MAXXAM Inc.

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MAXXAM Inc.

5847 San Felipe
Suite 2600
Houston, Texas 77257-2887
U.S.A.
(713) 975-7600
Fax: (713) 267-3710

Public Company
Incorporated: 1955 as Cuban American Oil Company
Employees: 12,000
Sales: $2.2 billion
Stock Exchanges: American Pacific Philadelphia SICs: 3354 Aluminum Extruded Products; 3355 Aluminum Rolling and Drawing, Nec

MAXXAM Inc. is a multi-faceted corporation that operates in three separate industries: aluminum, forest products, and real estate. Aluminum accounts for about 86 percent of MAXXAM’s sales. The company’s aluminum business is conducted through its 68 percent-owned subsidiary Kaiser Aluminum Corporation. Kaiser is a fully integrated producer of alumina, primary aluminum, and fabricated aluminum, with facilities in nine states and five foreign countries. The next largest share of MAXXAM’s revenue is generated by its forest products operations. These operations are conducted through two wholly owned subsidiaries: Pacific Lumber Company and Britt Lumber Co., Inc. MAXXAM sold about $223 million in forest products in 1992. Through the 123-year-old Pacific Lumber Company, MAXXAM owns about 196,000 acres of timberland in Humboldt County, California, where over 300 million board feet of redwood and Douglas fir lumber are produced yearly at the company’s five saw mills and other related facilities. MAXXAM’s real estate business is conducted through MAXXAM Property Company, MCO Properties Inc., and Horizon Corporation. The company’s real estate holdings, concentrated mainly in the Southwest, include large land holdings, residential communities, and commercial rental operations. Real estate generated about $70 million in revenue in 1992.

The company that would eventually evolve into MAXXAM was formed in 1955 as Cuban American Oil Company. In 1960 the company’s name was changed to McCulloch Oil Corporation of California. The company was founded and guided through its early years by Robert McCulloch, an independent oil explorer. The method by which McCulloch built his company was to organize syndicates of investors annually to cover the costs of oil exploration. For a minimum investment of $10,000, participants in the program would receive all of the benefits from a productive exploratory well until their investments were repaid, and two-thirds interest in any further oil field development that took place as a result of the exploration. For organizing the syndicate and operating the program, McCulloch would retain the remaining one-third share. From 1956 to 1965, the company drilled 167 exploratory wells. 39 of these wells actually produced oil. 179 of the 247 development wells drilled during this period were producers, although none of these finds represented what could be called a major oil strike. In 1966, McCulloch Oil had gross revenues from oil and gas sales of approximately $2.7 million. About $24 million was raised that year through the outside investor program.

In 1965 McCulloch-Hancock Oil & Gas Properties, Inc., was merged into McCulloch Oil Corp. of California. McCulloch-Hancock was created by members of a McCulloch exploration syndicate to operate oil and gas properties that had been completed. According to the terms of the deal McCulloch-Hancock shareholders received two-thirds of a share of McCulloch Oil common stock for each share of McCulloch-Hancock. The merger gave McCulloch Oil total possession of McCulloch Gas Transmission Co., the firm that operated a 100-mile natural gas pipeline system located in northeastern Wyoming.

In the second half of the 1960s, under president C. V. Wood, Jr. McCulloch Oil’s biggest gains came in real estate rather than oil, where a major strike continued to elude the company. In 1965 the company unveiled Lake Havasu City, a planned community in Arizona. By the end of 1968, Lake Havasu had about 4,000 permanent residents, 140 businesses, a handful of industrial facilities, and a full range of public services. The city was also fully outfitted for major tourism, including hotels, golf courses, camp grounds, trailer parks, and a marina. During this period of rapid development, 50 salesmen were stationed at Lake Havasu City, and prospective buyers were flown in at no cost on the company’s six airplanes to see the property. Lake Havasu received global attention in 1968 when McCulloch Oil purchased the London Bridge for $2.4 million and had it shipped in pieces to the development, where it was reassembled as a tourist attraction. By the end of 1968, McCulloch Oil’s sales had grown to $39 million, largely thanks to the expansion of its real estate endeavors. In fact, land sales accounted for around three-fourths of that year’s net income. The company was not idle in its other areas, however. In 1969 McCulloch Oil drilled its first test well on the North Slope of Alaska, not far from Prudhoe Bay, where other companies had found gigantic oil reserves. The company also acquired several thousand acres of potential silver mining property in Colorado. In addition, operations at the Wyoming gas pipeline were expanded. Output from the pipeline in 1969 was about five times what it had been only three years earlier.

In 1969 the company’s name was shortened to McCulloch Oil Corporation. That year, a partnership was developed with Investors Diversified Services, Inc. (IDS) of Minneapolis, in which IDS would take responsibility for the efforts to coordinate the sale of units in the participant investor programs, while McCulloch Oil would focus on the actual field operation of the programs. Numerous acquisitions, including coal, gas, oil, and real estate operations, aided the company’s expansion in the early 1970s. Among these were the 1970 purchases of Omega Gas Company and Richland Gas Company. Two small airlines, Vance International Airways, based in Seattle, and Oklahoma Airmotive, were also acquired that year, as were four Kentucky coal companies, each located in Letcher County. The success of Lake Havasu led Wood to launch further “new cities” around this time. Towns were developed at Fountain Hills, Arizona, and Pueblo West, Colorado. In 1971 McCulloch Oil bought 22,500 acres of property near Elko, Nevada, for the development of Spring Creek, a new city designed to contain 5,500 home sites, as well as an array of recreational facilities, including a golf course, an equestrian center, a shooting range, trout ponds, and an Old West town center.

The following year, however, a change in accounting rules dampened McCulloch Oil’s real estate gains. Beginning in 1972, the company could record as revenue only payments actually received on land purchased, rather than count the entire sale price upon completion of the deal. The company reported a net loss of $731,000 in 1972, largely due to this accounting change. Two profitable years followed, but in 1975, the land division lost over $5 million. Plagued by defaults resulting from that year’s recession, as well as inflation and increased government regulation, the expenses of developing and maintaining the new cities became overwhelming. By late 1976, Wood announced that the company would take a $60 million write-off to exit the land development business entirely. During that year, the price of McCulloch Oil stock sank to $3 a share, after peaking at $36 back in 1972. Nevertheless, the company managed to earn over $7 million in profit in 1975 on sales of $124 million, thanks mostly to solid years in its oil, gas, and coal mining operations.

IDS, McCulloch’s partner in oil and gas exploration programs, was bought out in 1976 for a little over $8 million. In 1977 McCulloch Properties Inc., the land-development subsidiary run by Robert McCulloch, Jr., son of the company’s founder, pleaded guilty to 19 counts of fraud concerning sales at the Pueblo West development. The charges involved promises of improvements on the property made by salesmen to prospective buyers that could not be kept. Similar accusations in connection with other properties followed. To facilitate the company’s retreat from the land development business in the wake of these legal and financial setbacks, a new company was formed with a former company executive. All of McCulloch Properties’ assets were sold to the newly created Pratt Properties Inc., 49 percent of which was to be owned by Lome Pratt, a former executive vice-president of McCulloch Properties. Two years later, however, Pratt sold all of his shares back to McCulloch Oil so that he could pursue his own personal real estate ventures.

Merlin Witte became company president in 1977, and Wood stayed on as chairman of the board. That year, Robert McCulloch, the company’s founder, died from a combination of drugs and alcohol. In 1978 Charles Hurwitz, a Houston entrepreneur, began to take an interest in McCulloch Oil, and his involvement would have a dramatic influence on the company’s future. Hurwitz had begun his career as a stockbroker with Bache & Company. He was running his own investment firm by the time he was 24 years-old. After a couple of failed insurance and investment ventures, not to mention brushes with the Securities and Exchange Commission, Hurwitz purchased a New York real estate company called Federated Development Company in 1973. He began to acquire stock through Federated Development and its wholly owned subsidiary Federated Reinsurance Company. In 1978, Hurwitz acquired 13 percent of McCulloch Oil stock from Black & Decker Manufacturing Company, which had inherited that share by virtue of its 1973 purchase of McCulloch Corporation, a manufacturer of chain saws. Although he was initially opposed by most of the company’s management, Hurwitz managed to get two representatives elected to the McCulloch Oil board at the 1978 annual meeting, and he himself became a director shortly after that. Wood resigned his chairmanship in July 1979. McCulloch, Jr. resigned from the board as well. The leadership vacuum was eventually filled in March 1980, when Hurwitz became both chairman and chief executive. Hurwitz then named William Leone to replace Witte as president. When this change in the company’s power structure was completed, with Hurwitz and his associates firmly in charge, the company’s name was changed to MCO Holdings Inc. Witte emerged from the scrap as a Hurwitz ally, and became president of MCO Resources Inc., one of the company’s principal subsidiaries.

By 1981 MCO’s sales had grown to $173 million. Hurwitz led MCO through a period of diversification through acquisitions over the next few years. At the same time, the company shed many of its energy holdings. In 1982 MCO gained controlling interest in Simplicity Pattern Company, the well-known maker of sewing patterns, with annual sales of about $82 million. Hurwitz also became chairman and chief executive of Simplicity. The same year, MCO sold its interests in the Midway Sunset oil field in California for about $155 million. The company’s Manley-McGinn oil properties were also disposed of for another $115 million. Another move made in 1982 was the purchase of about 37 percent interest in Maxxam Group Inc., an investment partnership also controlled by Hurwitz. Maxxam essentially consisted of the remnants of Simplicity, retained for use as an instrument for real estate purchases, after that company’s core pattern business had been sold off. In 1982 and 1983 MCO purchased shares that eventually amounted to a 23 percent holding in United Financial Group, Inc., the parent company to United Savings of Texas.

In 1986 MCO, through the Maxxam Group, completed a takeover attempt launched the previous year on Pacific Lumber Company. The $863 million purchase of Pacific Lumber was made through junk bond king Michael Milken of Drexel Burnham Lambert, and was one of the earliest instances of a hostile takeover financed by the sale of junk bonds. The takeover was spurred in part by Hurwitz’s discovery during an aerial survey that Pacific actually owned about 30 percent more standing timber than was believed, a fact that kept the company’s stock price artificially low. Shortly after the buyout, the cutting rate on Pacific Lumber properties was doubled. This infuriated environmentalists, many of whom have continued to hold a grudge against Hurwitz because of this practice.

MCO purchased the remaining portion of the Maxxam Group it did not already own and merged it into the company as a wholly owned subsidiary in May 1988. Two months later, MCO Resources, Inc., the company’s energy subsidiary, was sold to United Meridian Corporation. In October of that year, the company’s name was changed to MAXXAM Inc. Before that month was over, MAXXAM had made its most important acquisition yet, the $930 million purchase of Kaiser Aluminum Corporation. Once again, Drexel Burnham Lambert junk bonds covered a sizeable portion of Kaiser’s purchase price.

With Kaiser Aluminum in the fold, MAXXAM’s sales reached $2.4 billion in 1989, with net income of $117 million. In 1990 Kaiser’s chairman and chief executive John Seidl replaced the retiring William Leone as president of MAXXAM. The following year, 13 percent of Kaiser was sold to the public, with MAXXAM retaining control of the rest. The company’s sales began to shrink gradually as the 1990s began. MAXXAM’S 1990 figures were net income of $162 million on sales of $2.36 billion. The following year, the company reported net income of $57 million on sales of $2.25 billion. 1992 was a particularly bleak year for MAXXAM, due primarily to a deeply depressed global aluminum market. As sales dipped to $2.2 billion, the company posted a $7.3 million net loss for the year. Contributing to MAXXAM’S difficulties were increased aluminum production capacities among countries in the Western world, combined with much higher levels of aluminum exports from the former Soviet Union. In spite of these problems, several of the company’s facilities set production records in 1992. In addition, a major expansion project at the company’s Jamaican alumina operation was completed, and a new extrusions facility was launched in London, Ontario.

In contrast to the aluminum operations, MAXXAM’s forest products operations made gains in 1992. Operating income from this industry reached $65 million, an increase of nearly 16 percent from the previous year. Late in 1992 and into 1993, MAXXAM began an effort to refinance the bulging debt it had built up in acquiring Pacific Lumber and Kaiser Aluminum. $400 million in new 10-year bonds was issued to replace existing debt that was due in 1995. Though this move increased the actual size of the debt, it took advantage of favorable interest rates at the same time. In June 1993, MAXXAM raised $120 million through a public offering of several million depositary shares of Kaiser aluminum stock. This sale reduced MAXXAM’ s holding in Kaiser to about 68 percent of the common stock.

Because of the cyclical nature of the aluminum industry, combined with the lingering sluggishness of the global economy in the early 1990s, MAXXAM’s unimpressive performance during this period was not unexpected by company management. Like many industrial corporations, MAXXAM has concentrated on reducing costs and increasing efficiency during this downturn.