally Palco, Scotia LLC and Britt; real
estate investment and development, through various subsidiaries; 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 62% of Kaiser, an
integrated aluminum producer. All references to the "Company," "Kaiser," "MGHI,"
"MGI," "Palco," "MPC" and "SHRP, Ltd." 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 years
ended December 31, 2003, 2002 and 2001 for the Company's consolidated
operations.
YEARS ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
--------- --------- ----------
(IN MILLIONS OF DOLLARS)
Net sales......................................................................... 336.6 $ 468.5 $ 2,039.8
Costs and expenses................................................................ (312.7) (484.5) (1,994.4)
Gains on sales of timberlands and other assets.................................... 17.5 0.9 16.7
--------- --------- ----------
Operating income (loss)........................................................... 41.4 (15.1) 62.1
Other income (expenses), net...................................................... 25.0 12.6 170.2
Interest expense.................................................................. (77.0) (92.8) (190.7)
--------- --------- ----------
Income (loss) before income taxes and minority interest........................... $ (10.6) $ (95.3) $ 41.6
========= ========= ==========
Revenues by segment as a percentage of total:
Forest products................................................................ 61.9 % 42.6 % 9.1 %
Real estate.................................................................... 23.3 % 10.4 % 3.4 %
Racing......................................................................... 14.8 % 11.2 % 2.6 %
Aluminum....................................................................... - % 35.8 % 84.9 %
---------- ---------- ---------
100.0 % 100.0 % 100.0%
========== ========== =========
Deconsolidation of Kaiser
Under generally accepted accounting principles for entities consolidated
through voting interests, 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 a result of Kaiser's filing for bankruptcy (as
discussed in Note 1), Kaiser's financial results were deconsolidated 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. 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 following condensed pro forma financial data reflects the results of
operations of the Company, excluding Kaiser, for the periods presented (in
millions, except share data).
YEARS ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
------------ ------------ -------------
Net sales............................................................... $ 336.6 $ 301.0 $ 307.1
Costs and expenses...................................................... (295.2) (292.5) (315.9)
------------ ------------ -------------
Operating income (loss)................................................. 41.4 8.5 (8.8)
Other income (expenses), net............................................ 25.0 20.7 39.4
Interest expense........................................................ (77.0) (80.2) (81.7)
------------ ------------ -------------
Loss before income taxes and minority interests......................... (10.6) (51.0) (51.1)
Income tax benefit...................................................... (1.0) 15.2 16.7
Minority interests...................................................... - 0.3 -
------------ ------------ -------------
Net loss................................................................ $ (11.6) $ (35.5) $ (34.4)
============ ============ =============
Basic and diluted net loss per share.................................... $ (1.79) $ (5.45) $ (5.22)
See Notes 1 and 12 for further discussion of Kaiser's reorganization
proceedings and other information regarding the Company's investment in Kaiser.
OVERVIEW OF CONSOLIDATED RESULTS OF OPERATIONS
Net Sales
Net sales for 2003 totaled $336.6 million, compared to $468.5 million in
2002. The decline is primarily attributable to the deconsolidation of Kaiser's
financial results beginning February 12, 2002, the date Kaiser filed for Chapter
11 reorganization. Net sales for 2002 included $167.5 million attributable to
Kaiser for the period from January 1, 2002 to February 11, 2002, whereas 2003
included none of Kaiser's financial results. Net sales for the Company's forest
products segment increased $9.1 million for 2003 versus 2002, reflecting
favorable trends in lumber prices, while net sales for the real estate segment
increased $29.4 million for 2003 as compared to 2002, primarily due to increased
sales of real estate acreage and commercial lots. Net sales for the Company's
racing segment declined by $2.9 million. Net sales declined to $468.5 million in
2002 from $2,039.8 million in 2001, primarily due to the deconsolidation of
Kaiser's financial results. The forest products segment's net sales increased
$14.1 million for 2002 over the prior year primarily due to larger volumes of
lumber shipments, while lower sales of real estate acreage and commercial lots
contributed to a $20.2 million decline in net sales for the real estate segment
for 2002 versus 2001.
Operating Income (Loss)
The Company recorded operating income of $41.4 million in 2003 compared to
an operating loss of $15.1 million in 2002. Operating income for the Company's
forest products segment increased $15.7 million for 2003, primarily due to $17.5
million in gains on sales of timberlands and other assets, while the real estate
segment's operating results improved from a loss of $0.2 million in 2002 to
income of $17.1 million in 2003 as a result of the increase in net sales
discussed above. Results for the racing segment declined from operating income
of $0.4 million in 2002 to an operating loss of $1.9 million in 2003. Kaiser
contributed $23.6 million to the consolidated operating loss for 2002. The
Company's consolidated operating loss of $15.1 million in 2002 reflected a
decline from operating income of $62.1 million in 2001, primarily due to
operating results for the Company's aluminum segment, which decreased from
operating income of $70.8 million in 2001 to an operating loss of $23.6 million
for the period from January 1, 2002 to February 11, 2002. Operating income
improved for the forest products segment as a result of the increase in net
sales discussed above as well as a decline in cost of sales. Results for the
real estate segment were negatively impacted by the decline in net sales
discussed above.
Income (Loss) Before Income Taxes and Minority Interests
The Company's consolidated loss before income taxes and minority interests
decreased by $84.7 million in 2003 compared to the prior year, principally due
to the improved operating results discussed above. In addition, the Company's
investment, interest and other income for 2003 includes income related to an
$8.0 million reimbursement from an insurer for certain costs incurred in
connection with the OTS and FDIC actions. Interest expense decreased $8.1
million in 2003 from the preceding year as a result of early extinguishment of
MGHI's Senior Secured Notes (the "MGHI NOTES"). Results decreased in 2002 as
compared to 2001 primarily due to the deconsolidation of Kaiser's financial
results. In addition, the Company had lower returns on investments in cash
equivalents and marketable securities in 2002 versus 2001 and lower earnings
from real estate joint ventures. Excluding results from Kaiser, improvements in
operating income contributed favorably to the loss before income taxes and
minority interests.
FOREST PRODUCTS OPERATIONS
Industry Overview and Selected Operational Data
This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See this section and Item 1.
"Business--General" for cautionary information with respect to such
forward-looking statements.
The Company's forest products operations are conducted by MGI, through
Palco, Scotia LLC and Britt. 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.
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 play a significant role in the
Company's forest products operations. See Item 1. "Business - Forest Products
Operations - Regulatory and Environmental Matters" and Note 13 for a discussion
of these matters. Regulatory compliance and related litigation have caused and
may continue to cause delays in approval of THPs and delays in harvesting on
THPs once they are approved. This could result in a decline in harvest, an
increase in the cost of logging operations and increased costs related to timber
harvest litigation.
As discussed in Item 1. "Business--Regulatory and Environmental
Factors--Water Quality," the North Coast Water Board is requiring Palco to apply
various waste discharge reporting, mitigation and erosion control requirements
in respect of timber harvesting activities in several of its watersheds, and may
impose additional measures in the future. The requirements imposed to date have
modestly increased operating costs; additional requirements imposed in the
future could further increase costs and cause delays in THP approvals or lower
harvest levels.
Also discussed in Note 13 is the enactment of California Senate Bill 810,
which provides regional water quality control boards with additional authority
related to the approval of THPs. Implementation of this law could result in
delays in obtaining approvals of THPs, increased costs and additional water
protection measures beyond those contained in the HCP.
Furthermore, 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 position, results of operations or liquidity. See Item 1.
"Business--Forest Products Operations--Regulatory and Environmental Factors,"
Item 3. "Legal Proceedings" and Note 13 for further information regarding
regulatory and legislative matters and legal proceedings relating to the
Company's 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 the results of 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
additional cost savings. Subsequent to December 31, 2003, Palco opened a new
planer facility in Scotia and began construction on a $25.0 million sawmill
project in Scotia. Funds for this project will come from existing cash resources
and borrowings under Palco's new credit facility. See "--Financial Condition and
Investing and Financing Activities--Overview." As part of the project, the
equipment from Palco's Carlotta mill will be moved to the new mill in Scotia.
After this equipment is moved, the Carlotta mill will be permanently closed, and
management is considering alternative uses for the property. Further actions may
be taken during the next year as a result of Palco's continuing evaluation
process, and additional writedowns of certain assets may be required.
The following table presents selected operational and financial
information for the years ended December 31, 2003, 2002 and 2001 for the
Company's forest products operations.
YEARS ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
---------- ---------- ----------
(IN MILLIONS OF DOLLARS,
EXCEPT SHIPMENTS AND PRICES)
Shipments:
Lumber: (1)
Redwood upper grades...................................................... 26.4 27.0 16.2
Redwood common grades..................................................... 215.8 224.3 165.0
Douglas-fir upper grades.................................................. 4.4 4.7 8.8
Douglas-fir common grades................................................. 44.4 22.4 50.5
Other..................................................................... 7.7 0.1 3.9
---------- ---------- ----------
Total lumber................................................................. 298.7 278.5 244.4
========== ========== ==========
Cogeneration power (2)....................................................... 163.5 152.4 128.2
========== ========== ==========
Average sales price:
Lumber: (3)
Redwood upper grades...................................................... $ 1,275 $ 1,317 $ 1,770
Redwood common grades..................................................... 601 544 577
Douglas-fir upper grades.................................................. 1,249 1,351 1,32