FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993 Commission File Number 1-3924
MAXXAM INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 95-2078752
(State or other (I.R.S. Employer
jurisdiction Identification Number)
of incorporation or
organization)
5847 SAN FELIPE, SUITE 2600
HOUSTON, TEXAS 77057
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (713) 975-7600
__________________
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
12 1/2% Subordinated Debentures due December 15, 1999 American
14% Senior Subordinated Reset Notes due May 20, 2000 American
Common Stock, $.50 par value American, Pacific, Philadelphia
Shares of common stock outstanding at March 15, 1994: 8,698,464
Securities registered pursuant to Section 12(g) of the Act: None.
__________________
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
/X/ No /___/
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. /X/
Based upon the March 15, 1994 American Stock Exchange closing price
of $37.125 per share, the aggregate market value of the Registrant's
outstanding Common Stock held by non-affiliates was approximately $222.9
million.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's annual report to stockholders for the
fiscal year ended December 31, 1993 are incorporated by reference under
Part II. Certain portions of Registrant's definitive proxy statement, to
be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the close of the
Registrant's fiscal year, are incorporated by reference under Part III.
<PAGE>
MAXXAM INC.
PART I
ITEM 1. BUSINESS
GENERAL
MAXXAM Inc. and its majority and wholly owned subsidiaries are
collectively referred to herein as the "Company" or "MAXXAM" unless
otherwise indicated or the context indicates otherwise. The Company,
through Kaiser Aluminum Corporation ("Kaiser") and Kaiser's principal
operating subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), is
a fully integrated aluminum company. The Company's voting interest in
Kaiser is approximately 61% on a fully diluted basis. See "--Aluminum
Operations." In addition, the Company is engaged in forest products
operations through its wholly owned subsidiary, MAXXAM Group Inc. ("MGI")
and MGI's wholly owned subsidiaries, The Pacific Lumber Company and its
wholly owned subsidiaries (collectively referred to herein as "Pacific
Lumber," unless the context indicates otherwise), and Britt Lumber Co.,
Inc. ("Britt"). See "--Forest Products Operations." The Company is also
engaged in real estate management and development, principally through
MAXXAM Property Company (and its subsidiaries), MCO Properties Inc.
("MCOP"), Palmas del Mar Properties, Inc. and various other wholly owned
subsidiaries. See "--Real Estate Operations." The Company, through its
subsidiaries, also has various interests in a Class 1 thoroughbred and
quarter horse racing facility currently under construction just northwest
of Houston. See "--Sam Houston Race Park." See Note 11 to the
Consolidated Financial Statements for certain financial information by
industry segment and geographic area.
ALUMINUM OPERATIONS
INDUSTRY OVERVIEW
Primary aluminum is produced by the refining of bauxite (the
major aluminum-bearing ore) into alumina (the intermediate material) and
the reduction of alumina into primary aluminum. Approximately two pounds
of bauxite are required to produce one pound of alumina, and
approximately two pounds of alumina are required to produce one pound of
primary aluminum. Aluminum's valuable physical properties include its
light weight, corrosion resistance, thermal and electrical conductivity
and high tensile strength.
Demand
The packaging and transportation industries are the principal
consumers of aluminum in the United States, Japan and Western Europe. In
the packaging industry, which accounted for approximately 22% of
consumption in 1992, aluminum's recyclability and weight advantages have
enabled it to gain market share from steel and glass, primarily in the
beverage container area. The aluminum packaging market in the United
States, Japan and Western Europe grew at a rate of approximately 4.0% per
year during the period 1982-1992, and total United States aluminum
beverage can shipments increased at a rate of approximately 2.5% in 1993,
1.5% in 1992 and 3.9% in 1991. Nearly all beer cans and approximately
95% of the soft drink cans manufactured for the United States market are
made of aluminum. Despite the flat demand currently being experienced in
the can stock market, growth in the packaging area is generally expected
to continue in the 1990's due to general population increase and to
further penetration of the beverage can market in Western Europe and
Japan, where aluminum cans are a substantially lower percentage of the
total beverage container market than in the United States.
In the transportation industry, which accounted for
approximately 28% of aluminum consumption in the United States, Japan and
Western Europe in 1992, automotive manufacturers use aluminum instead of
steel or copper for an increasing number of components, including
radiators, wheels and engines, in order to meet more stringent
environmental and fuel efficiency requirements through vehicle weight
reduction.
<PAGE>
Management believes that sales of aluminum to the transportation industry
have considerable growth potential due to projected increases in the use
of aluminum in automobiles. According to industry sources, aluminum
content in United States automobiles nearly doubled in the last 15 years
to an average of 191 pounds per vehicle and the amount of aluminum
consumed in the manufacture of Japanese automobiles more than doubled
from 1983 to 1990. Management believes that the use of aluminum in
automobiles in the United States and Japan will approximately double
between 1991 and 2006.
Supply
As of year-end 1993, Western world aluminum capacity from 109
smelting facilities was approximately 16.4 million tons per year. Net
exports of aluminum from the Commonwealth of Independent States
(the "C.I.S.") increased substantially from 1990 levels during the period
from 1991 through 1993 and have contributed to a significant increase in
London Metal Exchange stocks of primary aluminum.
Based upon information currently available, Kaiser believes
that only moderate additions will be made during 1994-1995 to Western
world alumina and primary aluminum production capacity; however, due to
the decline of primary aluminum prices since January 1, 1991, and other
factors, curtailments or permanent shutdowns have been announced, to
management's knowledge, with respect to approximately 3 million tons of
primary aluminum production capacity (all references to tons herein are
to metric tons of 2,204.6 pounds). See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Trends-
-Aluminum Operations" on pages 34 and 35 of the Company's 1993 Annual
Report to Stockholders. The increases in alumina capacity during 1994
-1995 will come from incremental expansions of existing refineries and
not from new plants, which generally require a four to five year design,
engineering and construction period.
Recent Industry Trends
The aluminum industry has been cyclical and market prices of
alumina and primary aluminum have been volatile from time to time.
During 1989, tight supply conditions for alumina and strong demand for
primary aluminum resulted in unusually high spot prices for alumina.
During 1990, a moderate surplus of alumina supply developed due to new
alumina production from two facilities restarted in prior years
(including Kaiser's Alpart refinery) and increased production at other
refineries. Furthermore, curtailments of primary aluminum production in
response to declining ingot prices have increased the surplus of alumina
supply. Since 1990, spot prices of alumina have declined substantially
due to these factors and slow economic growth in major aluminum consuming
countries. Contract prices for deliveries of alumina in 1993 were in a
lower range than the ranges applicable during the past several years. As
a result of these factors and the continuing expansion of existing
alumina refineries during 1992-1993, the current surplus of alumina is
expected to continue.
During 1989 and 1990, primary aluminum smelters throughout the
world operated at near capacity levels. This factor, combined with
increased production from smelter capacity additions during 1989 and
1990, resulted in a reduction of the market price of primary aluminum
from 1988 peak prices. Additions to smelter capacity in 1991, 1992 and
1993, continued high operating rates in the Western world and slow
economic growth in major aluminum consuming countries as well as exports
from the C.I.S. have contributed to an oversupply of primary aluminum and
a significant increase in primary aluminum inventories in the world. If
Western world production and exports from the C.I.S. continue at current
levels, primary aluminum inventory levels are expected to increase
further in 1994. The foregoing factors have contributed to a significant
reduction in the market price of primary aluminum, and may continue to
adversely affect the market price of primary aluminum in the future. The
average price of primary aluminum was at historic lows in real terms for
the year ended 1993. See Item 7. "Management's
<PAGE>
Discussion and Analysis of Financial Condition and Results of Operations
--Trends--Aluminum Operations" on pages 34 and 35 of the Company's 1993
Annual Report to Stockholders.
Government officials from the European Union, the United
States, Canada, Norway, Australia and the Russian Federation met in a
multilateral conference in January 1994 to discuss the current excess
global supply of primary aluminum. All participants have ratified as a
trade agreement the resulting Memorandum which provides, in part, for (i)
a reduction in Russian Federation primary aluminum production by 300,000
tons per year within three months of the date of ratification of the
Memorandum and an additional 200,000 tons within the following three
months, (ii) improved availability of comprehensive data on Russian
aluminum production, and (iii) certain assistance to the Russian aluminum
industry. A Russian Federation Trade Ministry official has publicly
stated that the output reduction would remain in effect for 18 months to
two years, provided that other worldwide production cutbacks occur,
existing trade restrictions on aluminum are eliminated, and no new trade
restrictions on aluminum are imposed. The Memorandum does not require
specific levels of production cutbacks by other producing nations. The
Memorandum was finalized at a second meeting of the participants held at
the end of February 1994.
KAISER ALUMINUM
General
Kaiser operates in all principal aspects of the aluminum
industry--the mining of bauxite, the refining of bauxite into alumina,
the production of primary aluminum from alumina, and the manufacture of
fabricated (including semi-fabricated) aluminum products. In addition to
the production utilized by Kaiser in its operations, Kaiser sells
significant amounts of alumina and primary aluminum in the domestic and
international markets. In 1993, Kaiser produced approximately 2,826,600
tons of alumina, of which approximately 71% was sold to third parties,
and produced 436,200 tons of primary aluminum, of which approximately 56%
was sold to third parties. Kaiser is also a major domestic supplier of
fabricated aluminum products. In 1993, Kaiser shipped approximately
373,200 tons of fabricated aluminum products to third parties, which
accounted for approximately 6% of the total tonnage of United States
domestic shipments in 1993. A majority of Kaiser's fabricated products
are used by customers as components in the manufacture and assembly of
finished end-use products.
The following table sets forth total shipments and intracompany
transfers of Kaiser's alumina, primary aluminum and fabricated aluminum
operations:
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
(In thousands of tons)
<S> <C> <C> <C>
ALUMINA:
Shipments to Third Parties . . . . . . . . . . . . . 1,997.5 2,001.3 1,945.9
Intracompany Transfers . . . . . . . . . . . . . . . 807.5 878.2 884.2
PRIMARY ALUMINUM:
Shipments to Third Parties . . . . . . . . . . . . . 242.5 355.4 340.6
Intracompany Transfers . . . . . . . . . . . . . . . 233.6 224.4 199.6
FABRICATED ALUMINUM PRODUCTS:
Shipments to Third Parties . . . . . . . . . . . . . 373.2 343.6 314.2
</TABLE>
Business Strategy
Kaiser has made significant changes in the mix of products sold
to customers by disposing of selected assets, restarting and increasing
its percentage ownership interest in the Alumina Partners of Jamaica
<PAGE>
("Alpart") alumina refinery, and increasing production of alumina at
Gramercy, Louisiana, and Queensland Australia Limited ("QAL") in
Australia. The percentage of Kaiser's alumina production sold to third
parties increased from approximately 35% in 1987 to approximately 71% in
1993, and the percentage of its primary aluminum production sold to third
parties increased from approximately 20% in 1987 to approximately 56% in
1993.
Kaiser has concentrated its fabricated products operations on
the beverage container market (which historically has been recession-
resistant); high value-added, heat-treated sheet and plate products for
the aerospace industry; hubs, wheels and other products for the truck,
trailer and shipping container industry; parts for air bag canisters and
other automotive components; and distributor markets for a variety of
semifabricated aluminum products. Since January 1, 1989, Kaiser has
constructed four new fabrication facilities and has modernized and
expanded others, with the objective of reducing manufacturing costs and
expanding sales in selected product markets in which Kaiser has
production expertise, high quality capability and geographic and other
competitive advantages.
Kaiser has taken steps to control and reduce costs, improve the
efficiency and increase the capacity of its alumina and primary aluminum
production and fabricating operations, modernize its facilities, and
streamline and decentralize its management structure to reduce corporate
overhead and shift decision making and accountability to its business
units. In October 1993, Kaiser announced that it is restructuring its
flat-rolled products operation at its Trentwood plant in Spokane,
Washington, to reduce that facility's annual operating costs. This
effort is in response to over-capacity in the aluminum rolling industry,
flat demand in can stock markets, and declining demand for aluminum
products sold to customers in the commercial aerospace industry, all of
which have resulted in declining prices in Trentwood's key markets. The
Trentwood restructuring is expected to result in annual cost savings of
approximately $50.0 million after it has been fully implemented (which is
expected to occur by the end of 1995). See "Fabricated Products--Flat-
Rolled Products" below.
Primary aluminum production at Kaiser's Mead and Tacoma
smelters was curtailed in 1993 because of a power reduction imposed by
the Bonneville Power Administration (the "BPA"), which reduced the
operating rates for such smelters. See "--Primary Aluminum Products"
below. Furthermore, Kaiser announced on February 24, 1994 that it will
curtail approximately 9.3% of its annual production capacity currently
available from its primary aluminum smelters.
Kaiser has also attempted to lessen its exposure to possible
future declines in the market prices of alumina and primary aluminum by
entering into fixed and variable rate power and fuel supply contracts,
and a labor contract with the United Steelworkers of America (the "USWA")
which provides for semi-variable compensation with respect to
approximately 73% of Kaiser's domestic hourly work force. See "-
-Production Operations" and "--Employees" below.
Sensitivity to Prices and Hedging Programs
Kaiser's earnings are sensitive to changes in the prices of
alumina, primary aluminum and fabricated aluminum products, and also
depend to a significant degree upon the volume and mix of all products
sold. Through its variable cost structures, forward sales and hedging
program, Kaiser has attempted to mitigate its exposure to possible
further declines in the market prices of alumina and primary aluminum
while retaining the ability to participate in favorable pricing
environments that may materialize. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-Trends--Aluminum Operations--Sensitivity to Prices and Hedging Programs"
on pages 34 and 35 of the Company's 1993 Annual Report to Stockholders.
<PAGE>
Production Operations
Kaiser's operations are conducted through decentralized
business units which compete throughout the aluminum industry.
- The Alumina Business Unit, which mines bauxite and obtains
additional bauxite tonnage under long term contracts, produced
approximately 8% of Western world alumina in 1993. During 1993, Kaiser
utilized approximately 82% of its bauxite production at its alumina
refineries and the remainder was either sold to third parties or tolled
into alumina by a third party. In addition, during 1993 Kaiser utilized
approximately 29% of its alumina for internal purposes and sold the
remainder to third parties. Kaiser's share of total Western world alumina
capacity was 8% in 1993.
- The Primary Aluminum Products Business Unit operates two
domestic smelters wholly owned by KACC and two foreign smelters in which
KACC holds significant ownership interests. In 1993, Kaiser utilized
approximately 44% of its primary aluminum for internal purposes and sold
the remainder to third parties. Kaiser's share of total Western world
primary aluminum capacity was 3% in 1993.
- Fabricated products are manufactured by three Business Units --
Flat-Rolled Products, Extruded Products (including rod and bar), and
Forgings -- which manufacture a variety of fabricated products (including
body, lid and tab stock for beverage containers, sheet and plate
products, screw machine stock, redraw rod, forging stock, truck wheels
and hubs, air bag canisters and other forgings and extruded products) and
operate plants located in principal marketing areas of the United States
and Canada. Substantially all of the primary aluminum utilized in
Kaiser's fabricated products operations is obtained internally, with the
balance of the metal utilized in its fabricated products operations
obtained from scrap metal purchases. In 1993, Kaiser shipped
approximately 373,200 tons of fabricated aluminum products to third
parties, which accounted for approximately 6% of the total tonnage of
United States domestic fabricated shipments for such year.
Alumina
The following table lists Kaiser's bauxite mining and alumina
refining facilities as of December 31, 1993:
<TABLE>
<CAPTION>
Total Total
Available Annual
Company to Production
Activity Facility Location Ownership Kaiser Capacity
(tons) (tons)
<S> <C> <C> <C> <C> <C>
Bauxite Mining KJBC(1) Jamaica 49% 4,500,000 4,500,000
Alpart(2) Jamaica 65% 2,275,000 3,500,000
----------- -----------
6,775,000 8,000,000
=========== ===========
Alumina Refining Gramercy Louisiana 100% 1,000,000 1,000,000
Alpart Jamaica 65% 943,000 1,450,000
QAL Australia 28.3% 934,000 3,300,000
----------- -----------
2,877,000 5,750,000
=========== ===========
<<FN>
(1) Although Kaiser owns 49% of Kaiser Jamaica Bauxite Company, it has the right to receive all of such entity's output.
(2) Alpart bauxite is refined into alumina at the Alpart refinery.
</TABLE>
<PAGE>
Bauxite mined in Jamaica by Kaiser Jamaica Bauxite Company
("KJBC") is refined into alumina at Kaiser's plant at Gramercy,
Louisiana, or is sold to third parties. In 1979, the Government of
Jamaica granted Kaiser a mining lease for the mining of bauxite
sufficient to supply Kaiser's then-existing Louisiana alumina refineries
at their annual capacities of 1,656,000 tons per year until January 31,
2020. Alumina from the Gramercy plant is sold to third parties. Kaiser
has entered into a series of medium term contracts for the supply of
natural gas to the Gramercy plant. The price of such gas varies based
upon certain spot natural gas prices, with floor and ceiling prices
applicable to approximately one-half of the delivered gas. Kaiser has,
however, established a fixed price for a portion of the delivered gas
through a hedging program.
Alpart holds bauxite reserves and owns an alumina plant located
in Jamaica. KACC has a 65% interest in Alpart and Hydro Aluminium a.s.
("Hydro") owns the remaining 35% interest. KACC has management
responsibility for the facility on a fee basis. KACC and Hydro have
agreed to be responsible for their proportionate shares of Alpart's costs
and expenses. Alpart began a program of modernization and expansion of
its facilities in 1991. As a part of that program, the capacity of the
Alpart alumina refinery has been increased to 1,450,000 tons per year as
of December 31, 1992. In 1981, the Government of Jamaica granted Alpart
a mining lease covering bauxite reserves sufficient to operate the Alpart
plant until December 31, 2019. In connection with the expansion program,
the Alpart partners have entered into an agreement with the Government of
Jamaica designed to assure that sufficient reserves of bauxite will be
available to Alpart to operate its refinery, as it has been expanded and
as it may be expanded through the year 2024 (to a capacity of 2,000,000
tons per year).
In mid-1990, Alpart entered into a five-year agreement for the
supply of substantially all of its fuel oil, the refinery's primary
energy source. In February 1992, the term of this agreement was extended
for one year and the quantity of fuel oil to be supplied was increased.
The price for 80% of the initial quantity remains fixed at a price which
prevailed in the fourth quarter of 1989; the price for 80% of the
increased quantity is fixed at a negotiated price; and the price for the
balance of the initial and increased quantities was based upon certain
spot fuel oil prices plus transportation costs. Alpart has purchased all
of the quantities of fuel oil which could be purchased based upon certain
spot fuel oil prices under both the initial and extended agreements.
KACC holds a 28.3% interest in QAL, which owns the largest and
one of the most efficient alumina refineries in the world, located in
Queensland, Australia. QAL refines bauxite into alumina, essentially on
a cost basis, for the account of its stockholders pursuant to long-term
tolling contracts. The stockholders, including KACC, purchase bauxite
from another QAL stockholder pursuant to long-term supply contracts. KACC
has contracted to take approximately 751,000 tons per year of capacity or
pay standby charges. KACC is unconditionally obligated to pay amounts
calculated to service its share ($73.6 million at December 31, 1993) of
certain debt of QAL, as well as other QAL costs and expenses, including
bauxite shipping costs. QAL's annual production capacity is
approximately 3,300,000 tons, of which approximately 934,000 tons are
available to KACC.
Kaiser's principal customers for bauxite and alumina consist of
large and small domestic and international aluminum producers that
purchase bauxite and reduction-grade alumina for use in their internal
refining and smelting operations and trading intermediaries who resell
raw materials to end-users. In 1993, Kaiser sold all of its bauxite to
one customer, and sold alumina to 13 customers, the largest and top five
of which accounted for approximately 22% and 79% of such sales,
respectively. Among alumina producers, the Company believes Kaiser is
now the world's second largest seller of alumina to third parties.
Kaiser's strategy is to sell a substantial portion of the bauxite and
alumina available to it in excess of its internal refining and smelting
requirements pursuant to forward sales contracts. See Item 7.
"Management's
<PAGE>
Discussion and Analysis of Financial Condition and Results of Operations
--Trends--Sensitivity to Prices and Hedging Programs" on pages 34 and 35
of the Company's 1993 Annual Report to Stockholders. Marketing and sales
efforts are conducted by executives of the Alumina Business Unit and
Kaiser.
Primary Aluminum Products
The following table lists Kaiser's primary aluminum smelting
facilities as of December 31, 1993:
<TABLE>
<CAPTION>
Annual
Rated
Capacity Total
Available Annual 1993
Company to Rated Operating
Location Facility Ownership Kaiser Capacity Rate
(tons) (tons)
<S> <C> <C> <C> <C> <C>
DOMESTIC:
Washington Mead 100% 200,000 200,000 80%
Washington Tacoma 100% 73,000 73,000 77%
----------- -----------
Subtotal 273,000 273,000
----------- -----------
INTERNATIONAL:
Ghana Valco 90% 180,000 200,000 88%
Wales, U.K. Anglesey 49% 55,000 112,000 112%
----------- -----------
Subtotal 235,000 312,000
----------- -----------
Total 508,000 585,000
=========== ===========
</TABLE>
Kaiser owns two smelters located at Mead and Tacoma,
Washington, where alumina is processed into primary aluminum. The Mead
facility uses pre-bake technology and produces primary aluminum, almost
all of which is used at Kaiser's Trentwood fabricating facility and the
balance of which is sold to third parties. The Tacoma plant uses
Soderberg technology and produces primary aluminum and high-grade,
continuous cast, redraw rod, which currently commands a premium price in
excess of the price of primary aluminum. Both smelters have achieved
significant production efficiencies in recent years through retrofit
technology, cost controls and semi-variable wage and power contracts,
leading to increases in production volume and enhancing their ability to
compete with newer smelters. At the Mead plant, Kaiser has converted to
welded anode assemblies to increase energy efficiency, reduced the number
of anodes used in the smelting process, changed from pencil to liquid
pitch to produce carbon anodes which achieved environmental and operating
savings, and engaged in efforts to increase production through the use of
improved, higher-efficiency reduction cells.
Electrical power represents an important production cost for
Kaiser at its Mead and Tacoma smelters. The electricity supply contracts
between the BPA and the Company expire in 2001. The electricity supply
contracts between the BPA and its direct service industry customers
(which consist of fifteen energy intensive companies, principally
aluminum producers, including Kaiser) permit the BPA to interrupt up to
25% of the amount of power which it normally supplies to such customers.
Both the Mead and Tacoma plants operated at approximately full rated
capacity during 1991-1992, but operated at less than rated capacity
throughout 1993. As a result of drought conditions, in January 1993 the
BPA reduced the amount of power it normally supplies to its direct
service industry customers. In response to such reduction, Kaiser
removed three reduction potlines from production (two at the Mead smelter
and one at the Tacoma smelter) and purchased substitute power in the
first quarter of 1993 at increased costs. Despite the temporary
availability of such power through July 1993, Kaiser has operated its
Mead and Tacoma smelters at the reduced
<PAGE>
operating rates introduced in January 1993, and has operated its
Trentwood fabrication facility without any curtailment of its production.
The Company currently anticipates that in 1994 it will operate the Mead
and Tacoma smelters at rates which do not exceed the current operating
rates of 75% of full capacity for such smelters. The BPA has recently
notified its direct service industry customers that it intends to restore
full power through July 31, 1994.
Through June 1996, Kaiser pays for power on a basis which
varies, within certain limits, with the market price of primary aluminum,
and thereafter Kaiser will pay for power at variable rates to be
negotiated. During 1993, Kaiser paid for power under its power supply
contract with the BPA at the floor rate. Effective October 1, 1993, an
increase in the base rate BPA charges to its direct service industry
customers for electricity was adopted which will increase Kaiser's
production costs at the Mead and Tacoma smelters by approximately $15.0
million per year (approximately $9.1 million per year based on Kaiser's
current operating rate of approximately 75% of full capacity). The rate
increase generally is expected to remain in effect for two years. In the
event that the BPA's revenues fall below certain levels prior to April
1994, the BPA may impose up to a 10% surcharge on the base rate it
charges to its direct service industry customers, effective during the
period from October 1994 through October 1995 (which would increase
Kaiser's production costs at the Mead and Tacoma smelters by
approximately $9.1 million per year based on Kaiser's current operating
rate of approximately 75% of full capacity). In addition, in order to
comply with certain federal laws and regulations applicable to endangered
fish species, the BPA may be required in the future to reduce its power
generation and to purchase substitute power (at greater expense) from
other sources.
KACC manages, and holds a 90% interest in, the Volta Aluminium
Limited ("Valco") aluminum smelter in Ghana. The Valco smelter uses
prebake technology and processes alumina supplied by KACC and the other
participant into primary aluminum under long-term tolling contracts which
provide for proportionate payments by the participants in amounts
intended to pay not less than all of Valco's operating and financing
costs. KACC's share of the primary aluminum is sold to third parties.
Power for the Valco smelter is supplied under an agreement which expires
in 1997, subject to Valco's right to extend the agreement for 20 years.
The agreement indexes the price of two-thirds of the contract quantity to
the market price of primary aluminum and fixes the price for the
remainder. The agreement also provides for a review and adjustment of
the base power rate and the price index every five years. The Valco
smelter restarted production early in 1985 after being closed for more
than two years due to lack of rainfall and the resultant hydroelectricity
shortage. The Company believes that there has been sufficient rainfall
and water storage such that an adequate supply of electricity for the
Valco plant at its current operating rate is probable for at least one
year.
KACC has a 49% interest in the Anglesey Aluminium Limited
("Anglesey") aluminum smelter and port facility at Holyhead, Wales. The
Anglesey smelter uses prebake technology. KACC supplies 49% of
Anglesey's alumina requirements and purchases 49% of Anglesey's aluminum
output. KACC sells its share of Anglesey's output to third parties.
Power for the Anglesey aluminum smelter is supplied under an agreement
which expires in 2001.
Kaiser has developed and installed proprietary retrofit
technology in all of its smelters. This technology -- which includes the
redesign of the cathodes and anodes that conduct electricity through
reduction cells, improved "feed" systems that add alumina to the cells,
and a computerized system that controls energy flow in the cells --
enhances Kaiser's ability to compete more effectively with the industry's
newer smelters. Kaiser is actively engaged in efforts to license this
technology and sell technical and managerial assistance
<PAGE>
to other producers worldwide, and may participate in joint ventures or
similar business partnerships which employ Kaiser's technical and
managerial
knowledge. See "--Research and Development" below.
Kaiser's principal primary aluminum customers consist of large
trading intermediaries and metal brokers, who resell primary aluminum to
fabricated product manufacturers, and large and small international
aluminum fabricators. In 1993, Kaiser sold the approximately 56% of its
primary aluminum production not utilized for internal purposes to
approximately 50 customers, the largest and top five of which accounted
for approximately 44% and 64% of such sales, respectively. Marketing and
sales efforts are conducted by a small staff located at the business
unit's headquarters in Pleasanton, California, and by senior executives
of Kaiser who participate in the structuring of major sales transactions.
A majority of the business unit's sales are based upon long-term
relationships with metal merchants and end-users.
Fabricated Products
Kaiser manufactures and markets fabricated aluminum products
for the packaging, transportation, construction, and consumer durables
markets in the United States and abroad. Sales in these markets are made
directly and through distributors to a large number of customers, both
domestic and foreign. In 1993, seven domestic beverage container
manufacturers constituted the leading customers for Kaiser's fabricated
products and accounted for approximately 19% of Kaiser's sales revenue.
Kaiser's fabricated products compete with those of numerous
domestic and foreign producers and with products made with steel, copper,
glass, plastic and other materials. Product quality, price and
availability are the principal competitive factors in the market for
fabricated aluminum products. As a result, Kaiser has refocused its
fabricated products operations to concentrate on selected products in
which Kaiser has production expertise, high quality capability, and
geographic and other competitive advantages.
Flat-Rolled Products. The Flat-Rolled Products Business Unit,
the largest of Kaiser's fabricated products businesses, operates the
Trentwood sheet and plate mill at Spokane, Washington. The Trentwood
facility is Kaiser's largest fabricating plant and accounted for
substantially more than one-half of Kaiser's 1993 fabricated products
shipments. The business unit supplies the beverage container market
(producing body, lid and tab stock), the aerospace market, and the
tooling plate, heat-treated alloy and common alloy coil markets, both
directly and through distributors. Kaiser announced in October 1993 that
it is restructuring its flat-rolled products operation at its Trentwood
plant to reduce that facility's annual operating costs. This effort is
in response to over-capacity in the aluminum rolling industry, flat
demand in can stock markets, and declining demand for aluminum products
sold to customers in the commercial aerospace industry, all of which have
resulted in declining prices in Trentwood's key markets. The Trentwood
restructuring is expected to result in annual cost savings of
approximately $50.0 million (which is expected to occur by the end of
1995). In connection with the restructuring, Trentwood completed an
organizational streamlining that included a reduction of approximately 80
salaried employees. In addition, Kaiser has reached an agreement with
the USWA that will reduce the total number of hourly employees at
Trentwood by approximately 300 employees, or about 25%, by the end of
1995. The agreement with the USWA also includes a commitment by Kaiser
to spend up to $50 million of capital at Trentwood over three years
provided that goals on cost reduction and profitability are met or
exceeded.
Kaiser's flat-rolled products are sold primarily to beverage
container manufacturers located in the western United States where Kaiser
has a transportation advantage. Quality of products for the beverage
container industry, timeliness of delivery and price are the primary
bases on which Kaiser competes. The Company believes that capital
improvements at Trentwood have enhanced the quality of Kaiser's products
for the beverage container industry and the capacity and efficiency of
Kaiser's manufacturing operations.
<PAGE>
The Company believes that Kaiser is one of the highest quality producers
of aluminum beverage can stock in the world.
In 1993, the Flat-Rolled Products Business Unit had 22 foreign
and domestic can stock customers, the majority of which were beverage can
manufacturers (including seven of the eight major domestic beverage can
manufacturers) and the balance of which were brewers. The largest and
top five of such customers accounted for approximately 25% and 56%,
respectively, of the business unit's sales revenue. In 1993, the
business unit shipped products to over 200 customers in the aerospace,
transportation and industrial ("ATI") markets, most of which were
distributors who sell to a variety of industrial end-users. The top five
customers in the ATI markets for flat-rolled products accounted for
approximately 10% of the business unit's sales revenue. The marketing
staff for the Flat-Rolled Products Business Unit is headquartered in
Pleasanton, California, and is also located at the Trentwood facility.
Sales are made directly to customers (including distributors) from ten
sales offices located throughout the United States. International
customers are served by a sales office in the Netherlands and by
independent sales agents in Asia and Latin America. See also Item 7.
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Trends--Sensitivity to Prices and Hedging Programs--
Aluminum Processing" on page 34 and 35 of the Company's Annual Report to
Stockholders for a discussion of demand for fabricated products
in the aerospace market.
Extruded Products. The Extruded Products Business Unit is
headquartered in Dallas, Texas, and operates soft alloy extrusion
facilities in Los Angeles, California; Santa Fe Springs, California;
Sherman, Texas; and London, Ontario, Canada; a cathodic protection
business located in Tulsa, Oklahoma, that also extrudes both aluminum and
magnesium; and rod and bar facilities in Newark, Ohio, and Jackson,
Tennessee, which produce screw machine stock, redraw rod, forging stock
and billet. Each of the soft alloy extrusion facilities has fabricating
capabilities and provides finishing services. The Extruded Products
Business Unit's major markets are in the transportation industry, to
which it provides extruded shapes for automobiles, trucks, trailers, cabs
and shipping containers, and distribution, durable goods, defense,
building and construction, ordnance, and electrical markets. In 1993,
the Extruded Products Business Unit had over 900 customers for its
products, the largest and top five of which accounted for approximately
6% and 19%, respectively, of its sales revenue. Sales are made directly
from plants as well as marketing locations across the United States.
Forgings. The Forgings Business Unit operates forging
facilities at Erie, Pennsylvania; Oxnard, California; and Greenwood,
South Carolina; and a machine shop at Greenwood, South Carolina. The
Forgings Business Unit is one of the largest producers of aluminum
forgings in the United States and is a major supplier of high quality
forged parts to customers in the automotive, commercial vehicle and
ordnance markets. The high strength-to-weight properties of forged
aluminum make it particularly well suited for automotive applications.
The Forgings Business Unit entered the castings business by purchasing
the assets of Winters Industries, which supplies cast aluminum engine
manifolds to the automobile, truck and marine markets. The casting
production facilities include two foundries and a machining facility in
Ohio. Kaiser has recently implemented a plan to discontinue its castings
operations at these facilities. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Aluminum
Operations--Operating Income (Loss)--Aluminum Processing" on
pages 21 and 22 of the Company's 1993 Annual Report to Stockholders. In
1993, the Forgings Business Unit had over 500 customers for its products,
the largest and top five of which accounted for approximately 20% and
57%, respectively, of the Forgings Business Unit's sales revenue. The
Forgings Business Unit's headquarters is located in Erie, Pennsylvania,
and additional sales, marketing and engineering groups are located in the
midwestern and western United States.
<PAGE>
Competition
Aluminum products compete in many markets with steel, copper,
glass, plastic and numerous other materials. Within the aluminum
business, Kaiser competes with both domestic and foreign producers of
bauxite, alumina and primary aluminum, and with domestic and foreign
fabricators. Kaiser's principal competitors in the sale of alumina
include Alcoa of Australia Ltd., Billiton International Metals B.V.,
Clarendon Ltd. and Pechiney S.A. In addition to the foregoing, Kaiser
competes with most aluminum producers in the production of primary
aluminum. Many of Kaiser's competitors have greater financial resources
than Kaiser. In addition, the C.I.S. has been supplying large quantities
of primary aluminum to the Western world.
Primary aluminum and, to some degree, alumina are commodities
with generally standard qualities, and competition in the sale of these
commodities is based primarily upon price, quality and availability. The
Company believes that, assuming the current relationship between
worldwide supply and demand for alumina and primary aluminum does not
change materially, the loss of any one of Kaiser's customers, including
intermediaries, would not have a material adverse effect on Kaiser's
business or operations. Kaiser also competes with a wide range of
domestic and international fabricators in the sale of fabricated aluminum
products. Competition in the sale of fabricated products is based upon
quality, availability, price and service, including delivery performance.
Kaiser concentrates its fabricating operations on selected products in
which Kaiser has production expertise, high quality capability, and
geographic and other competitive advantages.
Research and Development
Kaiser conducts research and development activities principally
at three facilities dedicated to that purpose -- the Center for
Technology ("CFT") in Pleasanton, California; the Primary Aluminum
Products Division Technology Center ("DTC") adjacent to the Mead smelter
in Washington; and the Alumina Development Laboratory ("ADL") at the
Gramercy, Louisiana refinery. Net expenditures for Kaiser-sponsored
research and development activities were $18.5 million in 1993, $13.5
million in 1992, and $11.4 million in 1991. Kaiser's research staff
totaled 160 at December 31, 1993. Kaiser estimates that research and
development net expenditures will be in the range of approximately $17--
$19 million in 1994. Kaiser actively engages in efforts to license its
technology and sell technical and managerial assistance. CFT provided
technology and technical assistance to Samyang Metal Co. Ltd. in building
an aluminum rolling mill in Yongju, Korea. CFT also is engaged in
cooperative research and development projects with Furukawa Electric Co.,
Ltd., Pechiney Rhenalu and Kawasaki Steel Corporation of Japan, with
respect to the ground transportation market. DTC-developed technology
has been installed in aluminum smelters located in the C.I.S., West
Virginia, Ohio, Missouri, Kentucky, Sweden, Germany, India, Australia,
New Zealand, Ghana and the United Kingdom. Kaiser's alumina refinery
technology is in use in alumina refineries in the Americas, Australia,
India and Europe. Kaiser's technology sales and revenue from technical
assistance to third parties were $12.8 million in 1993, $14.1 million in
1992 and $10.9 million in 1991.
Employees
During 1993, Kaiser employed an average of approximately 10,220
persons, compared with an average of approximately 10,130 employees in
1992, and approximately 9,970 employees in 1991. As of December 31,
1993, Kaiser's workforce was approximately 10,030, including a domestic
workforce of approximately 5,930, of whom approximately 4,150 were paid
at an hourly rate. Most hourly paid domestic employees are covered by
collective bargaining agreements with various labor unions.
Approximately 73% of such employees are covered by a master agreement
(the "Labor Contract") with the USWA which expires on
<PAGE>
October 31, 1994. The Labor Contract covers Kaiser's plants in Spokane
(Trentwood); Mead and Tacoma, Washington; Gramercy, Louisiana; and
Newark, Ohio.
The Labor Contract provides for floor level wages at all
covered plants. In addition, for workers covered by the Labor Contract
at the Mead and Newark plants, for any quarterly period when the average
Midwest U.S. transaction price of primary aluminum is $.54 per pound or
above, a bonus payment is made. The amount of the quarterly bonus payment
changes incrementally with each full cent change in the price of primary
aluminum between $.54 per pound and $.61 per pound, remains constant when
the price is $.61 or more per pound but is below $.74 per pound, changes
incrementally again with each full cent change in the price between $.74
per pound and $.81 per pound, and remains at the ceiling when the price
is $.81 per pound or more. Workers covered by the Labor Contract at the
Trentwood, Tacoma and Gramercy plants may receive quarterly bonus
payments based on various indices of productivity, efficiency and other
aspects of specific plant performance, as well as, in certain cases, the
price of alumina or primary aluminum. The particular quarterly bonus
variable compensation formula currently applicable at each plant will
remain applicable for the remainder of the contract term.
Pursuant to the Labor Contract, base wage rates were raised
$.50 per hour effective November 1, 1993. Each of the employees covered
by the Labor Contract has received $2,000 in lump-sum signing and special
bonuses. In addition, in the first quarter of 1991, Kaiser acquired up
to $4,000 of preference stock held in the stock bonus plan for the
benefit of approximately 80% of the employees covered by the Labor
Contract, and in February 1994 acquired an additional $2,000 of such
preference stock held in the stock bonus plan for the benefit of
substantially the same employees. In the first quarter of 1991, Kaiser
also acquired up to $4,000 of preference stock which had been held for
the benefit of each of certain salaried employees, and in February 1994
acquired an additional $2,000 of such preference stock held in the stock
bonus plan for the benefit of substantially the same employees. The
February 1994 acquisitions of preference stock aggregated $5.4 million.
Kaiser considers its employee relations to be satisfactory.
Environmental Matters
Kaiser and KACC are subject to a wide variety of international,
state and local environmental laws and regulations (the "Environmental
Laws") which continue to be adopted and amended. The Environmental Laws
regulate, among other things, air and water emissions and discharges; the
generation, storage, treatment, transportation and disposal of solid and
hazardous waste; the release of hazardous or toxic substances, pollutants
and contaminants into the environment; and, in certain instances, the
environmental condition of industrial property prior to transfer or sale.
In addition, Kaiser is subject to various federal, state and local
workplace health and safety laws and regulations (the "Health Laws").
From time to time, Kaiser is subject, with respect to its
current and former operations, to fines or penalties assessed for alleged
breaches of the Environmental and Health Laws and to claims and
litigation brought by federal, state or local agencies and by private
parties seeking remedial or other enforcement action under the
Environmental and Health Laws or damages related to alleged injuries to
health or to the environment, including claims with respect to certain
waste disposal sites and the remediation of sites presently or formerly
operated by Kaiser. See Item 3. "Legal Proceedings--Kaiser Environmental
Litigation." Kaiser is currently subject to a number of lawsuits under
the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended by the Superfund Amendments and Reauthorization Act
of 1986 ("CERCLA"). Kaiser, along with several other entities, has been
named as a Potentially Responsible Party ("PRP") for remedial costs at
certain third-party sites listed on the National Priorities List under
CERCLA and in certain instances, may be exposed to joint and several
liability for those costs or damages to natural resources.
<PAGE>
Kaiser's Mead, Washington facility has been listed on the
National Priorities List under CERCLA. In addition, in connection with
certain of its asset sales, Kaiser has indemnified the purchasers of
assets with respect to certain liabilities (and associated expenses)
resulting from acts or omissions arising prior to such dispositions,
including environmental liabilities. While the ultimate extent of
Kaiser's liability for pending or potential fines, penalties, remedial
costs, claims and litigation relating to environmental and health and
safety matters cannot be determined at this time and, in light of
evolving case law relating to insurance coverage for environmental
claims, the Company is unable to determine definitively the extent of
such coverage, the Company believes that the resolution of these matters
(even without giving effect to potential insurance recovery) should not
have a material adverse effect on Kaiser's consolidated financial
position or results of operations.
Environmental capital spending was $12.6 million in 1993, $13.1
million in 1992 and $11.2 million in 1991. Annual operating costs for
pollution control, not including corporate overhead or depreciation, were
approximately $22.4 million in 1993, $21.6 million in 1992, and $17.8
million in 1991. Legislative, regulatory and economic uncertainties make
it difficult to project future spending for these purposes; however,
Kaiser currently anticipates that in the 1994-1995 period, environmental
capital spending will be within the range of approximately $7.0--$20.0
million per year, and operating costs for pollution control will be
within the range of $20.0--$22.0 million per year. These expenditures
will be made to assure compliance with applicable Environmental Laws and
are expected to include, among other things, additional "red mud"
disposal facilities and improved levees at the Gramercy, Louisiana
refinery (which are being financed by the industrial revenue bonds), bath
crushing improvements, baking furnace modernization, and improved
calcining controls at the Mead, Washington facility, new and continuing
environmental projects at the Trentwood, Washington facility, and
environmental projects required under the Clean Air Act Amendments of
1990. In addition, $7.2 million in cash expenditures in 1993, $9.6
million in 1992 and $14.0 million in 1991 were charged to previously
established reserves relating to environmental cost. Approximately $7.0
million is expected to be charged to such reserves in 1994.
See also Note 10 to the Consolidated Financial Statements.
Other
Kaiser's obligations under its 1994 Credit Agreement are
secured by, among other things, mortgages on Kaiser's plants located in
Spokane (the Trentwood and Mead plants) and Tacoma, Washington; Erie,
Pennsylvania; Newark, Ohio; and Sherman, Texas.
FOREST PRODUCTS OPERATIONS
GENERAL
The Company also engages in forest products operations through
MGI and MGI's wholly owned subsidiaries, Pacific Lumber and Britt.
Pacific Lumber, which has been in continuous operation for 125 years,
engages in all principal aspects of the lumber industry--the growing and
harvesting of redwood and Douglas-fir timber, the milling of logs into
lumber products and the manufacturing of lumber into a variety of
value-added finished products. Britt manufactures redwood and cedar
fencing and decking products from small diameter logs, a substantial
portion of which Britt acquires from Pacific Lumber.
PACIFIC LUMBER REFINANCING
On March 23, 1993 (the "Closing Date"), Pacific Lumber
transferred (the "Transfer") approximately 179,000 acres of timberlands
(the "Subject Timberlands"), its geographical information system and
certain other assets to its newly-formed wholly owned subsidiary, Scotia
Pacific Holding Company ("SPHC"), in exchange for (i) the assumption by
SPHC of $323.4 million of Pacific Lumber's public indebtedness consisting
of all of Pacific Lumber's 12% Series A Senior Notes due July 1, 1996
(the "Series A Notes") and a portion of Pacific Lumber's 12.2% Series B
Senior Notes due July 1, 1996 (the "Series B Notes") and (ii) all of
SPHC's outstanding common stock. SPHC was organized as a special purpose
Delaware corporation to facilitate the Transfer and the offering of the
Timber Notes described below. The Subject
<PAGE>
Timberlands consist substantially of residual old growth and young growth
redwood and Douglas-fir timber. On the Closing Date, Pacific Lumber and
SPHC entered into a Master Purchase Agreement, a Services Agreement, an
Additional Services Agreement and certain other agreements providing for
a variety of ongoing relationships. See "--Pacific Lumber Operations--
Relationships among Pacific Lumber, SPHC and Britt Lumber." On the
Closing Date, Pacific Lumber also transferred to its newly-formed wholly
owned subsidiary, Salmon Creek Corporation ("Salmon Creek"), in exchange
for all of Salmon Creek's common stock, approximately 3,000 contiguous
acres of its virgin old growth redwood timber, together with
approximately 3,000 additional acres of adjacent timberlands owned by
Pacific Lumber which could not be readily segregated from such virgin old
growth redwood timberlands (collectively, the "Salmon Creek Property").
Pacific Lumber retained the exclusive right to harvest (the
"Pacific Lumber Harvest Rights") approximately 8,000 non-contiguous acres
of the Subject Timberlands consisting substantially of virgin old growth
redwood and virgin old growth Douglas-fir timber located on numerous
small parcels throughout the Subject Timberlands. In addition, Pacific
Lumber retained its lumber milling, manufacturing, cogeneration and
related facilities, as well as approximately 11,000 acres of real
property located in Humboldt County, California, which do not constitute
part of the Subject Timberlands (collectively, the "Pacific Lumber Real
Property"). The Pacific Lumber Real Property consists of the town of
Scotia, the land on which Pacific Lumber's sawmills, manufacturing
facilities and related facilities are located and areas adjacent thereto,
certain potential residential and commercial development sites and other
areas, including timberlands owned by Pacific Lumber which cannot be
readily segregated from the foregoing properties. Pacific Lumber is
milling logs and producing and marketing lumber products from timber
located on the timberlands of SPHC, Pacific Lumber and Salmon Creek in
substantially the same manner as conducted prior to the Transfer.
Pacific Lumber is, pursuant to the Master Purchase Agreement, harvesting
and purchasing from SPHC all or substantially all of the logs harvested
from the Subject Timberlands. See "--Pacific Lumber Operations--
Relationships among Pacific Lumber, SPHC and Britt Lumber" below.
On the Closing Date, Pacific Lumber consummated its offering of
$235 million aggregate principal amount of 10 1/2% Senior Notes due 2003
(the "Pacific Lumber Senior Notes") and SPHC consummated its offering of
$385 million aggregate principal amount of 7.95% Timber Collateralized
Notes due 2015 (the "Timber Notes"). The net proceeds of such offerings,
together with cash and marketable securities, were used to redeem all of
Pacific Lumber's outstanding public indebtedness (including the amounts
assumed by SPHC), to make required deposits into certain accounts for the
benefit of the holders of the Timber Notes, to repay Pacific Lumber's
cogeneration loan and to pay a $25.0 million dividend to MAXXAM
Properties Inc., a subsidiary of the Company ("MPI"). Substantially all
of SPHC's assets, including the Subject Timberlands, were pledged as
security for the Timber Notes.
PACIFIC LUMBER OPERATIONS
Timberlands
Pacific Lumber owns and manages approximately 187,000 acres of
commercial timberlands in Humboldt County in northern California. These
timberlands contain approximately three-quarters redwood and one-quarter
Douglas-fir timber. Pacific Lumber's acreage is virtually contiguous, is
located in close proximity to its sawmills and contains an extensive
(1,100 mile) network of roads. These factors significantly reduce
harvesting costs and facilitate Pacific Lumber's forest management
techniques. The extensive roads throughout Pacific Lumber's timberlands
facilitate log hauling, serve as fire breaks and allow Pacific Lumber's
foresters access to employ forest stewardship techniques which protect
the trees from forest fires, erosion, insects and other damage.
<PAGE>
The forest products industry grades lumber in various
classifications according to quality. The two broad categories within
which all grades fall, based on the absence or presence of knots, are
called "upper" and "common" grades, respectively. "Old growth" trees,
often defined as trees which have been growing for approximately 200
years or longer, have a higher percentage of upper grade lumber than
"young growth" trees (those which have been growing for less than 200
years). "Virgin" old growth trees are located in timber stands that have
not previously been harvested. "Residual" old growth trees are located
in timber stands which have been selectively harvested in the past.
Pacific Lumber has engaged in extensive efforts, at relatively
low cost, to supplement the natural regeneration of timber and increase
the amount of timber on its timberlands. Regeneration of redwood timber
generally is accomplished through the natural growth of redwood sprouts
from the stump remaining after a redwood tree is harvested. Such new
redwood sprouts grow quickly, thriving on existing mature root systems.
In addition, Pacific Lumber supplements natural redwood generation by
planting redwood seedlings. Douglas-fir timber grown on Pacific Lumber's
timberlands is regenerated almost entirely by planting seedlings. During
the 1992-93 planting season (December through March), Pacific Lumber
planted approximately 488,000 redwood and Douglas-fir seedlings at a cost
of approximately $215,500.
Harvesting Practices
The ability of Pacific Lumber to sell logs or lumber products
will depend, in part, upon its ability to obtain regulatory approval of
timber harvesting plans ("THPs"). THPs are required to be filed with the
California Department of Forestry ("CDF") prior to the harvesting of
timber and are designed to comply with existing environmental laws and
regulations. The CDF's evaluation of proposed THPs incorporates review
and analysis of such THPs provided by several California and federal
agencies and public comments received with respect to such THPs. An
approved THP is applicable to specific acreage and specifies the
harvesting method and other conditions relating to the harvesting of the
timber covered by such THP. The method of harvesting as set forth in a
THP is chosen from among a number of accepted methods based upon
suitability to the particular site conditions. Pacific Lumber maintains
a detailed geographical information system covering its timberlands (the
"GIS"). The GIS covers numerous aspects of Pacific Lumber's properties,
including timber type, tree class, wildlife data, roads, rivers and
streams. By carefully monitoring and updating this data base, Pacific
Lumber's foresters are able to develop detailed THPs which are required
to be filed with and approved by the CDF prior to the harvesting of
timber.
Pacific Lumber principally harvests trees through selective
harvesting, which harvests only a portion of the trees in a given area,
as opposed to clearcutting, which harvests an entire area of trees in one
logging operation. Selective harvesting generally accounts for over 90%
(by volume on a net board foot basis) of Pacific Lumber's timber harvest
in any given year. Harvesting by clearcutting is used only when
selective harvesting methods are impractical due to unique conditions.
Selective harvesting allows the remaining trees to obtain more light,
nutrients and water thereby promoting faster growth rates. Due to the
size of its timberlands and conservative harvesting practices, Pacific
Lumber has historically conducted harvesting operations on approximately
5% of its timberlands in any given year.
Production Facilities
Pacific Lumber owns four highly mechanized sawmills and related
facilities located in Scotia, Fortuna and Carlotta, California. The
sawmills historically have been supplied almost entirely from timber
harvested from Pacific Lumber's timberlands. Since 1986, Pacific Lumber
has implemented numerous technological advances which have increased the
operating efficiency of its production facilities and the recovery of
finished products from its timber. Over the past three years, Pacific
Lumber's annual lumber production has averaged approximately 249 million
board feet, with approximately 228, 264 and 256 million board feet
<PAGE>
produced in 1993, 1992 and 1991, respectively. Pacific Lumber operates a
finishing plant which processes rough lumber into a variety of finished
products such as trim, fascia, siding and paneling. These finished
products include the industry's largest variety of customized trim and
fascia patterns. Pacific Lumber also enhances the value of some grades
of common grade lumber by cutting out knot-free pieces and reassembling
them into longer or wider pieces in Pacific Lumber'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.
Pacific Lumber dries the majority of its upper grade lumber
before it is sold. Upper grades of redwood lumber are generally
air-dried for six to eighteen months and then kiln-dried for seven to
twenty-four days to produce a dimensionally stable and high quality
product which generally commands higher prices than "green" lumber (which
is lumber sold before it has been dried). Upper grade Douglas-fir lumber
is generally kiln-dried immediately after it is cut. Pacific Lumber owns
and operates 34 kilns, having an annual capacity of approximately 95
million board feet, to dry its upper grades of lumber efficiently in
order to produce a quality, premium product. Pacific Lumber also
maintains several large enclosed storage sheds which hold approximately
25 million board feet of lumber.
In addition, Pacific Lumber owns and operates a modern
25-megawatt cogeneration power plant which is fueled almost entirely by
the wood residue from Pacific Lumber's milling and finishing operations.
This power plant generates substantially all of the energy requirements
of Scotia, California, the town adjacent to Pacific Lumber's timberlands
owned by Pacific Lumber where several of its manufacturing facilities are
located. Pacific Lumber sells surplus power to Pacific Gas and Electric
Company. In 1993, the sale of surplus power to Pacific Gas and Electric
Company accounted for approximately 2% of Pacific Lumber's total
revenues.
In April 1992, an earthquake and a series of aftershocks
occurred in northern California which produced a significant amount of
damage in and around the area where Pacific Lumber's forest products
operations are located. Standing timber on Pacific Lumber's timberlands
suffered virtually no damage; however, among other damage, a large number
of kilns used to dry upper grade redwood lumber and two sawmills were
damaged, including one sawmill which was not operational for a period of
approximately six weeks. Pacific Lumber maintains insurance coverage
with respect to damage to its property and the disruption of its business
from earthquakes. Consistent with its past practices and the owners of
most other timber tracts in the United States, Pacific Lumber does not
maintain earthquake or fire insurance in respect of standing timber.
Products
Lumber. Pacific Lumber primarily produces and markets lumber.
In 1993, Pacific Lumber sold approximately 240 million board feet of
lumber, which accounted for approximately 82% of Pacific Lumber's total
revenues. Lumber products vary greatly by the species and quality of the
timber from which it is produced. Lumber is sold not only by grade (such
as "upper" grade versus "common" grade), but also by board size and the
drying process associated with the lumber.
Redwood lumber is Pacific Lumber's largest product category,
constituting approximately 81% of Pacific Lumber's total lumber revenues
and 67% of Pacific Lumber's total revenues in 1993. Redwood is
commercially grown only along the northern coast of California and
possesses certain unique characteristics which 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
<PAGE>
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 old
growth trees and is characterized by an absence of knots and other
defects and a very fine grain, is used primarily in more costly and
distinctive interior and exterior applications. During 1993, upper
grade redwood lumber products accounted for approximately 25% of Pacific
Lumber's total lumber production volume (on a net board foot basis), 49%
of its total lumber revenues and 40% of its total revenues.
Common grade redwood lumber, Pacific Lumber's largest volume
product, has many of the same aesthetic and structural qualities of
redwood uppers, but has some knots, sapwood and a coarser grain. Such
lumber is commonly used for construction purposes, including outdoor
structures such as decks, hot tubs and fencing. In 1993, common grade
redwood lumber accounted for approximately 48% of Pacific Lumber's total
lumber production volume (on a net board foot basis), 32% of its total
lumber revenues and 26% of its total revenues.
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. In 1993, upper grade Douglas-fir lumber accounted for
approximately 5% of Pacific Lumber's total lumber production volume (on a
net board foot basis), 8% of its total lumber revenues and 6% of its
total revenues. 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. In 1993, common grade Douglas-fir
lumber accounted for approximately 22% of Pacific Lumber's total lumber
production volume, 11% of its total lumber revenues and 9% of its total
revenues.
Logs. Pacific Lumber currently sells certain logs that, due to
their size or quality, cannot be efficiently processed by its mills into
lumber. The purchasers of these logs are largely Britt, and surrounding
mills which do not own sufficient timberlands to support their mill
operations. In 1993, log sales accounted for approximately 10% of
Pacific Lumber's total revenues. See "--Relationships among Pacific
Lumber, SPHC and Britt Lumber" below.
Except for the agreement with Britt described below, Pacific
Lumber does not have any significant contractual relationships with any
third parties relating to the purchase of logs. Pacific Lumber has
historically not purchased significant quantities of logs from third
parties; however, Pacific Lumber may from time to time purchase logs from
third parties for processing in its mills or for resale to third parties
if, in the opinion of management, economic factors are advantageous to
the Company. See also Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--
Forest Products Operations--Operating Income" for a description of 1993
log purchases by Pacific Lumber due to inclement weather conditions.
Wood Chips. In 1990, Pacific Lumber installed a whole-log
chipper to produce wood chips from hardwood trees which were previously
left as waste. These chips primarily are sold to third parties for the
production of facsimile and other specialty papers. In 1993, hardwood
chips accounted for approximately 3% of Pacific Lumber's total revenues.
<PAGE>
Pacific Lumber also produces softwood chips from the wood
residue and waste from its milling and finishing operations. These chips
are sold to third parties for the production of wood pulp and paper
products. In 1993, softwood chips accounted for approximately 3% of
Pacific Lumber's total revenues.
Backlog and Seasonality
Pacific Lumber's backlog of sales orders at December 31, 1993
and 1992 was approximately $16.0 million and $15.4 million, respectively,
the substantial portion of which was delivered in the first quarter of
the succeeding fiscal year.
Pacific Lumber has historically experienced lower first and
fourth quarter sales due largely to the general decline in
construction-related activity during the winter months. As a result,
Pacific Lumber's results in any one quarter are not necessarily
indicative of results to be expected for the full year.
Marketing
The housing, construction and remodeling markets are the
primary markets for Pacific Lumber's lumber products. Pacific Lumber's
policy is to maintain a wide distribution of its products both
geographically and in terms of the number of customers. Pacific Lumber
sells its lumber products throughout the country to a variety of
accounts, the large majority of which are wholesalers, followed by
retailers, industrial users, exporters and manufacturers. Upper grades
of redwood and Douglas-fir lumber are sold throughout the entire United
States, as well as to export markets. Common grades of redwood lumber
are sold principally west of the Mississippi river, with California
accounting for approximately 60% of these sales in 1993. Common grades
of Douglas-fir lumber are sold primarily in California. In 1993, no
single customer accounted for more than 6% of Pacific Lumber's total
revenues. Exports of lumber accounted for approximately 4% of Pacific
Lumber's total lumber revenues in 1993. Pacific Lumber markets its
products through its own sales staff which focuses primarily on domestic
sales.
Pacific Lumber actively follows trends in the housing,
construction and remodeling markets in order to maintain an appropriate
level of inventory and assortment of product. Due to its high quality
products, large inventory, competitive prices and long history, Pacific
Lumber believes that it has a strong degree of customer loyalty.
Competition
Pacific Lumber's lumber is sold in highly competitive markets.
Competition is generally based upon a combination of price, service and
product quality. Pacific Lumber's products compete not only with other
wood products but with metals, masonry, plastic and other construction
materials made from non-renewable resources. The level of demand for
Pacific Lumber's products is dependent on such broad factors as overall
economic conditions, interest rates and demographic trends. In addition,
competitive considerations, such as total industry production and
competitors' pricing, as well as the price of other construction
products, affect the sales prices for Pacific Lumber's lumber products.
Pacific Lumber currently enjoys a competitive advantage in the upper
grade redwood lumber market due to the quality of its timber holdings and
relatively low cost production operations. Competition in the common
grade redwood and Douglas-fir lumber market is more intense, and Pacific
Lumber competes with numerous large and small lumber producers.
Employees
As of March 1, 1994, Pacific Lumber had approximately 1,200
employees.
<PAGE>
Relationships among Pacific Lumber, SPHC and Britt Lumber
On the Closing Date, Pacific Lumber and SPHC entered into a
Services Agreement (the "Services Agreement") and an Additional Services
Agreement (the "Additional Services Agreement"). Pursuant to the
Services Agreement, Pacific Lumber provides operational, management and
related services with respect to the Subject Timberlands containing
timber of SPHC ("SPHC Timber") not performed by SPHC's own employees.
Such services include the furnishing of all equipment, personnel and
expertise not within the SPHC's possession and reasonably necessary for
the operation and maintenance of the Subject Timberlands containing the
SPHC Timber. In particular, Pacific Lumber is required to regenerate
SPHC Timber, prevent and control loss of the SPHC Timber by fires,
maintain a system of roads throughout the Subject Timberlands, take
measures to control the spread of disease and insect infestation
affecting the SPHC Timber and comply with environmental laws and
regulations, including measures with respect to waterways, habitat,
hatcheries and endangered species. Pacific Lumber also is required (to
the extent necessary) to assist SPHC personnel in updating the GIS and to
prepare and file, on SPHC's behalf, all pleadings and motions and
otherwise diligently pursue appeals of any denial of any THP and related
matters. As compensation for these and the other services to be provided
by Pacific Lumber, SPHC pays a fee which is adjusted on January 1 of each
year based on a specified government index relating to wood products.
The fee was $100,000 per month in 1993 and is expected to be
approximately $114,000 per month in 1994. Pursuant to the Additional
Services Agreement, SPHC provides Pacific Lumber with a variety of
services, including (a) assisting Pacific Lumber to operate, maintain and
harvest its own timber properties, (b) updating and providing access to
the GIS with respect to information concerning Pacific Lumber's own
timber properties, and (c) assisting Pacific Lumber with its statutory
and regulatory compliance. Pacific Lumber pays SPHC a fee for such
services equal to the actual cost of providing such services, as
determined in accordance with generally accepted accounting principles.
Pacific Lumber and SPHC also entered into the Master Purchase
Agreement on the Closing Date. The Master Purchase Agreement governs all
purchases of logs by the Company from SPHC. Each purchase of logs by
Pacific Lumber from SPHC is made pursuant to a separate log purchase
agreement (which incorporates the terms of the Master Purchase Agreement)
for the SPHC Timber covered by an approved THP. Each log purchase
agreement generally constitutes an exclusive agreement with respect to
the timber covered thereby, subject to certain limited exceptions. The
purchase price must be at least equal to the SBE Price (as defined
below). The Master Purchase Agreement provides that if the purchase
price equals or exceeds (i) the price for such species and category
thereof set forth on the structuring schedule applicable to the Timber
Notes, and (ii) the SBE Price, then such price shall be deemed to be the
fair market value of such logs. The Master Purchase Agreement defines
the "SBE Price," for any species and category of timber, as the stumpage
price for such species and category as set forth in the most recent
"Harvest Value Schedule" published by the California State Board of
Equalization applicable to the timber sold during the period covered by
such Harvest Value Schedule. Such Harvest Value Schedules are published
for purposes of computing yield taxes and generally are established every
six months. As Pacific Lumber purchases logs from SPHC pursuant to the
Master Purchase Agreement, Pacific Lumber is responsible, at its own
expense, for harvesting and removing the standing SPHC Timber covered by
approved THPs and, thus, the purchase price thereof is based upon
"stumpage prices." Title to the harvested logs does not pass to Pacific
Lumber until the logs are transported to Pacific Lumber's log decks and
measured. Substantially all of SPHC's revenues are derived from the sale
of logs to Pacific Lumber under the Master Purchase Agreement.
In connection with the Transfer, Pacific Lumber, SPHC and
Salmon Creek also entered into a Reciprocal Rights Agreement granting to
each other certain reciprocal rights of egress and ingress through their
respective properties in connection with the operation and maintenance of
such properties and their respective businesses. In addition, on the
Closing Date, Pacific Lumber entered into an Environmental
<PAGE>
Indemnification Agreement with SPHC pursuant to which Pacific Lumber
agreed to indemnify SPHC from and against certain present and future
liabilities arising with respect to hazardous materials, hazardous
materials contamination or disposal sites, or under environmental laws
with respect to the Subject Timberlands.
On the Closing Date, Pacific Lumber entered into an agreement
with Britt which governs the sale of logs by Pacific Lumber and Britt to
each other, the sale of hog fuel (wood residue) by Britt to Pacific
Lumber for use in Pacific Lumber's cogeneration plant, the sale of lumber
by Pacific Lumber and Britt to each other, and the provision by Pacific
Lumber of certain administrative services to Britt (including accounting,
purchasing, data processing, safety and human resources services). The
logs which Pacific Lumber sells to Britt and which are used in Britt's
manufacturing operations are sold at approximately 75% of applicable SBE
prices (to reflect the lower quality of these logs). Logs which either
Pacific Lumber or Britt purchases from third parties and which are then
sold to each other are transferred at the actual cost of such logs. Hog
fuel is sold at applicable market prices, and administrative services are
provided by Pacific Lumber based on Pacific Lumber's actual costs and an
allocable share of Pacific Lumber's overhead expenses consistent with
past practice.
BRITT LUMBER OPERATIONS
Business
Britt is located in Arcata, California, approximately 45 miles
north of Pacific Lumber's headquarters. Britt's primary business is the
processing of small diameter redwood logs into wood fencing products for
sale to retail and wholesale customers. Britt was incorporated in 1965
and operated as an independent manufacturer of fence products until July
1990, when it was purchased by a subsidiary of the Company. Britt
purchases small diameter (6 to 14 inch) and short length (6 to 12 feet)
redwood logs from Pacific Lumber and a variety of different diameter and
different length logs from various timberland owners. Britt processes
logs at its mill into a variety of different fencing products, including
"dog-eared" 1" to 6" fence stock in six and eight foot lengths, 4" x 4"
fence posts in 6 through 12 foot lengths, and other fencing products in 6
through 12 foot lengths. Britt's purchases of logs from third parties
are generally consummated pursuant to short-term contracts of twelve
months or less. See "--Relationships among Pacific Lumber, SPHC, and
Britt Lumber" for a description of Britt's log purchases from Pacific
Lumber.
Marketing
In 1993, Britt sold approximately 73 million board feet of
lumber products to approximately 90 different customers, compared to
1992 sales of approximately 68 million board feet of lumber products to
approximately 100 customers. In both years, over one-half of its sales
were in northern California. The remainder of its 1993 and 1992 sales
were in southern California, Arizona, Colorado, Hawaii and Nevada. The
largest and top five of such customers accounted for approximately 33%
and 46%, respectively, of such 1993 sales and 33% and 80%, respectively,
of 1992 sales. Britt markets its products through its own sales person
to a variety of customers, including distribution centers, industrial
remanufacturers, wholesalers and retailers.
Facilities and Employees
Britt's manufacturing operations are conducted on 12 acres of
land, 10 acres of which are leased on a long-term fixed-price basis from
an unrelated third party. Fence production is conducted in a 46,000
square foot mill. An 18 acre log sorting and storage yard is located
1/4 mile away. The mill was constructed in 1980, and capital
expenditures to enhance its output and efficiency are made on a yearly
basis. Britt's
<PAGE>
(single shift) mill capacity, assuming 40 production hours per week, is
estimated at 40.3 million board feet of fencing products per year. As of
March 1, 1994, Britt employed approximately 100 people.
Competition
Management estimates that Britt accounted for approximately 24%
of the redwood fence market in 1993 in competition with the northern
California mills of Louisiana Pacific and Georgia Pacific.
REGULATORY AND ENVIRONMENTAL FACTORS
Regulatory and environmental issues play a significant role in
Pacific Lumber's forest products operations. Pacific Lumber's forest
products operations are subject to a variety of California, and in some
cases, federal laws and regulations dealing with timber harvesting,
endangered species, and air and water quality. These laws include the
California Forest Practice Act (the "Forest Practice Act"), which
requires that timber harvesting operations be conducted in accordance
with detailed requirements set forth in the Forest Practice Act and in
the regulations promulgated thereunder by the California Board of
Forestry (the "BOF"). The federal Endangered Species Act (the "ESA") and
the California Endangered Species Act (the "CESA") provide in general for
the protection and conservation of specifically listed fish, wildlife and
plants which have been declared to be endangered or threatened. The
California Environmental Quality Act ("CEQA") provides, in general, for
protection of the environment of the state, including protection of air
and water quality and of fish and wildlife. In addition, the California
Water Quality Act requires, in part, that Pacific Lumber's operations be
conducted so as to reasonably protect the water quality of nearby rivers
and streams. Pacific Lumber does not expect that compliance with such
existing laws and regulations will have a material adverse effect on its
timber harvesting practices or future operating results. There can be no
assurance, however, that future legislation, governmental regulations or
judicial or administrative decisions would not adversely affect Pacific
Lumber.
Additional BOF regulations (i.e., late succession forest stand
rules and sensitive watershed rules) went into effect March 1, 1994.
These new regulations require, among other things, the inclusion of more
information in THPs (concerning, among other things, timber generation
systems, the presence or absence of fish, wildlife and plant species, and
potentially impacted watersheds) and modification of certain timber
harvesting practices to comply with the new regulations. In early March
1994, the BOF also approved silviculture with sustained yield rules. The
Office of Administrative Law (the "OAL") is expected to (i) approve these
proposed regulations, (ii) request additional review, information or
action and resubmittal to the OAL, or (iii) reject the proposed
regulations. These proposed regulations are scheduled to become
effective on May 1, 1994, and if approved, will require additional
information to be included in THPs (concerning, among other things,
compliance with long-term sustained yield objectives) and modifications
of certain timber harvesting practices (including the creation of buffer
zones between harvest areas and increases in the amount of timber
required to be retained in a harvest area).
Various groups and individuals have filed objections with the
CDF regarding the CDF's actions and rulings with respect to certain of
Pacific Lumber's THPs, and the Company expects that such groups and
individuals will continue to file objections to certain of Pacific
Lumber's THPs. In addition, lawsuits are pending which seek to prevent
Pacific Lumber from implementing certain of its approved THPs. These
challenges have severely restricted Pacific Lumber's ability to harvest
virgin old growth timber on its property during the past few years. To
date, litigation with respect to Pacific Lumber's THPs relating to young
growth and residual old growth timber has been limited; however, no
assurance can be given as to the extent of such litigation in the future.
<PAGE>
In June 1990, the U.S. Fish and Wildlife Service (the "USFWS")
designated the northern spotted owl as threatened under the ESA. The
State of California also has adopted regulations designed to protect the
northern spotted owl, although the northern spotted owl has not been
listed as threatened or endangered under the CESA. The owl's range
includes all of Pacific Lumber's timberlands. The ESA and its
implementing regulations generally prohibit harvesting operations in
which individual owls might be killed, displaced or injured or which
result in significant habitat modification that could impair the survival
of individual owls or the species as a whole. Since 1988, biologists
have conducted inventory and habitat utilization studies of northern
spotted owls on Pacific Lumber's timberlands. The USFWS has given its
full concurrence to a northern spotted owl management plan (the "Owl
Plan"), a comprehensive wildlife management plan submitted by Pacific
Lumber with respect to the northern spotted owl. Pacific Lumber
incorporates this plan into each THP filed with the CDF and is no longer
required to receive individual approval of its northern spotted owl
conservation practices in connection with each THP it submits. The Owl
Plan enables Pacific Lumber to expedite the approval process with respect
to its THPs. Both federal and state agencies continue to review and
consider possible additional regulations regarding the northern spotted
owl. It is uncertain if such additional regulations will become
effective or their ultimate content.
On March 12, 1992, the marbled murrelet was approved for
listing as endangered under the CESA. Pacific Lumber has incorporated,
and will continue to incorporate, additional mitigation measures into its
THPs to protect and maintain habitat for marbled murrelets on its
timberlands. The California Department of Fish and Game (the "CDFG")
requires Pacific Lumber to conduct pre-harvest marbled murrelet surveys
and to provide certain other site specific mitigations in connection with
its THPs covering virgin old growth timber and unusually dense stands of
residual old growth timber. Such surveys can only be conducted during
April to July, the murrelets' nesting and breeding season. Accordingly,
such surveys are expected to delay the approval process with respect to
certain of the THPs filed by Pacific Lumber. The results of such surveys
could prevent Pacific Lumber from conducting certain of its harvesting
operations. In October 1992, the USFWS issued its final rule listing the
marbled murrelet as a threatened species under the ESA in the tri-state
area of Washington, Oregon and California. In January 1994, the USFWS
proposed designation of critical habitat for the marbled murrelet under
the ESA. This proposal is subject to public comment, hearings and
possible future modification. Both federal and state agencies continue
to review and consider possible additional regulations regarding the
marbled murrelet. It is uncertain if such additional regulations will
become effective or their ultimate content.
Pacific Lumber's wildlife biologist is conducting research
concerning the marbled murrelet on Pacific Lumber's timberlands and is
currently developing a comprehensive management plan for the marbled
murrelet (the "Murrelet Plan") similar to the Owl Plan. Pacific Lumber
is continuing to work with the USFWS and the other government agencies on
the Murrelet Plan. It is uncertain when the Murrelet Plan will be
completed and approved.
In October 1993, the USFWS received a petition proposing
listing the coho salmon (which is found on Pacific Lumber's property) as
threatened or endangered.
Laws and regulations dealing with Pacific Lumber's operations
are subject to change and new laws and regulations are frequently
introduced concerning the California timber industry. A variety of bills
are currently pending in the California legislature and the U.S. Congress
which relate to the business of Pacific Lumber, including the protection
and acquisition of old growth and other timberlands, endangered species,
environmental protection and the restriction, regulation and
and administration of timber harvesting practices. For example, the U.S.
Congressman for the congressional district in which Pacific Lumber is
located has introduced a bill which would, among other things,
incorporate within the boundaries of an existing national
<PAGE>
forest approximately 42,000 acres of Pacific Lumber's timberlands and
would designate approximately 12,000 acres of Pacific Lumber's
timberlands to be studied for possible inclusion within such national
forest. Corresponding legislation has been introduced in the California
legislature. These 54,000 acres constitute approximately 30% of Pacific
Lumber's timberlands. Since this and the other bills are subject to
amendment, it is premature to assess the ultimate content of these bills,
the likelihood of any of the bills passing, or the impact of any of these
bills on the consolidated financial position or results of operations of
the Company. Furthermore, any bills which are passed are subject to
executive veto and court challenge. In addition to existing and possible
new or modified statutory enactments, regulatory requirements,
administrative and legal actions, the California timber industry remains
subject to potential California or local ballot initiatives and evolving
federal and California case law which could affect timber harvesting
practices. It is, however, impossible to assess the effect of such
matters on the future operating results or consolidated financial
position of the Company.
REAL ESTATE OPERATIONS
The Company, principally through its wholly owned subsidiaries,
is also engaged in the business of real estate development and commercial
real estate investment in Arizona, California, Colorado, New Mexico,
Texas and Puerto Rico. The Company has outstanding receivables from the
financing of real estate sales in its developments and may continue to
finance such real estate sales in the future. The Company also holds
other receivables as a portion of its commercial real estate investments.
Properties
Texas. In 1991, a subsidiary of the Company purchased for
approximately $122.0 million a portfolio of real property and loans
secured by real property at auction from the Resolution Trust
Corporation. Substantially all of the real property was located in
Texas, with the largest concentration in the vicinity of San Antonio,
Houston, Austin and Dallas. During 1993 and the first two months of
1994, an aggregate of $12.5 million of the loans were sold or paid off,
approximately $20.9 million of real property securing loans was acquired
in lieu of foreclosure and eighteen properties were sold. The largest of
these sales was completed in December 1993 and resulted in the sale of
sixteen properties for $113.6 million. As of March 1, 1994, the Company
had six loans and seventeen properties remaining. Certain of the
remaining assets are being marketed by the Company.
Palmas del Mar. Palmas del Mar ("Palmas"), a resort, time-
sharing and land development and sales business, located on the
southeastern coast of Puerto Rico near Humacao, was acquired in 1984.
Originally 2,762 acres, Palmas now includes approximately 2,160 acres of
undeveloped land, 100 condominiums utilized in its time-sharing program
(comprising 5,300 time-share intervals of which approximately 1,135
remain to be sold), a 100-room hotel and adjacent executive convention
center known as the Candelero Hotel, a 23-room luxury hotel known as the
Palmas Inn, a casino, a Gary Player-designed 18-hole golf course, 20
tennis courts, golf and tennis pro shops, restaurants, beach and pool
facilities, an equestrian center and a sailing center. Certain stores
and restaurants and the equestrian center are operated by third parties.
Approximately 1,300 private residences and a marina are owned by third
parties. A number of these private residences are made available to
Palmas by their owners throughout the year for rental to vacationers.
Since 1985, the Company has been actively engaged in the development and
sale of condominiums, estate lots and villas. In 1993, Palmas sold
approximately twenty-five condominium units, one estate lot and
thirty-one time-shares intervals.
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
<PAGE>
Scottsdale, Arizona. As of March 1, 1994, Fountain Hills had
approximately 5,000 acres of undeveloped land, 90 commercial tracts and
65 developed residential lots available for sale. The population of
Fountain Hills is approximately 11,000. The Company is planning the
development of certain of its remaining acreage. Future sales are
expected to consist mainly of undeveloped acreage, semi-developed parcels
and fully-developed lots, although the Company expects to continue
limited construction and direct sale of residential units. In 1993,
approximately 150 lots and 20 acres were sold.
Lake Havasu City. In 1963, a subsidiary of the Company
purchased and began developing approximately 16,700 acres of real
property at Lake Havasu City, Arizona, which were offered for sale in the
form of subdivided single and multiple family residential, commercial and
industrial sites. The Company has sold substantially all of its lot
inventory in Lake Havasu City and is currently planning the development
of its remaining acreage.
Rancho Mirage. In 1991, a subsidiary of the Company acquired
Mirada, a 195-acre luxury resort-residential project located in Rancho
Mirage, California. The Company is currently marketing the project's
fully-developed lots.
Other. The Company, through its subsidiaries, owns a number of
other properties in Arizona, New Mexico, Texas and Colorado. Efforts are
underway to sell most of these properties.
Marketing
The Company is engaged in marketing and sales programs of
varying magnitudes at its real estate developments. In recent years, the
Company has constructed residential units and sold time-share intervals
at certain of its real estate developments. The Company intends to
continue selling land to builders and developers and lots to individuals
and expects to continue to construct and sell completed residential units
at certain of its developments. It also expects to sell certain of its
commercial real estate assets. All sales are made directly to purchasers
through the Company's marketing personnel, independent contractors or
through independent real estate brokers who are compensated through the
payment of customary real estate brokerage commissions.
Competition and Regulation and Other Industry Factors
There is intense competition among companies in the real estate
development business and the commercial real estate business for sales to
residential and commercial lot purchasers and to commercial property
investors. Sales and payments on real estate sales obligations depend,
in part, on available financing and disposable income and, therefore, are
affected by changes in general economic conditions and other similar
factors. The real estate development business and commercial real estate
business are subject to other risks such as shifts in population,
fluctuations in the real estate market, and unpredictable changes in the
desirability of residential, commercial and industrial areas. Palmas'
resort and time-sharing business competes with similar businesses in the
Caribbean, Florida and other locations. Palmas' resort operations are
seasonal and are subject to, among other things, the condition of the
United States economy and tourism business in Puerto Rico.
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 layout and 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 real estate development and
marketing
<PAGE>
operations of the Company and its subsidiaries. Various jurisdictions
also require inspection of properties by appropriate authorities,
approval of sales literature, disclosure to purchasers of specific
information, bonding for property improvements, approval of real estate
contract forms and delivery to purchasers of a report describing the
property.
SAM HOUSTON RACE PARK
General and Financing
On July 8, 1993, subsidiaries of the Company acquired various
interests in a Class 1 thoroughbred and quarter horse racing facility
(the "Race Park") currently under construction just northwest of Houston.
Houston is the fourth largest city in the United States and the largest
city without pari-mutuel horse racing. Sam Houston Race Park, Ltd. (the
"Partnership") owns the land, facilities and the racing license with
respect to the Race Park. On July 8, 1993, the Partnership obtained the
funds required to finance the construction and initial start-up costs of
the Race Park through (i) the sale by the Partnership and its wholly
owned subsidiary, SHRP Capital Corp., of $75,000,000 principal amount of
11 3/4% Senior Secured Notes due 1999 (ii) the sale by the sole general
partner of the Partnership (the "SHRP General Partner") of warrants to
acquire shares of Class A Common Stock, and (iii) the sale and issuance
of limited partnership interests by the Partnership (collectively, the
"Offering"). In connection with the Offering, subsidiaries of the
Company acquired, for a total investment of $9.1 million, (i) a 28.7%
equity interest in the Partnership through the purchase of existing
limited partnership interests (thereby becoming the largest limited
partner in the Partnership), (ii) all of the outstanding Class B Common
Stock of SHRP General Partner (representing a further 1% equity interest
in the Partnership), and (iii) a 75% interest in Race Track Management
Enterprises, the manager of the Race Park (the "Manager"). The Race Park
is expected to be substantially completed and open for live racing by
April 29, 1994.
Racing Operations
The ownership and operation of horse racetracks in Texas are
subject to significant regulation by the Texas Racing Commission (the
"Racing Commission") under the Texas Racing Act and related regulations
(collectively, the "Racing Act"). The Racing Act provides, among other
things, for the allocation of each wagering pool among the state of
Texas, purses, special equine programs, the racetrack and betting
participants and empowers the Racing Commission to license and regulate
substantially all aspects of horse racing in the state.
Only four Class 1 racetracks may be licensed and operated in
Texas under the Racing Act. While an unlimited number of Class 2, 3 and
4 racetracks may be licensed, the Company believes Class 1 racetracks
will be the "flagship" Texas racetracks, having the largest facilities
and the highest caliber horses and offering the greatest number of live
race and simulcasting days (discussed below). The Racing Commission, in
settlement of a lawsuit, has also granted an existing Class 2 racetrack
located to the west of Fort Worth ("Trinity Meadows") an upgrade to a
Class 1 license, subject to the fulfillment of certain conditions. The
Racing Commission has licensed two additional prospective Class 1 horse
racetracks, one in Dallas and the other in San Antonio. The Company does
not expect the Race Park to compete with the other Class 1 tracks for
patrons.
The Company expects the Race Park to offer pari-mutuel wagering
on live thoroughbred or quarter horse racing or simulcast racing
generally six days a week throughout the year. Simulcasting is the
process by which live races held at one facility are broadcast
simultaneously to other locations at which additional wagers are placed
on the race being broadcast. In Texas, the broadcast may only be sent to
licensed racetracks, as the Racing Act does not provide for off-track
betting. Class 1 and Class 2 racetracks in Texas
<PAGE>
must take simulcast signals from Texas Class 1 tracks in preference to
signals from other tracks when such signals are made available to them.
The Race Park may offer simulcast wagering only on races simulcast from
other Class 1 Texas racetracks on those days when the other Class 1
tracks make their signals available to the Race Park. On days that
signals are not made available from other Texas Class 1 racetracks, the
Race Park may simulcast out-of-state horse races with the approval of the
Racing Commission. The Partnership intends to enter into revenue-sharing
arrangements both with racetracks that will send simulcast signals to the
Race Park and with racetracks that will receive simulcast signals of
races held at the Race Park.
The Racing Commission must approve the number of live race days
that may be offered at the Race Park each year, as well as all simulcast
arrangements. The number and scheduling of race days at the Racing
Facility will depend on the scheduling of live race days at other Class 1
horse racing facilities. Under the Racing Act, Class 1 racetracks
generally may not have overlapping live race schedules for the same breed
of horse with other Class 1 racetracks unless the tracks with the
overlapping schedules each consent. In its settlement with the Racing
Commission, Trinity Meadows agreed that it would not participate in a
Texas racing circuit and that its race dates would not be exclusive. If
the other three Class 1 racetracks in Texas were open and operating on a
six-day live race week and the live race schedule were equally divided
among the three tracks to avoid overlapping race dates, each track would
generally be allocated 102 live race days for each breed of horse.
The Racing Commission has allocated to the Race Park 45
thoroughbred racing days commencing April 29, 1994 and ending on June 19,
1994 and an additional 66 thoroughbred racing days starting again October
11 and continuing through the end of the year. The Racing Commission has
also allocated to the Race Park 69 quarter horse racing days commencing
July 1, 1994 and ending on September 18, 1994. When the Dallas and San
Antonio Class 1 racetracks are constructed and operational, the Company
believes that it is likely that a Texas horse racing circuit will
develop. Under such a circuit, the Class 1 racetracks would coordinate
their activities such that, in general, at any one time and for several
months at a time, there would be thoroughbred racing at one track,
quarter horse racing at another track and the third track would have
wagering on races simulcast from both of the other Class 1 tracks. No
assurance can be given, however, that a Texas racing circuit will
develop.
In addition to revenues from wagering and simulcasting, the
Partnership will derive revenues from admission fees, food services, club
memberships, luxury suites, advertising sales and other sources.
Race Park Facilities
The Race Park is located on approximately 240 acres of land in
northwest Harris County approximately 18 miles from the Houston central
business district and approximately 15 miles from Houston
Intercontinental Airport. The Race Park, which will have a one-mile dirt
track and a one and one-eighth mile turf course, has been designed for an
average patron capacity of approximately 18,000, with additional capacity
for approximately 12,000 patrons on the infield. The Race Park is
bordered by the Sam Houston Parkway on the north and is accessible by
freeway and expects that access to the Race Park by nearby surface
streets will improve within the near future. The Partnership has
delegated to the Manager, pursuant to a management agreement, the right,
power and authority to manage, conduct and make all decisions relating to
the business and affairs of the Partnership insofar as they relate to the
Race Park, except that The Partnership has retained pre-approval rights
over certain major decisions by the Manager.
Marketing and Competition
The Race Park intends to focus its marketing on the greater
Houston metropolitan area, including encouraging family attendance at the
facility. The Race Park will compete with other forms of
<PAGE>
entertainment, including a greyhound racetrack located 60 miles from the
Race Park and a wide range of live and televised professional and
collegiate sporting events that are available in the Houston area. The
Race Park could in the future also be competing with other forms of
gambling in Texas, including riverboat gambling and casino gambling on
Indian reservations or otherwise. In this regard, the Alabama and
Coushatta Tribe, whose reservation is approximately 95 miles from the
Race Park, has applied for a license to construct a casino and/or conduct
gambling operations. In addition, two bills which would have authorized
riverboat gambling were introduced in the last session of the Texas
legislature, although neither passed.
Employees
As of March 1, 1994, the Partnership had approximately 55
employees. The Company expects that the Race Park will employ
approximately 75 year-round employees and an additional 600 employees
during live racing seasons.
EMPLOYEES
At March 1, 1994, the Company and its subsidiaries employed
approximately 2,320 persons, exclusive of those involved in Aluminum
Operations.
ITEM 2. PROPERTIES
For information concerning the principal properties and
operations of the Company, see Item 1. "Business."
ITEM 3. LEGAL PROCEEDINGS
KAISER ENVIRONMENTAL LITIGATION
Aberdeen Pesticide Dumps Site Matter
The Aberdeen Pesticide Dumps Site, listed on the Superfund
National Priorities List, is composed of five separate sites around the
town of Aberdeen, North Carolina (collectively, the "Sites"). The Sites
are of concern to the United States Environmental Protection Agency (the
"EPA") because of their past use as either pesticide formulation
facilities or pesticide disposal areas from approximately the mid-1930's
through the late-1980's.
The United States originally filed a cost recovery complaint
(as amended, the "Complaint") in the United States District Court for the
Middle District of North Carolina, Rockingham Division, No. C-89-231-R,
which, as amended, includes KACC and a number of other defendants. The
Complaint seeks reimbursement for past and future response costs and a
determination of liability of the defendants under Section 107 of CERCLA.
The EPA has performed a Remedial Investigation/Feasibility Study and
issued a Record of Decision ("ROD") for the Sites in September 1991. The
major remedy selected for the Sites would have a cost of $32 million.
Other possible remedies described in the ROD would have estimated costs
of approximately $53 million and $222 million, respectively. Kaiser
understands that the EPA is also investigating contamination of
groundwater at the Sites. The EPA has stated that it has incurred past
costs at the Sites in the range of $7.5--$8 million as of February 9,
1993, and alleges that response costs will continue to be incurred in the
future.
<PAGE>
On May 20, 1993, the EPA issued three unilateral Administrative
Orders under Section 106(a) of CERCLA ordering the respondents, including
KACC, to perform the remedial design and remedial action described in the
ROD for three of the Sites. The estimated cost as set forth in the ROD
for the remedial action at the three Sites is approximately $27 million.
A number of other companies are also named as respondents. KACC has
entered into an Agreement in Principle with certain of the respondents to
participate jointly in responding to the Administrative Orders, to share
costs incurred on an interim basis, and to seek to reach a final
allocation of costs through agreement or to allow such final allocation
and determination of liability to be made by the United States District
Court. A definitive PRP Participation Agreement is currently awaiting
execution by the group. By letter dated July 6, 1993, KACC has notified
the EPA of its ongoing participation with such group of respondents
which, as a group, are intending to comply with the Administrative Orders
to the extent consistent with applicable law.
By letters dated December 30, 1993, the EPA notified KACC of
its potential liability for, and requested that KACC, along with a number
other companies, undertake or agree to finance, groundwater remediation
at certain of the Sites. The ROD-selected remedy for the groundwater
remediation selected by EPA includes a variety of techniques. The EPA
has estimated the total present worth cost, including 30 years of
operation and maintenance, at approximately $11.8 million. KACC, along
with other notified parties, plans to meet with representatives of the
EPA to discuss whether an agreement to perform this remediation is
possible.
Based upon the information presently available to it, Kaiser is
unable to determine whether KACC has any liability with respect to any of
the Sites or, if there is any liability, the amount thereof. Two
government witnesses have testified that KACC acquired pesticide products
from the operator of the formulation site over a two to three year
period. KACC has been unable to confirm the accuracy of this testimony.
United States of America v. Kaiser Aluminum & Chemical
Corporation
In February 1989, a civil action was filed by the United States
Department of Justice at the request of the EPA against KACC in the
United States District Court for the Eastern District of Washington, Case
Number C-89-106-CLQ. The complaint alleged that emissions from certain
stacks at Kaiser's Trentwood facility in Spokane, Washington
intermittently violated the opacity standard contained in the Washington
State Implementation Plan ("SIP"), approved by the EPA under the federal
Clean Air Act. The complaint sought injunctive relief, including an order
that KACC take all necessary action to achieve compliance with the
Washington SIP opacity limit and the assessment of civil penalties of not
more than $25,000 per day.
In the course of the litigation, questions arose as to whether
the observers who recorded the alleged exceedances were qualified under
the Washington SIP to read opacity. In July 1990, KACC and the Department
of Justice agreed to a voluntary dismissal of the action. At that time,
however, the EPA had arranged for increased surveillance of the Trentwood
facility by consultants and the EPA's personnel. From May 1990 through
May 1991, these observers recorded approximately 130 alleged exceedances
of the SIP opacity rule. Justice Department representatives have stated
their intent to file a second lawsuit against KACC based on the opacity
observations recorded during that period.
The second lawsuit has not yet been filed. Instead, KACC has
entered into negotiations with the EPA to resolve the claims against KACC
through a consent decree. Although the EPA and KACC have made substantial
progress in negotiating the terms of the consent decree, key issues
remain to be resolved. Anticipated elements of any settlement would
include a commitment by KACC to improve the emission control equipment at
the Trentwood facility and a civil penalty assessment against KACC, in an
amount to be determined.
<PAGE>
At this time, Kaiser cannot predict the likelihood that the EPA
and KACC will reach an agreement upon the terms of a consent decree. In
the event that the negotiations are not successful the matter likely
would be resolved in federal court.
Catellus Development Corporation v. Kaiser Aluminum & Chemical
Corporation and James L. Ferry & Son Inc.
In January 1991, the City of Richmond, et al. (the
"Plaintiffs") filed a Second Amended Complaint for Damages and
Declaratory Relief against Catellus Development Corporation ("Catellus")
and other defendants (collectively, the "Defendants") alleging, among
other things, that the Defendants caused or allowed hazardous substances,
pollutants, contaminants, debris and other solid wastes to be discharged,
deposited, disposed of or released on certain property located in
Richmond, California (the "Property") formerly owned by Catellus and
leased to KACC for the purpose of shipbuilding activities conducted by
KACC on behalf of the United States during World War II. Plaintiffs
allege, among other things, that the Defendants are jointly and severally
liable for response costs, declaratory relief and natural resources
damages under CERCLA, and that Defendant Catellus is strictly liable on
grounds of continuing nuisance, continuing trespass and negligence for
such discharge, deposit, disposal or release, and is liable for
fraudulent concealment of the alleged contamination. KACC is alleged to
have performed certain excavation activities on the Property and, as a
result thereof, to have released contaminants on the Property and to have
arranged for the transportation, treatment and disposal of such
contaminants
Catellus has filed a third party complaint (the "Third Party
Complaint") against KACC in the United States District Court for the
Northern District of California, Case No. C-89-2935 DLJ. The Third Party
Complaint, as amended, seeks contribution and indemnity from KACC and
another party under a variety of theories (including negligence,
nuisance, waste and alleged contractual indemnities) for, among other
things, Catellus' response costs and natural resources damages under
CERCLA, any liability or judgment imposed against Cattelus, and treble
damages for the injury to its interest in the Property, and treble
damages from KACC pursuant to California Code of Civil Procedure Section
732.
By an October 1992 letter, counsel for certain underwriters at
Lloyd's London and certain London Market insurance companies (the "London
Insurers") advised that the London Insurers agreed to reimburse KACC for
defense expenses in the third party action filed by Catellus, subject to
a full reservation of rights.
The Plaintiffs filed a motion for leave to file a Third Amended
Complaint which would have added KACC as a first party defendant. This
motion was denied. In October 1992, the Plaintiffs served a separate
Complaint against KACC for damages and declaratory relief. The claims
asserted by the Plaintiffs are for, among other things, (i) response
costs, recovery of costs, natural resources damages and declaratory
relief under CERCLA; (ii) damages for injury to the Property arising from
negligence, and (iii) damages under a theory of strict liability. This
matter has been tendered to the London Insurers.
Picketville Road Landfill Matter
In July, 1991, the EPA served on KACC and thirteen other PRPs a
Unilateral Administrative Order For Remedial Design and Remedial Action
(the "Order") at the Picketville Road Landfill site in Jacksonville,
Florida. The EPA seeks remedial design and remedial action pursuant to
CERCLA from some, but apparently not all, PRPs based upon a Record of
Decision outlining remedial cleanup measures to be undertaken at the site
adopted by the EPA in September 1990. The site was operated as a
municipal and industrial waste landfill from 1968 to 1977 by the City of
Jacksonville. KACC was first notified by the EPA in January 1991, that
wastes from one of KACC's plants may have been transported to and
deposited in the site. In its Record of Decision, the EPA estimated that
the total capital, operations and maintenance costs
<PAGE>
of its elected remedy for the site would be approximately $9.9 million.
In addition, the EPA has reserved the right to seek recovery of its costs
incurred relating to the Order, including, but not relating to,
reimbursement of the EPA's cost of response. Through negotiations with
the EPA and other PRPs, KACC has reached an agreement with such PRPs
under which KACC will fund $146,700 of the cost of the remedial action
(unless remedial costs exceed $19 million in which event the settlement
agreement will be re-opened). The implementation of the foregoing
agreement is subject to continuing discussions among the EPA, the other
PRPs and KACC.
Asbestos-related Litigation
KACC is a defendant in a number of lawsuits in which the
plaintiffs allege that certain of their injuries were caused by exposure
to asbestos during, and as a result of, their employment with KACC or to
products containing asbestos produced or sold by KACC. The lawsuits
generally relate to products KACC has not manufactured for at least 15
years. The number of such lawsuits instituted against KACC increased
substantially in 1993 and management believes the number of such lawsuits
will continue to increase at a greater annualized rate than in prior
years. For additional information, see Note 10 to the Consolidated
Financial Statements.
The Company currently believes that there is no more than a
remote possibility (under generally accepted accounting principles) that
KACC's ultimate asbestos-related costs net of related insurance
recoveries will exceed those accrued as of December 31, 1993 and,
accordingly, that the resolution of such uncertainties and the incurrence
of such net costs should not have a material adverse effect on Kaiser's
consolidated financial position or results of operations.
OTHER KAISER LITIGATION
Various other lawsuits and claims are pending against Kaiser.
The Company believes that resolution of the lawsuits and claims made
against Kaiser, including the matters discussed above, will not have a
material adverse effect on Kaiser's consolidated financial position.
PACIFIC LUMBER MERGER LITIGATION
During the mid-to-late 1980's, Pacific Lumber was named as
defendant along with several other entities and individuals, including
the Company and MGI, in various class, derivative and other actions
brought in the Superior Court of Humboldt County by former stockholders
of Pacific Lumber relating to the cash tender offer (the "Tender Offer")
for the shares of Pacific Lumber by a subsidiary of MGI and the
subsequent merger (the "Merger"), as a result of which Pacific Lumber
became a wholly-owned subsidiary of MGI (the "Humboldt County Lawsuits").
The Humboldt County Lawsuits which remain open are captioned: Fries, et
al. v. Carpenter, et al. (No. 76328) ("Fries State"); Omicini, et al. v.
The Pacific Lumber Company, et al. (No. 76974) ("Omicini"); Thompson, et
al. v. Elam, et al. (No. 78467) ("Thompson State"); and Russ, et al. v.
Milken, et al. (No. DR-85429) ("Russ"). The Humboldt County Lawsuits
generally allege, among other things, that in documents filed with the
Securities and Exchange Commission (the "Commission"), the defendants
made false statements concerning, among other things, the estimated value
of Pacific Lumber's assets, financing for the Tender Offer and the Merger
and minority stockholders' appraisal rights, and that the individual
directors of Pacific Lumber breached certain fiduciary duties owed
stockholders and other constituencies of Pacific Lumber. The Company and
MGI are alleged to have aided and abetted these violations and committed
other wrongs. The Thompson State, Omicini and Fries State suits seek
<PAGE>
compensatory damages in excess of $1 billion, exemplary damages in excess
of $750 million, rescission and other relief. The Russ suit does not
specify the amount of damages sought. There has been no activity in the
Fries State case since 1987 nor in the Omicini case since 1986. The
Thompson State and Russ actions are stayed pending the outcome of the In
re Ivan F. Boesky Multidistrict Securities Litigation described below.
In 1988, the plaintiffs in the Fries State action filed another
action entitled Fries, et al. v. Hurwitz, et al. (No. 88-3493 RMT), in
United States District Court, Central District of California ("Fries
Federal") against the Company, Pacific Lumber, MGI and others. Fries
Federal repeats many of the allegations and seeks damages and relief
similar to that contained in the Humboldt County Lawsuits, and, among
other things, asserts that the defendants violated RICO and the
Hart-Scott-Rodino Antitrust Improvements Act, and further alleges that,
as a result of alleged arrangements between Ivan F. Boesky and others,
MGI beneficially owned, for purposes of Pacific Lumber's bylaws, more
than 5% of Pacific Lumber's outstanding shares so that the Merger
required the approval of 80% of the outstanding shares rather than a
majority. In 1988, plaintiffs in the Thompson State action and others
filed a complaint in the United States District Court, Central District
of California, entitled Thompson, et al. v. MAXXAM Group Inc., et al.
(No. 88-06274) ("Thompson Federal"). The defendants in the Thompson
Federal action include Pacific Lumber, the Company, MGI and others. This
action, as amended, repeats the allegations, asserts claims and seeks
damages and relief similar to that contained in the Fries Federal and
Fries State actions.
In May 1989, the Thompson Federal and Fries Federal actions
were consolidated in the In re Ivan F. Boesky Multidistrict Securities
Litigation in the United States District Court, Southern District of New
York (MDL No. 732 M 21-45-MP) ("Boesky"). An additional action filed in
November 1989, entitled American Red Cross, et al. v. Hurwitz, et al.
(No. 89 Civ 7722) ("American Red Cross"), has been consolidated with the
Boesky action. The American Red Cross action contains allegations and
seeks damages and relief similar to that contained in the Russ, Thompson
Federal and Fries Federal actions. In September 1990, the Court in the
Boesky action certified a class of plaintiffs comprised of persons who
sold their shares in Pacific Lumber on or after September 27, 1985.
Various plaintiffs in the Boesky action have opted out of the certified
class of plaintiffs and are prosecuting their claims individually within
the Boesky proceeding. The Boesky action has been set for trial
commencing April 11, 1994.
In September 1989, seven past and present employees of Pacific
Lumber brought an action against Pacific Lumber, the Company, MGI,
certain current and former directors and officers of the Company, Pacific
Lumber and MGI, and First Executive Life Insurance Company ("First
Executive") (subsequently dismissed as a defendant) in the United States
District Court, Northern District of California, entitled Kayes, et al.
v. Pacific Lumber Company, et al. (No. C89-3500) ("Kayes"). Plaintiffs
purport to be participants in or beneficiaries of Pacific Lumber's former
Retirement Plan (the "Retirement Plan") for whom a group annuity contract
was purchased from Executive Life Insurance Company ("Executive Life") in
1986 after termination of the Retirement Plan. The Kayes action alleges
that the Company, Pacific Lumber and MGI defendants breached their ERISA
fiduciary duties to participants and beneficiaries of the Retirement Plan
by purchasing the group annuity contract from First Executive and
selecting First Executive to administer the annuity payments. Plaintiffs
seek, among other things, a new group annuity contract on behalf of the
Retirement Plan participants and beneficiaries. This case was dismissed
on April 14, 1993 and was refiled as Jack Miller, et al. v. Pacific
Lumber Company, et al. (No. C-89-3500-SBA) ("Miller") on April 26, 1993;
the Miller case was dismissed on May 14, 1993. These dismissals have
been appealed. On October 28, 1993, a bill amending ERISA, was passed by
the U.S. Senate which appears to be intended, in part, to overturn the
District Court's dismissal of the Miller action and to make available
certain remedies. This bill
<PAGE>
has not been voted upon by the House of Representatives. It is
impossible to say if the bill will be enacted or if enacted its ultimate
content.
In June 1991, the U.S. Department of Labor filed a civil action
entitled Lynn Martin, Secretary of the U.S. Department of Labor v. The
Pacific Lumber Company, et al. (No. 91-1812-RHS) ("DOL civil action") in
the United States District Court, Northern District of California,
against the Company, Pacific Lumber, MGI and certain of their current and
former officers and directors. The allegations in the DOL civil action
are substantially similar to that in the Kayes action. The DOL civil
action has been stayed pending resolution of the Kayes and Miller
appeals.
Management is of the opinion that the outcome of the foregoing
litigation is unlikely to have a material adverse effect on the Company's
consolidated financial position. Management is unable to express an
opinion as to whether the outcome of such litigation is unlikely to have
a material adverse effect on the Company's results of operations in
respect of any fiscal year.
In April 1991, the California Commissioner of Insurance (the
"Commissioner") filed for conservatorship of Executive Life in Los
Angeles County Superior Court in proceedings entitled Insurance
Commissioner of the State of California v. Executive Life Insurance Co.
and Does 1-1000 (Case No. BS006912) ("Executive Life Conservatorship").
In September 1993, the final rehabilitation plan for Executive Life (the
"Plan") was closed. The Commissioner expects that for nearly all
policyholders who chose to remain with Aurora National Life Assurance
Corporation, the new owner and successor of Executive Life ("Aurora"),
such persons will receive full payments. Policyholders who chose to
"opt-out" of the Plan (i.e., chose to terminate their policy and cash in
at a discounted rate), will be paid in accordance with their choice to
opt-out.
ZERO COUPON NOTE LITIGATION
In April 1989, an action was filed against the Company, MGI,
MAXXAM Properties Inc. ("MPI") and certain of the Company's directors in
the Court of Chancery of the State of Delaware, entitled Progressive
United Corporation v. MAXXAM Inc., et al., Civil Action No. 10785.
Plaintiff purports to bring this action as a stockholder of the Company
derivatively on behalf of the Company and MPI. In May 1989, a second
action containing substantially similar allegations was filed in the
Court of Chancery of the State of Delaware, entitled Wolf v. Hurwitz, et
al. (No. 10846) and the two cases were consolidated (collectively, the
"Zero Coupon Note" actions). The Zero Coupon Note actions relate a Put
and Call Agreement entered into between MPI and Mr. Charles Hurwitz
(Chairman of the Board of the Company, MGI and MPI), as well as a
predecessor agreement (the "Prior Agreement"). Among other things, the
Put and Call Agreement provided that Mr. Hurwitz had the option (the
"Call") to purchase from MPI certain notes (or the common stock of the
Company into which they were converted) for $10.3 million. In July 1989,
Mr. Hurwitz exercised the Call and acquired 990,400 shares of the
Company's common stock. The Zero Coupon Note actions generally allege
that in entering into the Prior Agreement Mr. Hurwitz usurped a corporate
opportunity belonging to the Company, that the Put and Call Agreement
constituted a waste of corporate assets of the Company and MPI, and that
the defendant directors breached their fiduciary duties in connection
with these matters. Plaintiffs seek to have the Put and Call Agreement
declared null and void, among other remedies.
RANCHO MIRAGE LITIGATION
<PAGE>
In May 1991, a derivative action entitled Progressive United
Corporation v. MAXXAM Inc., et al. (No. 12111) ("Progressive United")
was filed in the Court of Chancery, State of Delaware against the
Company, Federated Development Company ("Federated"), MCO Properties Inc.
("MCOP"), a wholly-owned subsidiary of the Company, and the Company's
Board of Directors. The action alleges abuse of control and breaches of
fiduciary obligations based on, and unfair consideration for, the
Company's Agreement in Principle with Federated to (a) forgive payments
of principal and interest of approximately $32.2 million due from
Federated under two loan agreements entered into between MCOP and
Federated in 1987, and (b) grant an additional $11.0 million of
consideration to Federated, in exchange for certain real estate assets
valued at approximately $42.9 million in Rancho Mirage, California, held
by Federated (the "Mirada transactions"). See Note 10 to the
Consolidated Financial Statements for a description of the exchange to
which this action and the actions referenced below relate. Plaintiff
seeks to have the Agreement in Principle rescinded, an accounting under
the loan agreements, repayment of any losses suffered by the Company or
MCOP, costs and attorneys fees.
The following six additional lawsuits similar to the
Progressive United case were filed in Delaware Chancery Court challenging
the now-completed Mirada transactions action has been: NL Industries, et
al. v. MAXXAM Inc., et al. (No. 12353); Kahn, et al. v. Federated
Development Company, et al. (No. 12373); Thistlethwaite, et al. v. MAXXAM
Inc., et al. (No. 12377); Glinert, et al. v. Hurwitz, et al. (No. 12383);
Friscia, et al. v. MAXXAM Inc., et al. (No. 12390); and Kassoway, et al.
v MAXXAM Inc., et al. (No. 12404). The Kahn, Glinert, Friscia and
Kassoway actions have been consolidated with the Progressive United
action into In re MAXXAM Inc./Federated Development Shareholders
Litigation (No. 12111); the NL Industries action has been "coordinated"
with the consolidated actions; the Thistlethwaite action has been stayed
pending the outcome of the consolidated actions. In January 1994, a
derivative action entitled NL Industries, Inc., et al. v. Federated
Development Company, et al. (No. 94-00630) was filed in the District
Court of Dallas County, Texas, against the Company (as nominal defendant)
and Federated. This action contains allegations and seeks relief similar
to that contained in the In re MAXXAM Inc./Federated Development
Shareholders Litigation.
OTHER LITIGATION MATTERS
The Company and certain of its subsidiaries are also involved
in other claims and litigation, both as plaintiffs and defendants, in the
ordinary course of business. Management is of the opinion that the
outcome of such other litigation will not have a material adverse effect
upon the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Reference is made to this section in the portions of the
Company's 1993 Annual Report to Stockholders (the "Annual Report") which
are included as part of Exhibit 13.1 hereto and incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to this section in the portions of the Annual
Report which are included as part of Exhibit 13.1 hereto and incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to this section in the portions of the Annual
Report which are included as part of Exhibit 13.1 hereto and incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the consolidated financial statements and
notes thereto and the quarterly financial information in the portions of
the Annual Report which are included as part of Exhibit 13.1 hereto and
incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
Information required under Part III (Items 10, 11, 12 and 13)
has been omitted from this report since the Company intends to file with
the Securities and Exchange Commission, not later than 120 days after the
close of its fiscal year, a definitive proxy statement pursuant to
Regulation 14A which involves the election of directors.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-
K
(A) INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):
The consolidated financial statements and the Report
of Independent Public Accountants are included on
pages 36 to 65 of the Annual Report which are included
as part of Exhibit 13.1 hereto and incorporated herein
by reference.
2. FINANCIAL STATEMENT SCHEDULES:
Report of Independent Public Accountants on Financial
Statement Schedules 37
Schedule II - Amounts receivable from related parties
and underwriters, promoters and employees
other than related parties for the years
ended December 31, 1993, 1992 and 1991 38
Schedule III - Condensed financial information of
Registrant at December 31, 1993 and 1992
and for the years ended December 31, 1993,
1992 and 1991 40
Schedule V - Property, plant and equipment for the
years ended December 31, 1993, 1992 and
1991 (consolidated) 45
Schedule VI - Accumulated depreciation, depletion and
amortization of property, plant and equip-
ment for the years ended December 31, 1993,
1992 and 1991 (consolidated) 46
Schedule X - Supplementary consolidated statement of
operations information for the years ended
December 31, 1993, 1992 and 1991 47
</TABLE>
All other schedules are inapplicable or the required information is
included in the consolidated financial statements or the notes thereto.
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 49), which index is incorporated
herein by reference.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of MAXXAM Inc.:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in MAXXAM
Inc.'s 1993 Annual Report to Stockholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated February 24,
1994. Our audits were made for the purpose of forming an opinion on
those statements taken as a whole. The schedules listed in the index on
page 36 are the responsibility of the Company's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic consolidated financial
statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Houston, Texas
February 24, 1994
<PAGE>
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND
UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
Balance at end
Deductions of period
---------------------- ---------------------
Balance at
beginning Amounts Amounts Not
Name of debtor of period Additions collected forgiven Current Current
----------------------------- ---------- ---------- ---------- -------- -------- ---------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
1993:
Diane M. Dudley (a) . . . . . . $ 100 $ - $ - $ - $ - $ 100
Jacques C. Lazard (a) . . . . . 100 - (39) - - 61
James D. Noteware (b) . . . . . - 100 (100) - - -
Anthony R. Pierno (c) . . . . . 320 - - (15) 200 105
Paul N. Schwartz (d) . . . . . . 310 - (75) (20) 200 15
Byron Wade (e) . . . . . . . . . - 100 (80) - - 20
1992:
Diane M. Dudley (a) . . . . . . $ 100 $ - $ - $ - $ - $ 100
Jacques C. Lazard (a) . . . . . 100 - - - - 100
Anthony R. Pierno (c) . . . . . 335 - - (15) - 320
Paul N. Schwartz (d) . . . . . . 330 - - (20) - 310
1991:
Diane M. Dudley (a) . . . . . . $ 100 $ - $ - $ - $ - $ 100
Jacques C. Lazard (a) . . . . . 100 - - - - 100
Anthony R. Pierno (c) . . . . . 350 - - (15) - 335
Paul N. Schwartz (d) . . . . . . 350 - - (20) - 330
John Seidl (f) . . . . . . . . . 1,114 21 (1,135) - - -
Federated Development Company (g) 31,076 3,186
<FN>
--------------------
(a) Amounts outstanding from these individuals bore interest at an annual rate of 6% in 1993, 1992 and 1991. The loans
are generally due on demand; each is secured by real estate owned by each individual.
(b) In July 1993, MAXXAM Inc. (the "Company") loaned Mr. Noteware $100,000 pursuant to the terms of an unsecured
promissory note which bore interest at an annual rate of 6%. The loan was repaid within approximately one month.
(c) Mr. Pierno has entered into a five-year employment agreement with the Company effective March 8, 1990. Pursuant to
the terms of the agreement, personal loans of Mr. Pierno outstanding on the date of the agreement ($150,000) are to be forgiven
at the rate of $15,000 per year beginning March 8, 1991, with any remaining balance due and payable upon termination of
employment. The agreement also provides for an additional loan of $200,000 which Mr. Pierno received in 1990. As of December
31, 1993, Mr. Pierno had total loans outstanding of $305,000, interest on which is payable monthly at an annual rate of 6%.
$105,000 of principal on the loan is payable on demand (unless forgiven as indicated above) and $200,000 is payable on
December 15, 1994 (with prepayments due upon the exercise of certain stock appreciation rights). The loans are secured by real
estate owned by Mr. Pierno.
<PAGE>
(d) Mr. Schwartz has entered into a five-year employment agreement with the Company effective March 8, 1990. Pursuant to
the terms of the agreement, personal loans of Mr. Schwartz outstanding on the date of the agreement ($100,000) are to be
forgiven at the rate of $20,000 per year beginning March 8, 1991, with any remaining balance due and payable upon termination o
employment. The agreement also provided for additional loans to Mr. Schwartz, all of which were received by Mr. Schwartz in
1990. As of December 31, 1993, Mr. Schwartz had total loans outstanding of $215,000, interest on which is payable monthly at a
annual rate of 6%. $15,000 of principal on the loan is payable on demand (unless forgiven as indicated above) and $200,000 is
payable on December 15, 1994 (with prepayments due upon the exercise of certain stock appreciation rights). The loans are
secured by real estate owned by Mr. Schwartz.
(e) In July 1993, the Company loaned Mr. Wade $100,000 pursuant to the terms of an unsecured promissory note which bore
interest at an annual rate of 6%. The loan was repaid within approximately one month with a cash payment of $50,000 and a new
unsecured promissory note for $50,000, interest on which is payable monthly at an annual rate of 6%. The new note is payable
upon the earliest to occur of July 20, 1998 or Mr. Wade's termination of employment with the Company. In December 1993, Mr.
Wade repaid $30,000 of the outstanding principal balance of the note.
(f) In June 1990, Mr. Seidl entered into an agreement with the Company relating to his move to Houston. Pursuant to the
terms of such agreement, the Company loaned $1,000,000 to Mr. Seidl at an annual rate of 8.9%, payable quarterly. The agreemen
required full or partial payments upon Mr. Seidl's receipt of any payments pursuant to the Kaiser Long-Term Incentive Plan. In
accordance with this provision, the loan was paid in full in 1991. The agreement also provided for the Company to reimburse Mr
Seidl for certain expenses incurred in connection with his move, with Mr. Seidl being entitled to borrow (at the federal short-
term interest rate) the reimbursable amount until reimbursement was made. All such expenses were reimbursed in 1991. Mr. Seid
terminated his employment and resigned as a director of the Company and subsidiary companies effective December 31, 1992.
(g) The Company had loan agreements with Federated Development Company ("Federated") for loans secured by real estate
located in Rancho Mirage, California ("Mirada"). Federated is wholly owned by Mr. Hurwitz, members of his immediate family and
trusts for the benefit thereof. In July 1991, in exchange for the Mirada and other consideration, MCO Properties Inc., a wholl
owned subsidiary of the Company, assumed the outstanding principal and accrued interest on the loans.
</TABLE>
<PAGE>
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET (UNCONSOLIDATED)
<TABLE>
<CAPTION>
December 31,
------------------------
1993 1992
------------ ---------
(In millions of dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 26.7 $ 3.2
Marketable securities and other current assets . 32.3 54.0
------------ ---------
Total current assets . . . . . . . . . . . 59.0 57.2
Investment in subsidiaries . . . . . . . . . . . . . 3.6 637.0
Deferred income taxes . . . . . . . . . . . . . . . . 136.4 -
Other assets . . . . . . . . . . . . . . . . . . . . 6.0 6.6
------------ ---------
$ 205.0 $ 700.8
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities . . . . $ 9.3 $ 8.6
Deferred income taxes . . . . . . . . . . . . . 9.4 -
Long-term debt, current maturities . . . . . . . 4.1 3.9
------------ ---------
Total current liabilities . . . . . . . . . 22.8 12.5
Long-term debt, less current maturities . . . . . . . 48.0 70.7
Note payable to and advances from subsidiaries . . . 191.5 123.2
Other noncurrent liabilities . . . . . . . . . . . . 110.6 50.5
------------ ---------
Total liabilities . . . . . . . . . . . . . 372.9 256.9
------------ ---------
Stockholders' equity (deficit):
Preferred stock, $.50 par value; 12,500,000
shares authorized; Class A $.05
Non-Cumulative Participating Convertible
Preferred Stock; shares issued: 1993 -
679,084 and 1992 - 681,811 . . . . . . . . .3 .3
Common stock, $.50 par value; 28,000,000
shares authorized; shares issued:
10,063,359 . . . . . . . . . . . . . . . . 5.0 5.0
Additional capital . . . . . . . . . . . . . . . 51.2 47.9
Retained earnings (deficit) . . . . . . . . . . (180.8) 419.4
Pension liability adjustment . . . . . . . . . . (23.9) (9.0)
Treasury stock, at cost (shares held:
preferred - 845; common: 1993 - 1,364,895 and 1992 -
1,367,622) . . . . . . . . . . . . . . . . . . . . . (19.7) (19.7)
------------ ---------
Total stockholders' equity (deficit) . . . (167.9) 443.9
------------ ---------
$ 205.0 $ 700.8
============ =========
<FN>
See notes to consolidated financial statements and accompanying notes.
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS (UNCONSOLIDATED)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1993 1992 1991
-------------- -------------- -------------
(In millions of dollars)
<S> <C> <C> <C>
Investment, interest and other income . . . $ 3.0 $ 2.8 $ 4.1
Interest expense . . . . . . . . . . . . . (13.7) (15.1) (36.2)
General and administrative expenses . . . . (15.4) (8.4) (12.0)
Equity in earnings (losses) of subsidiaries (615.5) 9.3 66.2
-------------- -------------- -------------
Income (loss) before income taxes and
cumulative effect of changes in
accounting principles . . . . . . . . (641.6) (11.4) 22.1
Credit (provision) for income taxes . . . . (3.1) 4.1 35.4
-------------- -------------- -------------
Income (loss) before cumulative effect of
changes in accounting principles . . . (644.7) (7.3) 57.5
Cumulative effect of changes in accounting
principles:
Postretirement benefits other than
pensions, net of related credit
for income taxes of $.2 . . . . . (.4) - -
Accounting for income taxes . . . . . 44.9 - -
-------------- -------------- -------------
Net income (loss) . . . . . . . . . . . . . $ (600.2) $ (7.3) $ 57.5
============== ============== =============
<FN>
See notes to consolidated financial statements and accompanying notes.
</TABLE>
<PAGE>
STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1993 1992 1991
--------------- ------------ ---------------
(In millions of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . $ (600.2) $ (7.3) $ 57.5
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating
activities:
Equity in losses (earnings) of subsidiaries 615.5 (9.3) (66.2)
Amortization of deferred financing costs and
discounts on long-term debt . . . . . .5 .6 .6
Cumulative effect of changes in accounting
principles, net . . . . . . . . . . . (44.5) - -
Increase (decrease) in accounts payable and 7.5 (1.8) .3
other liabilities . . . . . . . . . .
Decrease (increase) in accrued and deferred
income taxes . . . . . . . . . . . . . (3.7) (6.5) (3.5)
Decrease in receivables . . . . . . . . . . .8 1.1 2.2
Other . . . . . . . . . . . . . . . . . . . 2.6 (1.4) 10.8
--------------- ------------ ---------------
Net cash provided by (used for)
operating activities . . . . . . . . . (14.1) (24.6) 1.7
--------------- ------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends received from subsidiaries . . . . . . 66.1 18.1 110.9
Net sales (purchases) of marketable securities . 18.3 (30.7) -
Investments in and net advances from (to)
subsidiaries . . . . . . . . . . . . . . . . . . (22.2) 18.0 (51.5)
Capital expenditures . . . . . . . . . . . . . . (.3) (1.5) (1.6)
--------------- ------------ ---------------
Net cash provided by investing
activities . . . . . . . . . . . . . . 61.9 3.9 57.8
--------------- ------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption, repurchase of and principal payments
on long-term debt . . . . . . . . . . . . . (24.3) (3.9) (34.7)
Proceeds from issuance of common stock . . . . . - .6 2.3
--------------- ------------ ---------------
Net cash used for financing activities (24.3) (3.3) (32.4)
--------------- ------------ ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 23.5 (24.0) 27.1
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . 3.2 27.2 .1
--------------- ------------ ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . $ 26.7 $ 3.2 $ 27.2
=============== ============ ===============
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Net assets transferred from subsidiary . . . . . $ 30.5
Dividend of the Company's notes payable and
marketable securities received from subsidiary . . . $ 14.9 $ 100.1
Gain from initial public offering of Kaiser
Aluminum Corporation common stock . . . . . . . . . . 28.5
Excess of fair value of assets acquired over
affiliate's basis . . . . . . . . . . . . . . . (24.0)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . $ 6.8 $ 11.1 $ 15.9
Income taxes paid (refunded) . . . . . . . . . . (.5) (1.9) 2.9
<FN>
See notes to consolidated financial statements and accompanying notes.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
A. SIGNIFICANT TRANSACTIONS
On August 4, 1993, contemporaneously with the consummation of
the MAXXAM Group Inc. ("MGI," a wholly owned subsidiary of the Company)
refinancing transaction (as described below), MGI (i) transferred to the
Company 50 million common shares of Kaiser Aluminum Corporation
("Kaiser," a majority owned subsidiary of the Company) held by a
subsidiary of MGI, representing MGI s (and the Company s) entire interest
in Kaiser s common stock, (ii) transferred to the Company 60,075 shares
of the Company's common stock held by a subsidiary of MGI, (iii)
transferred to the Company certain notes receivable, long-term
investments, and other assets, each net of related liabilities,
collectively having a carrying value to MGI of approximately $1.1 and
(iv) exchanged with the Company 2,132,950 Depositary Shares, acquired
from Kaiser on June 30, 1993 for $15.0, such exchange being in
satisfaction of a $15.0 promissory note evidencing a cash loan made by
the Company to MGI in January 1993 (the "MGI Loan"). On the same day,
the Company assumed approximately $17.5 of certain liabilities of MGI
that were unrelated to MGI s forest products operations or were related
to operations which have been disposed of by MGI. Contemporaneously with
these transfers, MGI issued $100.0 aggregate principal amount of 11 1/4%
Senior Secured Notes due 2003 (the "MGI Senior Notes") and $126.7
aggregate principal amount (approximately $70.0 net of original issue
discount) of 12 1/4% Senior Secured Discount Notes due 2003 (the "MGI
Discount Notes," which, together with the MGI Senior Notes, are referred
to collectively as the "MGI Notes"). The MGI Notes are secured by MGI s
pledge of 100% of the common stock of The Pacific Lumber Company, Britt
Lumber Co., Inc. and MAXXAM Properties Inc. (wholly owned subsidiaries of
MGI) and by the Company s pledge of 28 million shares of Kaiser s common
stock it received from MGI. Additionally, on September 28, 1993, MGI
transferred to the Company its interest in the real estate management and
development operation located at Palmas del Mar in Puerto Rico.
On October 13, 1993, Kaiser filed a registration statement with
the Securities and Exchange Commission for the sale to the public of the
2,132,950 Depositary Shares the Company exchanged for the MGI Loan, as
described above. The registration statement was declared effective by
the Securities and Exchange Commission on November 15, 1993. The Company
may consummate the sale of all or any portion of such Depositary Shares
at any time.
B. DEFERRED INCOME TAXES
The Company's net deferred income tax assets relate primarily
to the excess of the tax basis over financial statement basis with
respect to timber and timberlands and real estate of subsidiaries. The
Company has concluded that it is more likely than not that these net
deferred income tax assets will be realized based in part upon the
estimated values of the underlying assets which are in excess of their
tax basis.
C. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1993 1992
------------ -------------
<S> <C> <C>
14% Senior Subordinated Reset Notes due May 20, 2000 . . . . . . . . . $ 25.0 $ 45.0
12 1/2% Subordinated Debentures due December 15, 1999, net of discount
of $2.4 and $2.9 at December 31, 1993 and 1992,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.2 27.6
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 2.0
------------ -------------
52.1 74.6
Less: current maturities . . . . . . . . . . . . . . . . . . . . . . . (4.1) (3.9)
------------ -------------
$ 48.0 $ 70.7
============ =============
</TABLE>
<PAGE>
Maturities
Scheduled maturities of long-term debt outstanding at December
31, 1993 are as follows: years ending December 31, 1994 - $4.1; 1995 -
$4.1; 1996 - $3.6; 1997 - $3.3; 1998 - $3.3; thereafter - $36.1.
D. NOTE PAYABLE TO SUBSIDIARY
At December 31, 1993, the Company had a $181.9 unsecured note
payable to a real estate subsidiary which bears interest at 6% per annum.
<PAGE>
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT (CONSOLIDATED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
Balance at
beginning Additions Retirements Balance at
of year at cost and sales Other(1) end of year
------------- ------------ ------------- ---------- ------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
1993:
Land and improvements . . $ 139.6 $ 3.2 $ (1.3) $ 15.7 $ 157.2
Buildings . . . . . . . . 209.4 8.9 (.1) 21.9 240.1
Machinery and equipment . 1,108.5 74.6 (19.3) 100.1 1,263.9
Construction in progress . 71.1 (5.3) - (.7) 65.1
------------- ------------ ------------- ---------- ------------
$ 1,528.6 $ 81.4 $ (20.7) $ 137.0 $ 1,726.3
============= ============ ============= ========== ============
Timber and timberlands . . $ 484.8 $ .3 $ - $ (38.3) $ 446.8
============= ============ ============= ========== ============
1992:
Land and improvements . . $ 96.5 $ 17.5 $ - $ 25.6 $ 139.6
Buildings . . . . . . . . 184.0 22.1 (.5) 3.8 209.4
Machinery and equipment . 1,012.6 103.7 (6.0) (1.8) 1,108.5
Construction in progress . 87.7 (16.2) - (.4) 71.1
------------- ------------ ------------- ---------- ------------
$ 1,380.8 $ 127.1 $ (6.5) $ 27.2 $ 1,528.6
============= ============ ============= ========== ============
Timber and timberlands . . $ 484.3 $ .5 $ - $ - $ 484.8
============= ============ ============= ========== ============
1991:
Land and improvements . . $ 83.2 $ 4.0 $ (.6) $ 9.9 $ 96.5
Buildings . . . . . . . . 171.1 8.7 (1.1) 5.3 184.0
Machinery and equipment . 933.5 79.9 (7.9) 7.1 1,012.6
Construction in progress . 52.4 37.0 (.1) (1.6) 87.7
------------- ------------ ------------- ---------- ------------
$ 1,240.2 $ 129.6 $ (9.7) $ 20.7 $ 1,380.8
============= ============ ============= ========== ============
Timber and timberlands . . $ 484.0 $ .3 $ - $ - $ 484.3
============= ============ ============= ========== ============
<FN>
--------------------
(1) Amounts for 1993 are principally attributable to the restatement of assets and liabilities to their pre-tax amounts from
their net of tax amounts originally recorded in connection with the acquisition of various subsidiaries in prior years. The
restatement is due to the Company's implementation of Financial Accounting Standards No. 109, Accounting for Income Taxes, on
January 1, 1993.
</TABLE>
Amounts for 1992 and 1991 are principally due to various
reclassifications.
<PAGE>
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (CONSOLIDATED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
Additions
Balance at charged to
beginning costs and Retirements Balance at
of year expenses and sales Other(1) end of year
------------ ---------- ------------ ----------- ------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
1993:
Land and improvements . . $ 11.9 $ 4.2 $ (.2) $ 8.0 $ 23.9
Buildings . . . . . . . . 56.7 8.4 (.5) 3.0 67.6
Machinery and equipment . 272.9 90.2 (6.0) 32.7 389.8
------------ ---------- ------------ ----------- ------------
$ 341.5 $ 102.8 $ (6.7) $ 43.7 $ 481.3
============ ========== ============ =========== ============
Timber and timberlands . . $ 100.9 $ 15.2 $ - $ (7.9) $ 108.2
============ ========== ============ =========== ============
1992:
Land and improvements . . $ 10.1 $ 1.9 $ - $ (.1) $ 11.9
Buildings . . . . . . . . 47.6 7.5 (.2) 1.8 56.7
Machinery and equipment . 197.6 79.0 (1.9) (1.8) 272.9
------------ ---------- ------------ ----------- ------------
$ 255.3 $ 88.4 $ (2.1) $ (.1) $ 341.5
============ ========== ============ =========== ============
Timber and timberlands . . $ 84.2 $ 16.7 $ - $ - $ 100.9
============ ========== ============ =========== ============
1991:
Land and improvements . . $ 8.1 $ 2.1 $ (.3) $ .2 $ 10.1
Buildings . . . . . . . . 40.2 6.7 (.4) 1.1 47.6
Machinery and equipment . 126.1 72.9 (3.2) 1.8 197.6
------------ ---------- ------------ ----------- ------------
$ 174.4 $ 81.7 $ (3.9) $ 3.1 $ 255.3
============ ========== ============ =========== ============
Timber and timberlands . . $ 68.3 $ 15.9 $ - $ - $ 84.2
============ ========== ============ =========== ============
<FN>
--------------------
(1) Amounts for 1993 are principally attributable to the restatement of assets and liabilities to their pre-tax amounts from
their net of tax amounts originally recorded in connection with the acquisition of various subsidiaries in prior years. The
restatement is due to the Company's implementation of Financial Accounting Standards No. 109, Accounting for Income Taxes, on
January 1, 1993.
</TABLE>
Amounts for 1992 and 1991 are principally due to various
reclassifications.
<PAGE>
SCHEDULE X - SUPPLEMENTARY CONSOLIDATED STATEMENT OF
OPERATIONS INFORMATION
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1993 1992 1991
------------ ----------- -------------
(In millions of dollars)
<S> <C> <C> <C>
Maintenance and repairs . . . . . . . . . . $ 183.1 $ 159.4 $ 173.2
============ =========== =============
Taxes other than payroll and income taxes:
Production levy on bauxite . . . . . . $ 27.9 $ 31.5 $ 34.0
============ =========== =============
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<CAPTION>
<S>
<C> MAXXAM INC.
Date: March 30, 1994 By: JOHN T. LA DUC
John T. La Duc
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date: March 30, 1994 By: JACQUES C. LAZARD
Jacques C. Lazard
Vice President and Corporate
Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Date: March 30, 1994 By: CHARLES E. HURWITZ
Charles E. Hurwitz
Chairman of the Board, President
and
Chief Executive Officer
Date: March 30, 1994 By: ROBERT J. CRUIKSHANK
Robert J. Cruikshank
Director
Date: March 30, 1994 By: EZRA G. LEVIN
Ezra G. Levin
Director
Date: March 30, 1994 By: STANLEY D. ROSENBERG
Stanley D. Rosenberg
Director
</TABLE>
<PAGE>
MAXXAM INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description _______ _____________________
<S> <C>
3.1 Restated Certificate of Incorporation of MAXXAM Inc.
(the "Company" or "MAXXAM") dated April 10, 1989
(incorporated herein by reference to Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1989)
3.2 Certificate of Powers, Designations, Preferences and
Relative, Participating, Optional and Other Rights of
the Company's Class B Junior Participating Preferred
Stock (incorporated herein by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1989)
3.3 By-laws of the Company, as amended on October 6, 1988
(incorporated herein by reference to Exhibit 3.3 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1988)
4.1 Indenture regarding the Company's 14% Senior
Subordinated Reset Notes due May 20, 2000
(incorporated herein by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-4,
Registration No. 33-20096)
4.2 Indenture dated as of November 15, 1979 between the
Company and Bank of America National Trust and Savings
Association, Trustee, regarding the Company's 12 1/2%
Subordinated Debentures due December 15, 1999
(incorporated herein by reference to Exhibit 4.2 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1980)
4.3 Indenture dated as of August 4, 1993 by and between
Shawmut Bank, N.A. and MAXXAM Group Inc. ("MGI")
regarding MGI's 11 1/4% Senior Secured Notes due 2003
and 12 1/4% Senior Secured Discount Notes due 2003
(incorporated herein by reference to Exhibit 4.1 to
MGI's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, File No. 1-8857; the "MGI
1993 Form 10-K")
4.4 Indenture dated as of November 1, 1991 by and between
MGI and First Trust National Association, Trustee,
regarding MGI's 12 3/4% Notes due November 15, 1995
(incorporated herein by reference to Exhibit 4(a) to
Amendment No. 4 to MGI's Registration Statement on
Form S-4 on Form S-2, Registration No. 33-42300; the
"MGI 1991 Registration Statement")
4.5 Indenture among Kaiser Aluminum & Chemical Corporation
("KACC"), certain related corporations and The First
National Bank of Boston, Trustee, regarding KACC's 12
3/4% Senior Subordinated Notes due 2003 (the "KACC
Senior Subordinated Note Indenture") (incorporated
herein by reference to Exhibit 4.1 to KACC's Annual
Report on Form 10-K for the fiscal year ended December
31, 1993, File No. 1-3605.
4.6 First Supplemental Indenture, dated as of May 1, 1993
to the KACC Senior Subordinated Note Indenture
(incorporated herein by reference to Exhibit 4.2 to
KACC's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993, File No. 1-3605)
4.7 Indenture dated as of February 17, 1994 among KACC,
certain related corporations and First Trust National
Association, Trustee, regarding KACC's 9 7/8% Senior
Notes due 2002 (incorporated herein by reference to
Exhibit 4.3 to KACC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993, File No. 1-
3605; the "KACC 1993 Form 10-K")
4.8 Credit Agreement, dated as of February 17, 1994 among
Kaiser Aluminum Corporation
<PAGE>
("Kaiser"), KACC, certain financial institutions and
BankAmerica Business Credit, Inc., as Agent
(incorporated herein by reference to Exhibit 4.4 to
the KACC 1993 Form 10-K)
4.9 Certificate of Designation of Series A Mandatory
Conversion Premium Dividend Preferred Stock of Kaiser,
dated June 28, 1993 (incorporated herein by reference
to Exhibit 4.3 to Kaiser's Quarterly Report on Form
10-Q for the quarter ended June 30, 1993, File No. 1-
9447, the "Kaiser 1993 Third Quarter Form 10-Q")
4.10 Deposit Agreement between Kaiser and The First
National Bank of Boston, dated as of June 30, 1993
(incorporated herein by reference to Exhibit 4.4 to
the Kaiser 1993 Third Quarter Form 10-Q)
4.11 Certificate of Designation of 8.255% Preferred
Redeemable Increased Dividend Equity Securities of
Kaiser, dated February 17, 1993 (incorporated herein
by reference to Exhibit 4.21 to Kaiser's Annual Report
on Form 10-K for the fiscal year ended December 31,
1993, File No. 1-9447; the "Kaiser 1993 Form 10-K")
4.12 Credit Agreement dated as of December 13, 1989 among
KACC, Kaiser, Bank of America National Trust and
Savings Association, as Agent, Mellon Bank, N.A., as
Collateral Agent, and certain financial institutions
signatory thereto (the "Kaiser 1989 Credit Agreement")
(incorporated herein by reference to Exhibit 4.3 to
Amendment No. 6 to the Registration Statement of KACC
on Form S-1, Registration No. 33-30645)
4.13 First Amendment to Kaiser 1989 Credit Agreement dated
as of April 17, 1990 (incorporated herein by reference
to Exhibit 4.2 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30,
1990)
4.14 Second Amendment to Kaiser 1989 Credit Agreement,
dated as of September 17, 1990 (incorporated by
reference to Exhibit 4.3 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1990)
4.15 Third Amendment to Kaiser 1989 Credit Agreement, dated
as of December 7, 1990 (incorporated herein by
reference to Exhibit 4.6 to Amendment No. 1 to the
Registration Statement of Kaiser on Form S-1,
Registration No. 33-37895)
4.16 Fourth Amendment to the Kaiser 1989 Credit Agreement,
dated April 19, 1991 (incorporated herein by reference
to Exhibit 4.1 of KACC's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1991, File
No. 1-3605)
4.17 Fifth Amendment to the Kaiser 1989 Credit Agreement,
dated as of March 13, 1992 (incorporated herein by
reference to Exhibit 4.8 to Kaiser's Annual Report on
Form 10-K for the year ended December 31, 1991, File
No. 1-9447)
4.18 Seventh Amendment to the Kaiser 1989 Credit Agreement,
dated November 6, 1992 (incorporated herein by
reference to Exhibit 4.10 to Amendment No. 5 to the
Form S-1 on Form S-2 Registration Statement of KACC,
Registration No. 33-48260; the "KACC 1993 Registration
Statement")
4.19 Eighth Amendment to the Kaiser 1989 Credit Agreement,
dated January 7, 1993 (incorporated herein by
reference to Exhibit 4.12 to the KACC 1993
Registration Statement)
4.20 Ninth Amendment to the Kaiser 1989 Credit Agreement,
dated as of May 19, 1993, including the form of
Intercompany Note annexed thereto (incorporated herein
by reference to Exhibit 4.10 to Amendment No. 2 to the
Registration Statement of KACC on Form S-1,
Registration No. 33-49555)
4.21 Tenth Amendment to the Kaiser 1989 Credit Agreement,
dated as of July 23, 1993 (incorporated herein by
reference to Exhibit 4.13 to Amendment No. 2 to the
Registration
<PAGE>
Statement of KACC on Form S-3, Registration No. 50097;
the "KACC 1994 Registration Statement")
4.22 Eleventh Amendment to the Kaiser 1989 Credit
Agreement, dated as of August 27, 1993 (incorporated
herein by reference to Exhibit 4.13 to the
Registration Statement of Kaiser on Form S-3,
Registration No. 33-50581)
4.23 Twelfth Amendment to the Kaiser 1989 Credit Agreement,
dated as of December 20, 1993 (incorporated herein by
reference to Exhibit 4.15 to Amendment No. 3 to the
KACC 1994 Registration Statement)
4.24 Indenture between The Pacific Lumber Company ("Pacific
Lumber") and The First National Bank of Boston, as
Trustee, regarding Pacific Lumber's 10 1/2% Senior
Notes due 2003 (incorporated herein by reference to
Exhibit 4.1 to Amendment No. 2 to the Form S-2
Registration Statement of Pacific Lumber, Registration
Statement No. 33-56332; the "Pacific Lumber
Registration Statement")
4.25 Indenture between Scotia Pacific Holding Company
("SPHC") and The First National Bank of Boston, as
Trustee, regarding SPHC's 7.95% Timber Collateralized
Notes due 2015 (incorporated herein by reference to
Exhibit 4.1 to Amendment No. 3 to the Form S-1
Registration Statement of SPHC, Registration No. 33-
55538; the "SPHC Registration Statement")
4.26 Form of Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment among SPHC,
The First National Bank of Boston, as Trustee, and The
First National Bank of Boston, as the Collateral Agent
(incorporated herein by reference to Exhibit 4.2 to
SPHC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993; the "SPHC 1993 Form 10-K")
4.27 Indenture dated as of July 1, 1986 between Pacific
Lumber Company and Bank of America National Trust and
Savings Association, Trustee, regarding Pacific
Lumber's 12% Series A Senior Notes due July 1, 1996
and 12.2% Series B Senior Notes due July 1, 1996
(incorporated herein by reference to Exhibit 1 to
Amendment No. 1 to Form 8-A of Pacific Lumber filed on
July 15, 1986)
4.28 Indenture dated as of July 1, 1986 between Pacific
Lumber and Manufacturers Hanover Trust Company,
Trustee, regarding Pacific Lumber's 12.5% Senior
Subordinated Debentures due July 1, 1998 (incorporated
herein by reference to Exhibit 2 to Amendment No. 1 to
Form 8-A of Pacific Lumber filed on July 15, 1986)
4.29 Revolving Credit Agreement dated as of June 23, 1993
between Pacific Lumber and Bank of America National
Trust and Savings Association (incorporated herein by
reference to Exhibit 4.19 to Amendment No. 2 to the
Form S-2 Registration Statement of MGI, Registration
No. 33-56332; the "MGI 1993 Registration Statement")
4.30 Letter Amendment to the Pacific Lumber Revolving
Credit Agreement, dated October 5, 1993 (incorporated
herein by reference to Exhibit 4.1 to Pacific Lumber's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, File No. 1-9204)
4.31 Loan Agreement dated June 17, 1991 by and between
General Electric Capital Corporation ("GECC") and MXM
Mortgage Corp. (the "GECC Loan Agreement")
(incorporated herein by reference to Exhibit 10(dd) to
Amendment No. 4 to the MGI 1991 Registration
Statement")
4.32 Unconditional Guarantee of Payment and Performance
dated June 17, 1991 by the Company and MGI to and for
the benefit of GECC (incorporated herein by reference
to Exhibit 10(ee) to the 1991 MGI Registration
Statement)
4.33 First Renewal, Extension and Modification Agreement
dated as of June 17, 1992 among
<PAGE>
GECC, MXM Mortgage Corp. and the Company (incorporated
herein by reference to Exhibit 4.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992)
4.34 Loan Increase, Extension and Modification Agreement
among GECC, MXM Mortgage Corp. and the Company
executed as of December 30, 1992 (incorporated herein
by reference to Exhibit 4.23 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1992; the "Company 1992 Form 10-K")
4.35 Modification Agreement, dated as of June 29, 1993, to
the GECC Loan Agreement (incorporated herein by
reference to Exhibit 4.5 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1993)
*4.36 Consent and Assumption Agreement, dated as of December
10, 1993, among GECC, MXM Mortgage Corp., MXM Mortgage
L.P., the Company and MGI
*4.37 Third Modification Agreement, dated as of December 30,
1993, among GECC, MXM Mortgage Corp. and MXM Mortgage
L.P.
*4.38 Release and Termination of Unconditional Guarantee of
Payment and Performance, dated as of December 30,
1993, executed by GECC
*4.39 Fourth Amendment to Loan Agreement, dated as of
December 30, 1993, among GECC, MXM Mortgage Corp. and
MXM Mortgage L.P.
4.40 Indenture, dated July 7, 1993, by and among Sam
Houston Race Park, Ltd., SHRP Capital Corp., SHRP,
Inc. and Chemical Bank (incorporated herein by
reference to Exhibit 10.1 to the Registration
Statement on Form S-1 of SHRP, Inc., Registration No.
33-67736; the "SHRP Registration Statement")
4.41 Deed of Trust, Assignment, Security Agreement and
Financing Statement dated July 7, 1993 (incorporated
herein by reference to Exhibit 10.2 to the SHRP
Registration Statement)
4.42 License Negative Pledge Agreement dated July 7, 1993
(incorporated herein by reference to Exhibit 10.3 to
the SHRP Registration Statement)
4.43 Senior Subordinated Intercompany Note between KACC and
the Company (incorporated herein by reference to
Exhibit 4.13 to the KACC 1993 Registration Statement)
4.44 Senior Subordinated Intercompany Note between Kaiser
and KACC, dated February 15, 1994 (incorporated herein
by reference to Exhibit 4.22 to the Kaiser 1993 Form
10-K)
4.45 Senior Subordinated Intercompany Note between Kaiser
and KACC, dated March 17, 1994 (incorporated herein by
reference to Exhibit 4.23 to the Kaiser 1993 Form
10-K)
4.46 Senior Subordinated Intercompany Note between Kaiser
and KACC, dated June 30, 1993 (incorporated herein by
reference to Exhibit 4.24 to the Kaiser 1993 Form
10-K)
4.47 Intercompany Note between Kaiser and KACC
(incorporated herein by reference to Exhibit 4.2 to
Amendment No. 5 to the Registration Statement of KACC
on Form S-1, Registration No. 33-30645)
Note: Pursuant to Regulation Section 229.601, Item
601(b)(4)(iii) of Regulation S-K, upon request of the
Securities and Exchange Commission, the Company hereby
agrees to furnish a copy of any unfiled instrument
which defines the rights of holders of long-term debt
of the Company and its consolidated subsidiaries (and
for any of its unconsolidated subsidiaries for which
financial statements are required to be filed) wherein
the total amount of securities authorized thereunder
does not exceed 10 percent of the total consolidated
assets of the Company.
10.1 Tax Allocation Agreement among the Company and KACC
dated as of December 21,
<PAGE>
1989 (incorporated herein by reference to Exhibit
10.21 to Amendment No. 6 to the Registration Statement
of KACC on Form S-1, Registration No. 33-30645)
10.2 Tax Allocation Agreement between Kaiser and the
Company (incorporated herein by reference to Exhibit
10.23 to Amendment No. 4 to the Registration Statement
of Kaiser on Form S-1, Registration No. 33-37895)
10.3 Tax Allocation Agreement between the Company and MGI,
dated August 4, 1993 (incorporated herein by reference
to Exhibit 10.6 to the MGI 1993 Registration
Statement)
10.4 Tax Allocation Agreement dated as of May 21, 1988
among the Company, MGI, Pacific Lumber and the
corporations signatory thereto (incorporated herein by
reference to Exhibit 10.8 to Pacific Lumber's Annual
Report on Form 10-K for the fiscal year ended December
31, 1988, File No. 1-9204)
10.5 Tax Allocation Agreement among Pacific Lumber, SPHC,
Salmon Creek Corporation and the Company, dated as of
March 23, 1993 (incorporated herein by reference to
Exhibit 10.1 to the SPHC Registration Statement)
10.6 Tax Allocation Agreement between the Company and Britt
Lumber Co., Inc. (incorporated herein by reference to
Exhibit 10.4 to the MGI 1993 Form 10-K)
10.7 Tax Allocation Agreement between the Company and SHRP,
Inc., dated November 4, 1993 (incorporated herein by
reference to Exhibit 10.23 to Amendment No. 10.1 to
the Form S-1 Registration Statement of SHRP, Inc.,
Registration No. 33-67736)
10.8 Amended and Restated Alumina Supply Agreement, dated
as of October 11, 1989 (incorporated herein by
reference to Exhibit 10.19 to Amendment No. 3 to the
Registration Statement of KACC on Form S-1,
Registration No. 33-30645)
10.9 Assumption Agreement, dated as of October 28, 1988
(incorporated herein by reference to Exhibit HHH to
the Final Amendment to the Schedule 13D of MGI and
others in respect of the common stock of the Company)
10.10 Agreement, dated as of June 30, 1993, between Kaiser
and the Company (incorporated herein by reference to
Exhibit 10.2 to KACC's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993, File No. 1-3605)
10.11 Undertaking, dated as of August 4, 1993, by the
Company in favor of MGI (incorporated herein by
reference to Exhibit 10.27 to the MGI 1993 Form 10-K)
10.12 Form of Master Purchase Agreement between Pacific
Lumber and SPHC (incorporated herein by reference to
Exhibit 10.1 to the SPHC 1993 Form 10-K)
10.13 Form of Services Agreement between Pacific Lumber and
SPHC (incorporated herein by reference to Exhibit 10.2
to the SPHC 1993 Form 10-K)
10.14 Form of Additional Services Agreement between Pacific
Lumber and SPHC (incorporated herein by reference to
Exhibit 10.3 to the SPHC 1993 Form 10-K)
10.15 Form of Reciprocal Rights Agreement among Pacific
Lumber, SPHC and Salmon Creek Corporation
(incorporated herein by reference to Exhibit 10.4 to
the SPHC 1993 Form 10-K)
10.16 Form of Environmental Indemnification Agreement
between Pacific Lumber and SPHC (incorporated herein
by reference to Exhibit 10.5 to the SPHC 1993 Form 10-
K)
10.17 Purchase and Services Agreement between Pacific Lumber
and Britt Lumber Co., Inc. (incorporated herein by
reference to Exhibit 10.17 to the Pacific Lumber
Registration Statement)
10.18 Exchange Agreement dated as of May 20, 1991 by and
among the Company, MCO
<PAGE>
Properties Inc. ("MCOP") and Federated Development
Company (incorporated by reference from Exhibit 10(ff)
to the MGI 1991 Registration Statement)
10.19 Revolving Credit and Term Loan Agreement dated as of
August 27, 1987, as amended, between MCOP and
Federated Development Company (incorporated herein by
reference to Exhibit 10.82 to the Company's
Registration Statement on Form S-4, Registration No.
33-20096)
10.20 Term Loan Agreement dated as of November 17, 1987
between MCOP and Federated Development Company
(incorporated herein by reference to Exhibit 10.83 to
the Company's Registration Statement on Form S-4,
Registration No. 33-20096)
10.21 Put and Call Agreement dated November 16, 1987 (the
"Put and Call Agreement") between Charles E. Hurwitz
and MAXXAM Properties Inc. ("MPI") (incorporated
herein by reference to Exhibit C to Schedule 13D dated
November 24, 1987, filed by MGI with respect to the
Company's common stock)
10.22 Amendment to Put and Call Agreement, dated May 18,
1988, (incorporated herein by reference to Exhibit D
to the Final Amendment to Schedule 13D dated May 20,
1988, filed by MGI relating to the Company's common
stock)
10.23 Amendment to Put and Call Agreement, dated as of
February 17, 1989, (incorporated herein by reference
to Exhibit 10.35 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1988)
10.24 Note Purchase Agreement dated July 26, 1982, as
amended, between the Company and Drexel Burnham
Lambert Incorporated, relating to the Company's Zero
Coupon Senior Subordinated Notes due 2007
(incorporated herein by reference to Exhibit B to
Schedule 13D dated November 24, 1987, filed by MGI
relating to the Company's common stock)
10.25 Second Amended and Restated Limited Partnership
Agreement of Sam Houston Race Park, Ltd. (incorporated
herein by reference to Exhibit 3.2 to the SHRP
Registration Statement)
10.26 Warrant Agreement by and between SHRP, Inc., as
issuer, and Chemical Bank, as Trustee (incorporated
herein by reference to Exhibit 4.1 to the SHRP
Registration Statement)
10.27 Registration Rights Agreement by and among the Sam
Houston Race Park, Ltd., SHRP, Inc., SHRP Capital
Corp., and Salomon Brothers Inc., as Initial
Purchasers (incorporated herein by reference to
Exhibit 4.4 to the SHRP Registration Statement)
10.28 Voting Agreement, dated July 7, 1993, by and among
SHRP, Inc., SHRP General Partner, Inc. and Salomon
Brothers Inc., as Initial Purchasers (incorporated
herein by reference to Exhibit 9 to the SHRP
Registration Statement)
10.29 Amended and Restated Management Agreement, dated July
7, 1993, by and between Race Track Management
Enterprises and Sam Houston Race Park, Ltd.
(incorporated herein by reference to Exhibit 10.6 to
the SHRP Registration Statement)
Executive Compensation Plans and Arrangements __________________________________
10.30 Revised Capital Accumulation Plan effective January 1,
1988 (incorporated herein by reference to Exhibit
10.27 to the Company's Registration Statement on Form
S-4, Registration No. 33-20096)
10.31 The Company's 1984 Phantom Share Plan, as amended (the
"Company Phantom Share Plan") (incorporated herein by
reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1990)
10.32 Amendment dated as of March 8, 1990 relating to the
Company Phantom Share Plan
<PAGE>
(incorporated herein by reference to Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1990)
10.33 Form of Phantom Share Agreement relating to the
Company Phantom Share Plan (incorporated herein by
reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1988)
10.34 MAXXAM Group Inc. 1976 Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10(a) to
MGI's Annual Report on Form 10-K for the year ended
December 31, 1984, File No. 1-8857)
10.35 MAXXAM Supplemental Executive Retirement Plan
(incorporated herein by reference to Exhibit 10(jj) to
the 1991 MGI Registration Statement)
10.36 KACC's Limited Long-Term Incentive Plan dated June 2,
1989 (incorporated herein by reference to Exhibit
10.14 to KACC's Annual Report on Form 10-K for the
year ended December 31, 1989, File No. 1-3605)
10.37 Kaiser 1993 Omnibus Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.1 to KACC's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993, File No. 1-3605)
10.38 Amendment No. 2 to Kaisertech Limited Long Term
Incentive Plan, dated as of December 18, 1991
(incorporated herein by reference to Exhibit 10.7 to
Kaiser's Annual Report on Form 10-K for the year ended
December 31, 1991, File No. 1-9447)
10.39 Amendment No. 3 to Kaiser Aluminum Corporation Long
Term Incentive Plan, dated as of December 31, 1991
(incorporated herein by reference to Exhibit 10.8 to
Kaiser's Annual Report on Form 10-K for the year ended
December 31, 1991, File No. 1-9447)
10.40 KACC's Bonus Plan (incorporated herein by reference to
Exhibit 10.25 to Amendment No. 6 to the Registration
Statement of KACC on Form S-1, Registration No. 33-
30645)
10.41 KACC's Middle Management Long-Term Incentive Plan
dated June 25, 1990, as amended (incorporated herein
by reference to Exhibit 10.22 to Kaiser's Amendment
No. 1 to Registration Statement on Form S-1,
Registration No. 33-37895)
10.42 Employment Agreement, dated as of October 1, 1992,
among Kaiser, KACC and A. Stephens Hutchcraft, Jr.
(incorporated herein by reference to Exhibit 10.15 to
the 1993 KACC Registration Statement)
10.43 Severance Agreement, dated July 1, 1985, between KACC
and A. Stephens Hutchcraft, Jr. (the "Hutchcraft
Severance Agreement") (incorporated herein by
reference to Exhibit (10)(f) to KACC's Annual Report
on Form 10-K for the period ended December 31, 1988,
File No. 1-3605)
10.44 Amendment, dated October 31, 1989, to the Hutchcraft
Severance Agreement (incorporated herein by reference
to Exhibit 10.24 to Amendment No. 5 of KACC's
Registration Statement on Form S-1, Registration No.
33-30645)
*10.45 Consulting Agreement, dated November 19, 1993, between
KACC and A. Stephens Hutchcraft
10.46 Employment Agreement dated as of March 8, 1990 between
the Company and Anthony R. Pierno (incorporated herein
by reference to Exhibit 10.28 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1990)
10.47 Promissory Note dated February 1, 1989 by Anthony R.
Pierno and Beverly J. Pierno to the Company
(incorporated herein by reference to Exhibit 10.30 to
the Company's Annual Report on Form 10-K for year
ended December 31, 1988)
10.48 Promissory Note dated July 19, 1990 by Anthony R.
Pierno to the Company (incorporated
<PAGE>
herein by reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1990)
10.49 Commercial Guaranty, dated February 22, 1993, executed
by MAXXAM in favor of Charter National Bank--Houston
with respect to a loan of Anthony R. Pierno
(incorporated herein by reference to Exhibit 10.27 to
Kaiser's Annual Report on Form 10-K for the period
ended December 31, 1992, File No. 1-9447)
*10.50 Commercial Guaranty, dated January 24, 1994, between
the Company and Charter National Bank-Houston with
respect to a loan of Anthony R. Pierno, and a related
letter agreement
10.51 Employment Agreement dated as of March 8, 1990 between
the Company and Paul N. Schwartz (incorporated herein
by reference to Exhibit 10.32 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1990)
10.52 Real Estate Lien Note dated July 3, 1990 by Paul N.
Schwartz and Barbara M. Schwartz, Trustee, to the
Company and related Deed of Trust and Letter Agreement
(incorporated herein by reference to Exhibit 10.35 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1990)
10.53 Employment Agreement dated as of March 8, 1990 between
the Company and Diane M. Dudley (incorporated herein
by reference to Exhibit 10.37 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1990)
10.54 Real Estate Lien Note dated September 27, 1990 by
Diane M. Dudley to the Company and related Deed of
Trust and Letter Agreement (incorporated herein by
reference to Exhibit 10.41 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1990)
10.55 Employment Agreement dated September 26, 1990 among
the Company, KACC and John T. La Duc (incorporated
herein by reference to Exhibit 10.20 to Amendment No.
1 to Kaiser's Registration Statement on Form S-1,
Registration No. 33-37895)
10.56 Employment Agreement dated as of March 8, 1990 between
the Company and Jacques C. Lazard (incorporated herein
by reference to Exhibit 10.45 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1990)
10.57 Real Estate Lien Note dated June 27, 1990 by Jacques
C. Lazard and Lorel S. Lazard to the Company and
related Deed of Trust and Letter Agreement
(incorporated herein by reference to Exhibit 10.48 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1990)
10.58 Employment Agreement dated as of March 8, 1990 between
the Company and Byron L. Wade (incorporated herein by
reference to Exhibit 10.50 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1990)
*10.59 Promissory Note, dated July 20, 1993 between the
Company and Byron L. Wade
10.60 Employment Agreement dated as of August 22, 1990
between the Company, KACC and Robert W. Irelan
(incorporated herein by reference to Exhibit 10.53 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1990)
10.61 Promissory Note dated October 4, 1990 by Robert W.
Irelan and Barbara M. Irelan to KACC (incorporated
herein by reference to Exhibit 10.54 to the Company's
Annual Report on Form 10-K for the year ended December
31, 1990)
<PAGE>
10.62 Real Estate Lien Note dated October 4, 1990 by Robert
W. Irelan and Barbara M. Irelan to KACC and related
Deed of Trust (incorporated herein by reference to
Exhibit 10.55 to the Company's Annual Report on Form
10-K for the year ended December 31, 1990)
*10.63 Employment Agreement, dated August 20, 1993 between
KACC and Robert E. Cole
*11 Computation of Net Income Per Common and Common
Equivalent Share Information
*13.1 The portions of the Company's Annual Report to
Stockholders for the year ended December 31, 1993
which are incorporated herein by reference
13.2 Footnote 11 to the consolidated financial statements
of KACC, entitled Subsidiary Guarantors, (incorporated
herein by reference to KACC's Annual Report on Form
10-K for the fiscal year ended December 31, 1993, File
No. 1-3605)
*21 List of the Company's Subsidiaries
*23 Consent of Independent Public Accountants by Arthur
Andersen & Co.
<FN>
--------------------
* Included with this filing.
</TABLE>
EXHIBIT 11
MAXXAM INC.
COMPUTATION OF NET INCOME (LOSS)
PER COMMON AND COMMON EQUIVALENT SHARE
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1993 1992 1991
-------------- -------------- ---------------
<S> <C> <C> <C>
Weighted average common and common equivalent shares
outstanding during each year . . . . . . . . . . . . 9,376,703 9,367,974 9,333,574
Common equivalent shares attributable to stock
options and convertible securities . . . . . . . . . 80,380 59,037 124,679
-------------- -------------- ---------------
Total common and common equivalent shares . . . 9,457,083 9,427,011 9,458,253
============== ============== ===============
Income (loss) before extraordinary item and
cumulative effect of changes in accounting
principles . . . . . . . . . . . . . . . . . . . $ (131.9) $ (7.3) $ 57.5
Extraordinary item . . . . . . . . . . . . . . . . . (50.6) - -
Cumulative effect of changes in accounting principles (417.7) - -
-------------- -------------- ---------------
Net income (loss) . . . . . . . . . . . . . . . . . . $ (600.2) $ (7.3) $ 57.5
============== ============== ===============
Per common and common equivalent share:
Income (loss) before extraordinary item and
cumulative effect of changes in accounting
principles . . . . . . . . . . . . . . . . . . . $ (13.95) $ (.77) $ 6.08
Extraordinary item . . . . . . . . . . . . . . . (5.35) - -
Cumulative effect of changes in accounting
principles . . . . . . . . . . . . . . . . . . . (44.17) - -
-------------- -------------- ---------------
Net income (loss) . . . . . . . . . . . . . . . $ (63.47) $ (.77) $ 6.08
============== ============== ===============
</TABLE>
EXHIBIT 21
MAXXAM INC.
SUBSIDIARIES OF THE REGISTRANT
Listed below are MAXXAM Inc.'s principal subsidiaries and the
jurisdiction of their incorporation or organization. Certain
subsidiaries are omitted which, considered in the aggregate as a single
subsidiary, would not constitute a significant subsidiary.
<TABLE>
<CAPTION>
State or Province
of Incorporation
Name or Organization
<S> <C>
Aluminum Operations
-------------------
Alpart Jamaica Inc. Delaware
Alumina Partners of Jamaica (partnership) Delaware
Anglesey Aluminium Limited United Kingdom
Kaiser Alumina Australia Corporation Delaware
Kaiser Aluminum Corporation Delaware
Kaiser Aluminium Europe (U.K.) Limited United Kingdom
Kaiser Aluminium International, Inc. Delaware
Kaiser Aluminum & Chemical Corporation Delaware
Kaiser Aluminum & Chemical International N.V. Netherlands,
Antilles
Kaiser Aluminum & Chemical of Canada Limited Ontario
Kaiser Aluminum Technical Services, Inc. California
Kaiser Bauxite Company Nevada
Kaiser Center, Inc. California
Kaiser Center Properties (partnership) California
Kaiser Finance Corporation Delaware
Kaiser Jamaica Bauxite Company (partnership) Jamaica
Kaiser Jamaica Corporation Delaware
Queensland Alumina Limited Queensland
Strombus International Insurance Company, Ltd. Bermuda
Trochus Insurance Company, Ltd. Bermuda
Volta Aluminium Company Limited Ghana
Forest Products Operations
--------------------------
Britt Lumber Co., Inc. California
MAXXAM Group Inc. Delaware
MAXXAM Properties Inc. Delaware
Salmon Creek Corporation Delaware
Scotia Pacific Holding Company Delaware
The Pacific Lumber Company Delaware
<PAGE>
Real Estate Operations
----------------------
Horizon Corporation Delaware
MAXXAM Property Company Delaware
MCO Properties Inc. Delaware
MCO Properties L.P. (partnership) Delaware
MXM Mortgage L.P. (partnership) Delaware
Palmas del Mar Properties, Inc. Delaware
Race Park Operations
--------------------
Race Track Management Enterprises Delaware
Sam Houston Race Park, Ltd. Delaware
SHRP Acquisition, Inc. Delaware
SHRP Capital Corp. Delaware
SHRP General Partner, Inc. Texas
SHRP Inc. Delaware
SHRP Management, Inc. Delaware
</TABLE>
EXHIBIT 23
MAXXAM INC.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the
Company's previously filed Registration Statement File No. 33-22436.
ARTHUR ANDERSEN & CO.
Houston, Texas
March 25, 1994
<PAGE>
MAXXAM Inc. and Subsidiaries
S e l e c t e d F i n a n c i a l D a t a
The following summary of consolidated financial information for
each of the five years ended December 31, 1993, is not reported
upon herein by independent public accountants and should be read
in conjunction with the Consolidated Financial Statements and the
Notes thereto which are contained elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated statement of operations:
Net sales $2,031.1 $2,202.6 $2,254.5 $2,360.7 $2,423.3
Operating income (loss) (96.1) 130.8 235.5 413.9 468.8
Income (loss) before extraordinary item
and cumulative effect of changes in
accounting principles (131.9) (7.3) 57.5 144.4 116.8
Extraordinary item, net (50.6) - - 17.5 -
Cumulative effect of changes in
accounting principles, net (417.7) - - - -
Net income (loss) (600.2) (7.3) 57.5 161.9 116.8
Per common and common equivalent share --
primary:
Income (loss) before extraordinary
item and cumulative effect of
changes in accounting
principles (13.95) (.77) 6.08 15.19 12.97
Extraordinary item, net (5.35) - - 1.84 -
Cumulative effect of changes in
accounting principles, net (44.17) - - - -
Net income (loss) (63.47) (.77) 6.08 17.03 12.97
Per common and common equivalent share --
fully diluted:
Income before extraordinary item and
cumulative effect of changes in
accounting principles 12.46
Net income 12.46
Consolidated balance sheet at end of period:
Total assets 3,572.0 3,198.8 3,215.0 3,027.5 3,183.2
Long-term debt 1,567.9 1,592.7 1,551.9 1,445.5 1,551.2
Stockholders equity (deficit) (167.9) 443.9 459.6 395.3 233.1
Stockholders equity (deficit) per
common and common equivalent share (17.91) 47.34 49.12 42.49 25.07
Cash dividends declared - - - - -
</TABLE>
<PAGE>
MAXXAM Inc. and Subsidiaries
Management s Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The Company operates in three industries: aluminum, through its
majority owned subsidiary, Kaiser Aluminum Corporation
("Kaiser"), a fully integrated aluminum producer; forest
products, through MAXXAM Group Inc. ("MGI") and its wholly owned
subsidiaries; and real estate management and development,
principally through MAXXAM Property Company and various other
wholly owned subsidiaries. The Company has restated its
presentation of the results of operations for its forest products
group and other items not directly related to industry segments
as a result of the Forest Products Group Formation described in
Note 1 to the Company s Consolidated Financial Statements. The
following should be read in conjunction with the Company s
Consolidated Statement of Operations for the years ended December
31, 1993, 1992 and 1991, contained elsewhere herein.
ALUMINUM OPERATIONS
The following table presents selected operational and financial
information for the three-year period ended December 31, 1993,
with respect to Kaiser s operations. Kaiser s operating results
are sensitive to changes in prices of alumina, primary aluminum
and fabricated aluminum products, and also depend to a
significant degree upon the volume and mix of all products sold.
Kaiser, through its principal subsidiary Kaiser Aluminum &
Chemical Corporation ("KACC"), operates in two business segments:
bauxite and alumina, and aluminum processing. Aluminum
operations account for a significant portion of the Company s
revenues and operating results.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
(IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES) 1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Shipments(1):
Alumina 1,997.5 2,001.3 1,945.9
Aluminum products:
Primary aluminum 242.5 355.4 340.6
Fabricated products 373.2 343.6 314.2
-------- ------- -------
Total aluminum products 615.7 699.0 654.8
======== ======= =======
Average realized sales price:
Alumina (per ton) $169 $195 $240
Primary aluminum (per pound) .56 .66 .72
Net sales:
Bauxite and alumina:
Alumina $338.2 $390.8 $466.5
Other(2)(3) 85.2 75.7 84.3
-------- ------- -------
Total bauxite and alumina 423.4 466.5 550.8
-------- ------- -------
Aluminum processing:
Primary aluminum 301.7 515.0 538.5
Fabricated products 981.4 913.7 898.9
Other(3) 12.6 13.9 12.6
-------- ------- -------
Total aluminum processing 1,295.7 1,442.6 1,450.0
-------- ------- -------
Total net sales $1,719.1 $1,909.1 $2,000.8
======== ======= =======
Operating income (loss) $(117.4) $91.6 $216.4
======== ======= =======
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of changes in
accounting principles $(201.7) $33.8 $154.0
======== ======= =======
Capital expenditures $67.7 $114.4 $118.1
======== ======= =======
<FN>
(1)Shipments are expressed in thousands of metric tons. A metric ton is equivalent to 2,204.6 pounds.
(2)Includes net sales of bauxite.
(3)Includes the portion of net sales attributable to minority interests in consolidated subsidiaries.
</TABLE>
<PAGE>
Net Sales
Bauxite and alumina. Net sales of bauxite and alumina to third
parties were $423.4 million in 1993 compared to $466.5 million in
1992 and $550.8 million in 1991. Revenue from alumina decreased
13% to $338.2 million in 1993 from $390.8 million in 1992 because
of lower average realized prices. Revenue from alumina decreased
16% to $390.8 million in 1992 from $466.5 million in 1991 as
significantly lower average realized prices more than offset a 3%
increase in alumina shipments, which was principally attributable
to increased production at all three of Kaiser's alumina
refineries. The remainder of the segment's sales revenues were
from sales of bauxite, which remained about the same throughout
the three years, and the portion of sales of alumina attributable
to the minority interest in the Alumina Partners of Jamaica
("Alpart").
Aluminum processing. Net sales to third parties for the aluminum
processing segment were $1,295.7 million in 1993 compared to
$1,442.6 million in 1992 and $1,450.0 million in 1991. The bulk
of the segment's sales represents Kaiser's primary aluminum and
fabricated aluminum products, with the remainder due to the
portion of sales of primary aluminum attributable to the minority
interest in Volta Aluminium Company Limited.
Revenue from primary aluminum decreased 41% to $301.7 million in
1993 from $515.0 million in 1992 because of lower shipments and
lower average realized prices. Shipments of primary aluminum to
third parties were approximately 39% of total aluminum products
shipments in 1993 compared to approximately 51% in 1992. Revenue
from primary aluminum decreased 4% to $515.0 million in 1992 from
$538.5 million in 1991, as an 8% decrease in average realized
prices more than offset a 4% increase in primary aluminum
shipments. Shipments of primary aluminum to third parties were
approximately 51% of total aluminum products shipments in 1992
compared to approximately 52% in 1991.
Revenue from fabricated aluminum products increased 7% to $981.4
million in 1993 compared to $913.7 million in 1992, principally
due to increased shipments of most fabricated aluminum products,
partially offset (to a lesser extent) by a decrease in average
realized prices of most of these products. Revenue from
fabricated aluminum products increased 2% to $913.7 million in
1992 compared to $898.9 million in 1991, primarily because lower
average realized prices were more than offset by a 9% increase in
shipments of fabricated aluminum products.
Operating Income (Loss)
Operating losses in 1993 were $117.4 million, compared to
operating income of $91.6 million in 1992 and $216.4 million in
1991. In the fourth quarter of 1993, Kaiser recorded pre-tax
charges of $35.8 million relating to the restructuring of
aluminum operations (see "-- Aluminum processing") and
approximately $19.4 million and $29.0 million in the fourth
quarter of 1993 and 1992, respectively, because of reductions in
the carrying value of its inventories caused principally by
prevailing lower prices for alumina, primary aluminum and
fabricated products. Kaiser's corporate general and
administrative expenses of $72.6 million, $77.6 million and $84.2
million in 1993, 1992 and 1991, respectively, were allocated by
the Company to the bauxite and alumina and aluminum processing
segments based upon those segments' ratio of sales to
unaffiliated customers.
Bauxite and alumina. Operating losses for the bauxite and
alumina segment were $20.1 million in 1993, compared to operating
income of $44.6 million in 1992 and $127.7 million in 1991. In
1993 compared to 1992, operating income was adversely affected
principally due to a decrease in average realized prices for
alumina, which more than offset above-market prices for virtually
all of its excess alumina sold forward in prior periods under
long-term contracts. In 1992 compared to 1991, operating income
was adversely affected by a decrease in average realized prices
for alumina, which more than offset higher alumina shipments and
above-market prices for significant quantities of alumina sold
forward in prior periods under long-term contracts.
Aluminum processing. Operating losses for the aluminum
processing segment were $97.3 million in 1993, compared to
operating income of $47.0 million in 1992 and $88.7 million in
1991. In 1993 compared to 1992, operating income was adversely
affected due principally to reduced shipments and lower average
realized prices of primary aluminum products which more than
offset increased shipments of fabricated products. In 1993, KACC
implemented a restructuring plan for its flat-rolled products
operation at its Trentwood plant in response to overcapacity in
the aluminum rolling industry, flat demand in the U.S. can stock
markets and declining demand for aluminum products sold to
customers in the commercial aerospace industry, all of which have
resulted in declining prices in Trentwood's key markets.
Additionally, KACC implemented a plan to discontinue its casting
operations, which include three facilities located in Ohio. This
entire restructuring is expected to be completed by the end of
1995 and will affect approximately 670 employees. The pre-tax
charge for this restructuring of $35.8 million includes $25.2
million for pension, severance and other termination benefits;
$4.7 million for a writedown of the casting facilities to their
net realizable value; $3.3 million for the estimated losses of
the casting facilities to the expected date of closure or sale;
and $2.6 million relating to a variety of other items. The
Trentwood restructuring is expected to result in annual cost
savings of at least $50.0 million after it has been fully
implemented. Other contributing factors were lower production at
Kaiser's smelters in the Pacific Northwest in 1993 as a result of
the removal of three reduction potlines from production at those
smelters in January 1993 in response to the Bonneville Power
Administration's (the "BPA") reduction during the first quarter
of 1993 of the amount of power it normally provides to Kaiser,
and the increased cost of substitute power in such quarter. In
1993, Kaiser's average realized price from sales of primary
aluminum was approximately $.56 per pound, compared to the
average Midwest U.S. transaction price of approximately $.54 per
pound during such period. Operating income in 1992 was adversely
affected by a decrease in average realized prices for primary
aluminum and most fabricated aluminum products, partially offset
by increased shipments. In 1993, 1992 and 1991, Kaiser realized
above-market prices for significant quantities of primary
aluminum sold forward in prior periods under long-term contracts.
Income (Loss) Before Income Taxes, Minority Interests,
Extraordinary Item and Cumulative Effect of Changes in Accounting
Principles
Losses before income taxes, minority interests, extraordinary
item and cumulative effect of changes in accounting principles in
1993 were $201.7 million, compared to income of $33.8 million in
1992. This decrease resulted from the operating losses
previously described and approximately $10.8 million of other
pre-tax charges, principally related to establishing additional
litigation and environmental reserves.
Income before income taxes, minority interests, extraordinary
item and cumulative effect of changes in accounting principles in
1992 was $33.8 million, compared to $154.0 million in 1991. This
decrease resulted from the lower operating income previously
described. Investment, interest and other income remained about
the same in 1992 and 1991, as approximately $14.0 million of
income for non-recurring adjustments to previously recorded
liabilities and reserves in the fourth quarter of 1992
approximately equaled the receipt of a $12.0 million fee in the
first quarter of 1991 from the Company's minority partner in
Alpart in consideration for the execution of an expansion
agreement for the Alpart alumina refinery.
As described in Note 1 to the Consolidated Financial Statements,
Kaiser's cumulative losses in the first and second quarter of
1993, principally due to the implementation of the new accounting
standard for postretirement benefits other than pensions as
described in Note 6 to the Consolidated Financial Statements,
eliminated Kaiser's equity with respect to its common stock;
accordingly, the Company recorded 100% of Kaiser's losses in the
third and fourth quarters of 1993, without regard to the minority
interests represented by Kaiser's other common stockholders (as
described in Note 7 to the Consolidated Financial Statements).
The Company will record 100% of Kaiser's losses and profits until
such time as the losses recorded by the Company with respect to
Kaiser's minority common stockholders are recovered.
Information concerning net sales, operating income (loss) and
assets attributable to certain geographic areas and industry
segments is set forth in Note 11 to the Consolidated Financial
Statements.
FOREST PRODUCTS OPERATIONS
The Company's forest products operations are conducted by MGI
through its principal operating subsidiaries, The Pacific Lumber
Company ("Pacific Lumber") and Britt Lumber Co., Inc. ("Britt").
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
(IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES) 1993 1992 1991
---------- --------- -----
<S> <C> <C> <C>
Shipments:
Lumber(1):
Redwood upper grades 68.3 76.6 86.7
Redwood common grades 184.7 193.9 197.2
Douglas-fir upper grades 10.7 10.2 11.7
Douglas-fir common grades 46.4 56.0 37.8
------ ------ -------
Total lumber 310.1 336.7 333.4
====== ====== ======
Logs(2) 18.6 19.1 14.5
====== ====== =======
Wood chips(3) 156.8 202.7 168.4
====== ====== =======
Average sales price:
Lumber(4):
Redwood upper grades $1,275 $1,141 $1,085
Redwood common grades 469 427 347
Douglas-fir upper grades 1,218 1,125 1,033
Douglas-fir common grades 447 298 262
Logs(4) 704 366 373
Wood chips(5) 81 83 79
Net sales:
Lumber, net of discount $202.6 $194.2 $180.2
Logs 13.1 7.0 5.4
Wood chips 12.7 16.9 13.4
Cogeneration power 3.8 3.7 4.8
Other 1.3 1.6 1.9
------ ------ -------
Total net sales $233.5 $223.4 $205.7
====== ====== =======
Operating income $54.3 $64.1 $55.3
====== ====== =======
Loss before income taxes, minority interests,
extraordinary item and cumulative effect of
changes in accounting principles $(17.7) $(28.4) $(31.8)
====== ======= =======
Capital expenditures $11.1 $8.7 $6.4
====== ======= =======
<FN>
(1)Lumber shipments are expressed in millions of board feet.
(2)Log shipments are expressed in millions of board feet, net Scribner scale.
(3)Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds.
(4)Dollars per thousand board feet.
(5)Dollars per bone dry unit.
</TABLE>
Shipments
Lumber shipments to third parties in 1993 were 310.1 million
board feet, a decrease of 8% from 336.7 million board feet in
1992. This decrease was attributable to a 5% decrease in redwood
common lumber shipments, a 14% decrease in shipments of Douglas-fir
lumber and an 11% decrease in shipments of upper grade
redwood lumber. The Company believes the decrease in total
lumber shipments was caused primarily by a decline in
construction related activity resulting from weak economic
conditions in the Western region of the United States and, to a
lesser extent, by the difficulties related to weather conditions
in the West and Midwestern United States during 1993. Log
shipments in 1993 were 18.6 million feet (net Scribner scale), a
decrease of 3% from 19.1 million feet in 1992.
Lumber shipments to third parties in 1992 of 336.7 million board
feet increased 1% from 333.4 million board feet in 1991. This
increase was attributable to a 48% increase in common grade
Douglas-fir shipments, partially offset by a 12% decrease in
upper grade redwood shipments and a 2% decrease in shipments of
redwood common lumber. During the second quarter of 1992,
Pacific Lumber experienced lumber production delays attributable
to the earthquake and aftershocks which struck Humboldt County,
California in April. The earthquake and related aftershocks
disabled, for a period of approximately six weeks, a large number
of the kilns used to dry the upper grade redwood lumber and the
sawmill which produces a significant portion of Pacific Lumber's
upper grade redwood lumber. Pacific Lumber initiated additional
shifts at two of its other sawmills in order to minimize the
impact of the lost production. The increased production at one
of the sawmills was predominantly from Douglas-fir logs that had
recently been salvaged from an area that experienced a forest
fire in 1990. These factors resulted in substantially increased
shipments of Douglas-fir lumber and the decline in shipments of
redwood lumber discussed above. Log shipments in 1992 of 19.1
million feet increased 32% from 14.5 million feet in 1991. The
increase in log shipments resulted primarily from the sale, to
unaffiliated parties during the second quarter of 1992, of
certain logs salvaged from the 1990 forest fire that were not of
a suitable quality for Pacific Lumber's sawmills.
Net Sales
Revenues from net sales for 1993 increased by approximately 5%
from 1992. This increase was principally due to a 12% increase
in the average realized price of upper grade redwood lumber, a
10% increase in the average realized price of redwood common
lumber, a 92% increase in the average realized price of log sales
and a 50% increase in the average realized price of common grade
Douglas-fir lumber, partially offset by decreased shipments of
lumber and logs, as previously discussed, and decreased sales of
wood chips. The decrease in sales of wood chips resulted from
the closure of a pulp mill by one of Pacific Lumber's customers.
Revenues from net sales for 1992 increased by approximately 9%
from 1991. This increase was principally due to a 23% increase
in the average realized price of redwood common lumber, higher
shipments of common grade Douglas-fir lumber, a 5% increase in
the average realized price of upper grade redwood lumber,
increased sales of wood chips, a 14% increase in the average
realized price of common grade Douglas-fir lumber and higher log
shipments, partially offset by lower shipments of upper and
common grades of redwood lumber and lower sales of electrical
power resulting from damage sustained by Pacific Lumber's
cogeneration facility during the earthquake and aftershocks in
April 1992.
Operating Income
Operating income for 1993 decreased by approximately 15% as
compared to 1992. This decrease was primarily due to the
additional cost of logs purchased from third parties, lower
shipments of high margin wood chips and higher overhead costs,
partially offset by the increase in sales of lumber and logs, as
previously discussed. The Company arranged for the purchase of a
significant number of logs earlier in the year in response to
concerns regarding inclement weather conditions hindering logging
activities on the Company's timberlands during the first five
months of 1993. The cost associated with the purchase of logs
from third parties significantly exceeds the Company's cost to
harvest its own timber. As a result of the Company's last-in,
first-out (LIFO) methodology of accounting for inventories, a
substantial portion of the additional cost associated with the
purchased logs was charged to cost of sales in the third quarter
of 1993. Cost of goods sold for 1992 was reduced by a $3.3
million business interruption insurance claim as a result of the
April 1992 earthquake. The business interruption insurance claim
represents partial compensation for the added costs and lower
realized gross margins on lumber sales, primarily due to lost
production capacity of Pacific Lumber's drying kilns as described
above under "Shipments." Cost of goods sold for 1993 includes a
reduction of $1.2 million reflecting an additional business
interruption insurance claim.
Operating income for 1992 increased by approximately 16% as
compared to 1991. This increase was principally attributable to
the factors impacting shipments and sales, as previously
discussed. Cost of goods sold for 1991 reflects a benefit of
$3.3 million due to a reduction of Pacific Lumber's LIFO
inventories.
Cost of goods sold as a percentage of sales was approximately
58%, 51% and 50% for 1993, 1992 and 1991, respectively. The
increase for 1993 reflects the impact of purchased logs as
discussed above. Logging costs have increased primarily due to
the harvest of smaller diameter logs and, to a lesser extent,
compliance with environmental regulations relating to the
harvesting of timber and litigation costs incurred in connection
with certain timber harvesting plans filed by Pacific Lumber. See
"--Trends."During the past few years, the Company has
significantly increased its production of manufactured lumber
products by assembling knot-free pieces of common grade lumber
into wider and longer pieces in the Company's end and edge glue
plant. This manufactured lumber results in a significant
increase in lumber recovery and produces a standard size upper
grade product which is sold at a premium price compared to common
grade products of similar dimensions. The Company has instituted
a number of measures at its sawmills during the past several
years designed to enhance the efficiency of its operations such
as expansion of its manufactured lumber facilities and other
improvements in lumber recovery, automated lumber handling and
the modification of its production scheduling to increase
cogeneration power revenues.
Loss Before Income Taxes, Minority Interests, Extraordinary Item
and Cumulative Effect of Changes in Accounting Principles
The loss before income taxes, minority interests, extraordinary
item and cumulative effect of changes in accounting principles
decreased for 1993 as compared to 1992 due to an increase in
investment, interest and other income and a decrease in interest
expense, partially offset by the decrease in operating income.
The loss before income taxes, minority interests, extraordinary
item and cumulative effect of changes in accounting principles
decreased for 1992 as compared to 1991, primarily due to the
increase in operating income and a decrease in interest expense.
Investment, interest and other income for 1993 includes net gains
on marketable securities of $6.7 million. Investment, interest
and other income for 1992 includes estimated minimum insurance
recoveries of $1.6 million for earthquake damage incurred in
April 1992. Investment, interest and other income for 1991
includes a pre-tax gain of $4.0 million resulting from the sale
of Pacific Lumber's San Mateo County, California timberlands in
June 1991 for $7.5 million. Interest expense decreased in 1993
as compared to 1992 due to lower interest rates resulting from
the refinancing of the Company's long-term debt during 1993. See
"--Financial Condition and Investing and Financing
Activities."Interest expense decreased in 1992 as compared to
1991 primarily due to the repurchase of $15.5 million principal
amount of long-term debt in 1991 (see Note 4 to the Consolidated
Financial Statements).
REAL ESTATE OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
(IN MILLIONS OF DOLLARS) 1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Net sales $78.5 $70.1 $48.0
Operating loss (13.5) (9.3) (18.8)
Income (loss) before income taxes, minority
interests, extraordinary item and cumulative
effect of changes in accounting principles 38.1 (5.2) (21.8)
</TABLE>
Net Sales
Net sales for 1993 were $78.5 million, an increase of 12% from
$70.1 million in 1992. This increase was primarily due to
revenues associated with the real properties purchased from the
Resolution Trust Corporation ("RTC") in June 1991. Net sales for
1992 increased 46% from $48.0 million in 1991. This increase was
primarily due to revenues associated with the real properties
purchased from the RTC, together with an increase in sales at the
Company's Palmas del Mar development in Puerto Rico ("Palmas").
Operating Loss
The operating loss for 1993 was $13.5 million, an increase of
$4.2 million from 1992. This increase was primarily due to a
$5.9 million writedown of certain of the Company's nonstrategic
real estate holdings to their estimated net realizable value in
the first quarter of 1993, partially offset by improved
operations at the multi-family properties purchased from the RTC.
The operating loss for 1992 was $9.3 million, a decrease of $9.5
million from 1991. This decrease was primarily attributable to
the increase in net sales, along with lower allocations of
general and administrative expenses associated with the Company's
real estate development operations.
Income (Loss) Before Income Taxes, Minority Interests,
Extraordinary Item and Cumulative Effect of Changes in Accounting
Principles
Income before income taxes, minority interests, extraordinary
item and cumulative effect of changes in accounting principles
for 1993 was $38.1 million, an increase of $43.3 million from
1992. This increase was primarily due to an increase in
investment, interest and other income and a decrease in interest
expense, offset by the increased operating losses discussed
above. Investment, interest and other income for 1993 includes
the sale of sixteen multi-family real estate properties from the
RTC portfolio in December 1993 for $113.6 million, resulting in a
pre-tax gain of $47.8 million. Also included in investment,
interest and other income for 1993 are the sales of two other
real properties and three loans from the RTC portfolio resulting
in pre-tax gains of $5.1 million. Interest income decreased for
1993 as compared to 1992 due to the loan sales and the Company's
acquisition of properties that were collateral for certain loans.
The decrease in interest expense for 1993 as compared to 1992
resulted from lower interest rates and repayments on the debt
related to the RTC portfolio. The loss before income taxes,
minority interests, extraordinary item and cumulative effect of
changes in accounting principles for 1992 was $5.2 million, a
decrease of $16.6 million from 1991. This decrease was primarily
attributable to the improved operating results discussed above
and an increase in investment, interest and other income, offset
by increased interest expense. Investment, interest and other
income for 1992 includes the sale of six real properties and four
loans from the RTC portfolio resulting in pre-tax gains of $6.7
million. The increase in interest expense for 1992 as compared
to 1991 is attributable to the debt incurred in connection with
the purchase of the RTC portfolio in June 1991.
OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
(IN MILLIONS OF DOLLARS) 1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Operating loss $(19.5) $(15.6) $(17.4)
Loss before income taxes, minority interests,
extraordinary item and cumulative effect of
changes in accounting principles (30.1) (13.4) (33.0)
</TABLE>
Operating Loss
The operating losses represent corporate general and
administrative expenses that are not allocated to the Company's
industry segments. The operating loss for 1993 was $19.5
million, an increase of $3.9 million from 1992. This increase
was primarily due to a $6.5 million charge related to litigation
contingencies. The operating loss for 1992 was $15.6 million, a
decrease of $1.8 million from 1991. This decrease was primarily
due to lower overhead costs.
Loss Before Income Taxes, Minority Interests, Extraordinary Item
and Cumulative Effect of Changes in Accounting Principles
The loss before income taxes, minority interests, extraordinary
item and cumulative effect of changes in accounting principles
includes operating losses, investment, interest and other income
and interest expense, including amortization of deferred
financing costs, that are not allocated to the Company's industry
segments. The loss before income taxes, minority interests,
extraordinary item and cumulative effect of changes in accounting
principles for 1993 was $30.1 million, an increase of $16.7
million from 1992. This increase was primarily due to lower
investment, interest and other income and the increased operating
losses discussed above. The loss before income taxes, minority
interests, extraordinary item and cumulative effect of changes in
accounting principles for 1992 was $13.4 million, a decrease of
$19.6 million from 1991. This decrease was primarily due to
lower interest expense resulting from lower debt and interest
rates, $5.1 million in other income resulting from a non-recurring
adjustment to previously recorded accruals in the first
quarter of 1992 and the reduced operating losses as previously
described.
Minority Interests
Minority interests represent the minority stockholders' interest
in the Company's aluminum operations.
Extraordinary Item
The refinancing activities of KACC and Pacific Lumber in the
first quarter of 1993 and MGI in the third quarter of 1993, as
described in Note 4 to the Consolidated Financial Statements,
resulted in an extraordinary loss of $50.6 million, net of
benefits for minority interests of $2.8 million and income taxes
of $27.5 million. The extraordinary loss consists primarily of
the respective tender and redemption premiums paid and the write-off of
unamortized discount and deferred financing costs on the
KACC 14 1/4% Senior Subordinated Notes, Pacific Lumber's 12%
Series A Senior Notes, 12.2% Series B Senior Notes and 12 1/2%
Senior Subordinated Debentures (referred to collectively as the
"Old Pacific Lumber Securities") and the MGI 12 3/4% Notes.
Cumulative Effect of Changes in Accounting Principles
As of January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"), Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than
Pensions ("SFAS 106") and Statement of Financial Accounting
Standards No. 112, Employers' Accounting for Postemployment
Benefits ("SFAS 112") as more fully described in Notes 5 and 6 to
the Consolidated Financial Statements. The cumulative effect of
the change in accounting principle for the adoption of SFAS 109
increased results of operations by $26.6 million. The cumulative
effect of the change in accounting principle for the adoption of
SFAS 106 reduced results of operations by $437.9 million, net of
related benefits for minority interests of $63.6 million and
income taxes of $236.8 million. The cumulative effect of the
change in accounting principle for the adoption of SFAS 112
reduced results of operations by $6.4 million, net of related
benefits for minority interests of $1.0 million and income taxes
of $3.4 million. The new accounting methods have no effect on the
Company's cash outlays for postretirement and postemployment
benefits, nor will the cumulative effect of the changes in
accounting principles affect the Company's compliance with its
existing debt covenants. The Company reserves the right, subject
to applicable collective bargaining agreements and applicable
legal requirements, to amend or terminate these benefits.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
During 1993 and through February 17, 1994, subsidiaries of the
Company's Aluminum Operations and Forest Products Operations
completed a number of transactions designed to enhance their
liquidity and significantly extend their debt maturities.
Collectively, these transactions included public offerings for
approximately $1.4 billion of debt securities, approximately $210
million of additional equity capital and the replacement of
approximately $280 million of revolving credit facilities. The
following should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto.
The Company's consolidated indebtedness decreased $57.7 million
to $1,606.2 million at December 31, 1993 from $1,663.9 million at
December 31, 1992. The decrease is due to KACC's prepayment of
the remaining amounts outstanding on its Term Loan under the 1989
Credit Agreement (as defined below), the reduction of the
outstanding borrowings on the revolving credit facility of the
1989 Credit Agreement with the proceeds it received from Kaiser's
sale of Depositary Shares (as defined below) and principal
payments made in connection with sales of real estate, partially
offset by increased indebtedness incurred by Kaiser, Pacific
Lumber and MGI as a result of their recent refinancings.
PARENT COMPANY
The Company conducts its operations primarily through its
subsidiaries. Creditors of and holders of minority interests in
subsidiaries of the Company have priority with respect to the
assets and earnings of such subsidiaries over the claims of the
creditors of the Company, including the holders of the Company's
public debt. As of December 31, 1993, the indebtedness of the
subsidiaries and the minority interests reflected on the
Company's Consolidated Balance Sheet were $1,555.5 million and
$224.3 million, respectively. Certain of the Company's
subsidiaries, principally Kaiser and MGI, are restricted by their
various debt agreements as to the amount of funds that can be
paid in the form of dividends or loaned to the Company. KACC's
1994 Credit Agreement (as defined below) and the indentures
governing KACC's 9 7/8% Senior Notes due 2002 (the "KACC Senior
Notes") and 12 3/4% Senior Subordinated Notes due 2003 (the "KACC
Notes") contain covenants which, among other things, limit
Kaiser's ability to pay cash dividends and restrict transactions
between Kaiser and its affiliates. Under the most restrictive of
these covenants, Kaiser is not currently permitted to pay
dividends on its common stock. The indenture governing MGI's 11
1/4% Senior Secured Notes due 2003 (the "MGI Senior Notes") and
12 1/4% Senior Secured Discount Notes due 2003 (the "MGI Discount
Notes" and together with the MGI Senior Notes, the "MGI Notes")
contains various covenants which, among other things, limit the
payment of dividends and restrict transactions between MGI and
its affiliates. At December 31, 1993, under the most restrictive
of these covenants, no dividends may be paid by MGI. Under the
most restrictive covenants governing debt of the Company's real
estate subsidiaries, approximately $24.0 million could be paid as
of December 31, 1993.
On October 13, 1993, Kaiser filed a registration statement with
the Securities and Exchange Commission for the sale to the public
of the 2,132,950 Depositary Shares the Company exchanged for a
$15.0 million promissory note issued by KACC which evidenced a
$15.0 million cash loan made by MGI to KACC in January 1993 (the
"MGI Loan"), as described below. The registration statement was
declared effective by the Securities and Exchange Commission on
November 15, 1993. The Company may consummate the
sale of all or any portion of such Depositary Shares at any time.
On March 1, 1994, the New York Stock Exchange
reported the closing price of Depositary Shares as $8.50 per
share. The Company intends to use the net proceeds from the sale
of the Depositary Shares for general corporate purposes.
Contemporaneously with the issuance of the MGI Notes (see "--Forest
Products Operations"), MGI (i) transferred to the Company
50 million common shares of Kaiser held by a subsidiary of MGI,
representing MGI's (and the Company's) entire interest in
Kaiser's common stock, (ii) transferred to the Company 60,075
shares of the Company common stock held by a subsidiary of MGI,
(iii) transferred to the Company certain notes receivable, long-term
investments, and other assets, each net of related
liabilities, collectively having a carrying value to MGI of
approximately $1.1 million and (iv) exchanged with the Company
2,132,950 Depositary Shares (acquired by MGI from Kaiser in
exchange for the MGI Loan), such exchange being in satisfaction
of a $15.0 million promissory note evidencing a cash loan made by
the Company to MGI in January 1993. On the same day, the Company
assumed approximately $17.5 million of certain liabilities of MGI
that were unrelated to MGI's forest products operations or were
related to operations which have been disposed of by MGI. On
August 4, 1993, the Company pledged 28 million shares of the
Kaiser common stock as collateral for the MGI Notes.
Additionally, on September 28, 1993, MGI transferred its interest
in Palmas to the Company.
MGI used a portion of the net proceeds from the sale of the MGI
Notes to retire the entire outstanding balance of its 12 3/4%
Notes at 101% of their principal amount, plus accrued interest
through November 14, 1993. MGI used the remaining portion of the
net proceeds from the sale of the MGI Notes, together with a
portion of its existing cash resources, to pay a $20.0 million
dividend to the Company. The Company used such proceeds to
redeem, on August 20, 1993, $20.0 million aggregate principal
amount of its 14% Senior Subordinated Reset Notes due 2000 (the
"Reset Notes") at 100% of their principal amount plus accrued
interest thereon. The Company incurred a pre-tax extraordinary
loss associated with the early retirement of the 12 3/4% Notes
and the redemption of $20.0 million aggregate principal amount of
the Reset Notes of approximately $9.8 million.
On July 8, 1993, MAXXAM became the general partner in a Class 1
thoroughbred and quarter horse racing track currently under
construction on approximately 240 acres of land northwest of
Houston. Financing for the track was completed through a private
placement of $75.0 million aggregate principal amount of 11 3/4%
Senior Secured Notes due 1999, along with a $9.1 million
investment, representing an equity interest of approximately
29.7%, from MAXXAM. The track is the first of its type in Texas
and is expected to be operating by spring of 1994. Certain
affiliated parties of the Company, including Mr. Charles E.
Hurwitz, President and Chief Executive Officer of the Company,
collectively hold less than an 11% equity interest in the
facility.
In November 1991, MGI issued $150.0 million aggregate principal
amount of the 12 3/4% Notes, due November 15, 1995, at 99% of
their face amount. MGI used a portion of the proceeds from the
sale of the 12 3/4% Notes to pay a $30.9 million cash dividend to
the Company, which together with a portion of the Company's
existing cash resources enabled the Company to redeem its 14 1/4%
Senior Subordinated Notes. The remaining proceeds from the sale
of the 12 3/4% Notes together with a portion of MGI's existing
cash resources (a portion of which was obtained from Kaiser
through Kaiser's initial public offering of its common stock as
described below) were used to redeem MGI's 13 5/8% Senior
Subordinated Notes.
As of December 31, 1993, the Company (excluding its aluminum,
forest products and real estate subsidiary companies) had cash
and marketable securities of approximately $53.6 million.
Interest and sinking fund obligations with respect to parent
company indebtedness will aggregate approximately $10 million per
year in 1994 and 1995. Although there are no restrictions on the
Company's ability to pay dividends on its capital stock, the
Company has not paid any dividends for a number of years and has
no present intention to pay dividends in the foreseeable
future.The Company believes that its existing cash and marketable
securities (excluding its aluminum, forest products and real
estate subsidiaries) together with the funds available to it will
be sufficient to fund its working capital requirements.
ALUMINUM OPERATIONS
On a pro forma basis, after giving effect to the refinancing
transactions completed on February 17, 1994 as described below,
Kaiser and its subsidiaries would have had consolidated working
capital of $389.4 million and long-term debt of $755.7 million
(net of current maturities). The offering of the 8.255% Preferred
Redeemable Increased Dividend Equity Securities (the "PRIDES"), the
concurrent issuance of the KACC Senior Notes and the replacement
of the 1989 Credit Agreement on February 17, 1994 completed the
final steps of a comprehensive refinancing plan which Kaiser
began in January 1993 which extended the maturities of Kaiser's
outstanding indebtedness, enhanced its liquidity and raised new
equity capital. Kaiser anticipates that cash flows from
operations and borrowings under available sources of financing
will be sufficient to satisfy its debt service and capital
expenditures requirements through at least December 31, 1995.
On February 17, 1994, Kaiser and KACC entered into a credit
agreement with BankAmerica Business Credit, Inc. (as agent for
itself and other lenders), Bank of America National Trust and
Savings Association and certain other lenders (the "1994 Credit
Agreement"). The 1994 Credit Agreement replaced the credit
agreement entered into in December 1989 by Kaiser and KACC with a
syndicate of commercial banks and other financial institutions
(as amended, the "1989 Credit Agreement") and consists of a
$250.0 million five-year secured, revolving line of credit,
scheduled to mature in 1999. KACC is able to borrow under the
facility by means of revolving credit advances and letters of
credit (up to $125.0 million) in an aggregate amount equal to the
lesser of $250.0 million or a borrowing base relating to eligible
accounts receivable and inventory. As of February 24, 1994, KACC
had $67.4 million of letters of credit outstanding under the 1994
Credit Agreement. The 1994 Credit Agreement is unconditionally
guaranteed by Kaiser and by all significant subsidiaries of KACC
which were guarantors of KACC's obligations under the 1989 Credit
Agreement. Loans under the 1994 Credit Agreement bear interest
at a rate per annum, at KACC's election, equal to (i) a Reference
Rate plus 1 1/2% or (ii) LIBOR plus 3 1/4%. After June 30, 1995,
the interest rate margins applicable to borrowings under the 1994
Credit Agreement may be reduced by up to 1 1/2% (non-cumulatively) based
upon a financial test, determined quarterly.
KACC will record a pre-tax extraordinary loss of approximately
$8.3 million in the first quarter of 1994, consisting primarily
of the write-off of unamortized deferred financing costs related
to the 1989 Credit Agreement.
The 1994 Credit Agreement requires KACC to maintain certain
financial covenants and places restrictions on Kaiser's and
KACC's ability to, among other things, incur debt and liens, make
investments, pay common stock dividends, undertake transactions
with affiliates, make capital expenditures and enter into
unrelated lines of business. The 1994 Credit Agreement is
secured by, among other things, (i) mortgages on KACC's major
domestic plants (excluding the Gramercy plant); (ii) subject to
certain exceptions, liens on the accounts receivable, inventory,
equipment, domestic patents and trademarks and substantially all
other personal property of KACC and certain of its subsidiaries;
(iii) a pledge of all the stock of KACC owned by Kaiser and (iv)
pledges of all of the stock of a number of KACC's wholly owned
domestic subsidiaries, pledges of a portion of the stock of
certain foreign subsidiaries and pledges of a portion of the
stock of certain partially owned foreign affiliates.
Concurrent with the offering of the PRIDES on February 17, 1994,
KACC issued $225.0 million of the KACC Senior Notes. The net
proceeds from the offering of the KACC Senior Notes were used to
reduce outstanding borrowings under the Revolving Credit Facility
of the 1989 Credit Agreement immediately prior to the
effectiveness of the 1994 Credit Agreement and for working
capital and general corporate purposes.
On February 17, 1994, Kaiser consummated a public offering for
the sale of 8,000,000 shares of its PRIDES. The net proceeds
from the sale of the PRIDES were approximately $90.6 million.
Kaiser used $30.0 million of such net proceeds to make a non-interest
bearing loan to KACC (evidenced by a note) which is
designed to provide sufficient funds to make the required
dividend payments on the PRIDES until December 31, 1997 (the
"PRIDES Mandatory Conversion Date") and $60.6 million of such net
proceeds to make a capital contribution to KACC. In connection
with the PRIDES offering, Kaiser granted the underwriters an over
allotment option for up to 1,200,000 of such shares. Each share
of PRIDES is convertible into one share of Kaiser's common stock
(or a fraction thereof as described in Note 7 to the Consolidated
Financial Statements); however, Kaiser may call for the
redemption of all or any portion of the outstanding PRIDES during
the period from December 31, 1996 to the PRIDES Mandatory
Conversion Date. In addition, the holders of the PRIDES have the
option to convert their shares at any time prior to the PRIDES
Mandatory Conversion Date. The PRIDES call for the payment of
quarterly dividends of approximately $1.9 million ($.2425 per
share).
On June 30, 1993, Kaiser issued 17,250,000 of $.65 Depositary
Shares (the "Depositary Shares"), each representing one-tenth of
a share of Series A Mandatory Conversion Premium Dividend
Preferred Stock (the "Series A Shares"). In connection with the
issuance of the Depositary Shares, Kaiser issued an additional
2,132,950 of its Depositary Shares to MGI in exchange for the MGI
Loan. Kaiser used approximately $81.5 million of the net
proceeds it received from the sale of the Depositary Shares
together with the MGI Loan to make a capital contribution to
KACC, and $37.8 million of the net proceeds it received from the
sale of the Depositary Shares to make a non-interest bearing loan
to KACC which is designed to provide sufficient funds to make the
required dividend payments on the Series A Shares until June 30,
1996 (the "Series A Shares Mandatory Conversion Date"). KACC
used approximately $13.7 million of such funds to prepay the
remaining balance of the Term Loan under the 1989 Credit
Agreement and $105.6 million of such funds to reduce outstanding
borrowings under the Revolving Credit Facility of the 1989 Credit
Agreement. Each Depositary Share is convertible into one share
of Kaiser's common stock (or a fraction thereof as described in
Note 7 to the Consolidated Financial Statements); however, Kaiser
may call for the redemption of all or any portion of the
outstanding Depositary Shares prior to the Series A Shares
Mandatory Conversion Date. The Depositary Shares call for the
payment of quarterly dividends (when and as declared by Kaiser's
Board of Directors) of approximately $3.2 million ($.1625 per
share).
As a result of the issuance of the PRIDES and the Depositary
Shares, the Company's voting interest in Kaiser decreased from
approximately 87.2% to approximately 61% on a fully diluted
basis.
On February 1, 1993, KACC issued $400.0 million of the KACC
Notes. The net proceeds from the sale of the KACC Notes were
used to retire the KACC 14 1/4% Senior Subordinated Notes, to
prepay $18.0 million of the Term Loan under KACC's 1989 Credit
Agreement and to reduce outstanding borrowings under the
Revolving Credit Facility of the 1989 Credit Agreement. The
obligations of KACC with respect to the KACC Notes and the KACC
Senior Notes are guaranteed, jointly and severally, by certain
subsidiaries of KACC.
The indentures governing the KACC Senior Notes and the KACC Notes
contain, among other things, restrictions on KACC's ability to
incur debt, undertake transactions with affiliates and pay
dividends. The declaration and payment of dividends by Kaiser
and KACC with respect to shares of their common stock is subject
to certain covenants contained in the 1994 Credit Agreement;
currently, such covenants do not permit Kaiser or KACC to pay any
dividends on their common stock. The declaration and payment of
dividends by Kaiser with respect to the Depositary Shares and the
PRIDES are expressly permitted by the terms of the 1994 Credit
Agreement to the extent Kaiser receives payments on the
respective intercompany notes established in connection with the
issuance of the Depositary Shares and the PRIDES or certain other
permitted distributions from KACC.
In July 1991, Kaiser consummated an initial public offering of
7.25 million shares of its common stock at a price of $14.00 per
share. The 7.25 million shares represented approximately a 12.7%
interest in Kaiser. Kaiser received approximately $93.2 million,
net of related offering costs, from the sale. Seventy-five
percent of the net proceeds were used to prepay certain notes
together with accrued interest thereon to MGI, and the remaining
25% was used to prepay a portion of the indebtedness under
Kaiser's 1989 Credit Agreement.
In December 1991, Alpart entered into a $60.0 million loan
agreement with the Caribbean Basin Projects Financing Authority
("CARIFA") under which CARIFA loaned Alpart the proceeds from the
issuance of CARIFA's Industrial Revenue bonds. Proceeds from the
sale of the bonds were used by Alpart to refinance interim loans
from the partners in Alpart, to pay eligible project costs for
the expansion and modernization of its alumina refinery and
related port and bauxite mining facilities and to pay certain
costs of issuance. Alpart's obligations under the loan agreement
are secured by a $64.2 million letter of credit severally
guaranteed by the partners in Alpart (of which $22.5 million is
guaranteed by Kaiser's minority partner).
During each of the past three years, Kaiser entered into a number
of commodity futures and commodity option contracts as a
component of its plan to mitigate its exposure to declining
aluminum prices. The terms of these contracts allowed Kaiser to
withdraw certain amounts of its equity in those contracts at
various times, provided the current aggregate market value of
such contracts exceeded their cost. The equity withdrawn from
these option contracts decreased during 1992 by $66.3 million
over 1991.
Kaiser has historically participated in various raw material
joint ventures outside the United States. At December 31, 1993,
Kaiser was unconditionally obligated for $73.6 million of
indebtedness of one such joint venture affiliate.
Kaiser's capital expenditures of approximately $300.2 million (of
which $42.6 million was funded by Kaiser's minority partners in
certain foreign joint ventures) during the three years ended
December 31, 1993 were made primarily to improve production
efficiency, reduce operating costs, expand capacity at existing
facilities and construct new facilities. Kaiser's capital
expenditures were $67.7 million in 1993, compared to $114.4
million in 1992 and $118.1 million in 1991 (of which $9.4
million, $17.1 million and $16.1 million were funded by the
minority partners in certain foreign joint ventures in 1993, 1992
and 1991, respectively). Kaiser's capital expenditures are
expected to be in the range of $50 million to $75 million per
year in the 1994 -- 1996 period (of which approximately 5% is
expected to be funded by Kaiser's minority partners in certain
foreign joint ventures).
As described in Note 10 to the Consolidated Financial Statements,
Kaiser and KACC are subject to a wide variety of environmental
laws and regulations, to fines or penalties assessed for alleged
breaches of the environmental laws and to claims and litigation
based upon such laws. KACC is currently subject to a number of
lawsuits under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the
Superfund Amendments Reauthorization Act of 1986 ("CERCLA") and,
along with certain other entities, has been named as a
potentially responsible party for remedial costs at certain
third-party sites listed on the National Priorities List under
CERCLA. Additionally, KACC is a defendant in a number of
lawsuits in which the plaintiffs allege that certain of their
injuries were caused by exposure to asbestos during, and as a
result of, their employment with KACC or to products containing
asbestos produced or sold by KACC. While uncertainties are
inherent in the ultimate outcome of these matters and it is
impossible to presently determine the actual costs that
ultimately may be incurred and the insurance recoveries that will
be received, management believes the resolution of such
uncertainties and the incurrence of such net costs should not
have a material adverse effect upon KACC's consolidated financial
position, results of operations or liquidity.
FOREST PRODUCTS OPERATIONS
As of December 31, 1993, MGI and its subsidiaries had
consolidated working capital of $81.9 million and long-term debt
of $738.7 million (net of current maturities and restricted cash
deposited in the Liquidity Account). MGI anticipates that cash
flows from operations, together with existing cash, marketable
securities and available sources of financing, will be sufficient
to fund the working capital requirements of MGI and its
respective subsidiaries; however, due to its highly leveraged
condition, MGI is more sensitive than less leveraged companies to
factors affecting its operations, including governmental
regulation affecting its timber harvesting practices, increased
competition from other lumber producers or alternative building
products and general economic conditions.
On August 4, 1993, MGI issued $100.0 million aggregate principal
amount of MGI Senior Notes and $126.7 million aggregate principal
amount (approximately $70.0 million net of original issue
discount) of MGI Discount Notes. The MGI Notes are secured by
MGI's pledge of 100% of the common stock of Pacific Lumber, Britt
and MAXXAM Properties Inc. ("MPI," a wholly owned subsidiary of
MGI), and by the Company's pledge of 28 million shares of
Kaiser's common stock. The indenture governing the MGI Notes,
among other things, restricts the ability of MGI to incur
additional indebtedness, engage in transactions with affiliates,
pay dividends and make investments. The MGI Notes are senior
indebtedness of MGI; however, they are effectively subordinate to
the liabilities of MGI's subsidiaries, which liabilities would
include the 10 1/2% Senior Notes due 2003 (the "Pacific Lumber
Senior Notes") of Pacific Lumber and the 7.95% Timber
Collateralized Notes due 2015 (the "Timber Notes") of Scotia
Pacific Holding Company ("SPHC"), a wholly owned subsidiary of
Pacific Lumber.
MGI conducts its operations primarily through its subsidiaries.
Creditors of MGI's subsidiaries have priority with respect to the
assets and earnings of such subsidiaries over the claims of the
creditors of MGI, including the holders of the MGI Notes. As of
December 31, 1993, the indebtedness of the subsidiaries reflected
on MGI's Consolidated Balance Sheet was $614.9 million. The
indentures governing the Pacific Lumber Senior Notes and the
Timber Notes and Pacific Lumber's Revolving Credit Agreement
contain various covenants which, among other things, restrict
transactions between Pacific Lumber and its affiliates and the
payment of dividends. Pacific Lumber can pay dividends in an
amount that is generally equal to 50% of Pacific Lumber's
consolidated net income plus depletion and cash dividends
received from SPHC (for periods subsequent to March 1, 1993),
exclusive of the net income and depletion of SPHC so long as any
Timber Notes are outstanding. On February 24, 1994, Pacific
Lumber paid dividends of $5.7 million which represents the entire
amount permitted at December 31, 1993.
Substantially all of MGI's consolidated assets are owned by
Pacific Lumber and a significant portion of Pacific Lumber's
consolidated assets are owned by SPHC. MGI expects that Pacific
Lumber will provide a major portion of its future operating cash
flow. Pacific Lumber is dependent upon SPHC for a significant
portion of its operating cash flow. The holders of the Timber
Notes have priority over the claims of creditors of Pacific
Lumber with respect to the assets and cash flow of SPHC and the
holders of the Pacific Lumber Senior Notes have priority over the
claims of creditors of MGI with respect to the assets and cash
flows of Pacific Lumber. Under the terms of the indenture
governing the Timber Notes (the "Timber Note Indenture"), SPHC
will not have available cash for distribution to Pacific Lumber
unless SPHC's cash flow from operations exceeds the amounts
required by the Timber Note Indenture to be reserved for the
payment of current debt service (including interest, principal
and premiums) on the Timber Notes, capital expenditures and
certain other operating expenses. See Note 4 to the Consolidated
Financial Statements for a description of the principal payment
requirements of the Timber Notes.
MGI expects that, consistent with SPHC's purposes and its need to
fund operating and capital expenses, substantially all of SPHC's
available cash will be periodically distributed to Pacific
Lumber. Once appropriate provision for current debt service on
the Timber Notes and expenditures for operating and capital costs
are made and in the absence of certain Trapping Events (as
defined in the Timber Note Indenture) or outstanding judgements,
the Timber Note Indenture does not limit monthly distributions of
available cash from SPHC to Pacific Lumber. In the event SPHC's
cash flows are not sufficient to generate distributable funds to
Pacific Lumber, Pacific Lumber's ability to pay interest on the
Pacific Lumber Senior Notes and to service its other indebtedness
would be materially impaired and MGI's ability to pay interest on
the MGI Notes and its other indebtedness would also be materially
impaired. SPHC paid $58.3 million of dividends to Pacific Lumber
during the period from March 23, 1993 to December 31, 1993.
The MGI Senior Notes require annual interest payments of $11.3
million. The MGI Discount Notes will require annual interest
payments of $15.5 million beginning on February 1, 1999. As of
December 31, 1993, MGI (excluding Pacific Lumber and its
subsidiary companies) had cash and marketable securities of
approximately $11.4 million. MGI believes, although there can be
no assurance, that the aggregate dividends that will be available
to it from Pacific Lumber and Britt, during the five year period
in which cash interest will not be payable on the MGI Discount
Notes, will exceed MGI's cash interest payments on the MGI Senior
Notes. When cash interest payments on the MGI Discount Notes
commence on February 1, 1999, MGI believes that it will be able
to make such cash interest payments out of its then existing cash
resources and from cash expected to be available to it from
Pacific Lumber and Britt.
On June 23, 1993, Pacific Lumber entered into a new Revolving
Credit Agreement with a bank which provides for borrowings of up
to $30.0 million, of which $15.0 million may be used for standby
letters of credit. As of December 31, 1993, $19.7 million of
borrowings was available under the Revolving Credit Agreement, of
which $4.7 million was available for letters of credit. No
borrowings were outstanding as of December 31, 1993, and letters
of credit outstanding amounted to $10.3 million. The Revolving
Credit Agreement expires May 31, 1996, is secured by Pacific
Lumber's trade receivables and inventories and contains covenants
substantially similar to those contained in the indenture
governing the Pacific Lumber Senior Notes.
On March 23, 1993, Pacific Lumber transferred to SPHC
substantially all of Pacific Lumber's non-virgin old growth
redwood and Douglas-fir timber and timberlands, together with
certain other assets, in exchange for (i) the assumption by SPHC
of $323.4 million aggregate principal amount of Pacific Lumber's
outstanding public indebtedness and (ii) all of SPHC's
outstanding common stock. On the same date, Pacific Lumber
issued $235.0 million of the Pacific Lumber Senior Notes and SPHC
issued $385.0 million of the Timber Notes. The net proceeds from
the sale of the Pacific Lumber Senior Notes and the Timber Notes,
together with Pacific Lumber's existing cash and marketable
securities, were used to (i) retire the Old Pacific Lumber
Securities; (ii) pay accrued interest on the Old Pacific Lumber
Securities through the date of redemption thereof; (iii) pay the
applicable redemption premiums on the Old Pacific Lumber
Securities (at approximately 1.7% of the principal amount
thereof); (iv) repay Pacific Lumber's $28.9 million cogeneration
facility loan; (v) fund the initial deposit of $35.0 million to
an account held by the trustee for the Timber Notes (the
"Liquidity Account"); and (vi) pay a $25.0 million dividend to a
subsidiary of MGI.
The Timber Notes are secured by substantially all of the assets
of SPHC. The Timber Notes are generally designed to link deemed
depletion of SPHC's timber to the required amortization of the
Timber Notes. The indenture governing the Timber Notes prohibits
SPHC from incurring any additional indebtedness for borrowed
money and limits the business activities of SPHC to the ownership
and operation of its timber and timberlands.
During the years ended December 31, 1993, 1992 and 1991, Pacific
Lumber's operating income plus depletion and depreciation
("operating cash flow") amounted to $76.6 million, $90.1 million
and $83.2 million, respectively, which exceeded interest accrued
on all of its indebtedness in those years by $17.4 million, $24.5
million and $14.5 million, respectively. The Company believes
that Pacific Lumber's and SPHC's level of operating cash flow and
other available sources of financing will enable them to meet the
debt service requirements on the Pacific Lumber Senior Notes and
the Timber Notes, respectively.
Pacific Lumber's and Britt's capital expenditures of
approximately $26.2 million for the three years ended December
31, 1993 were made to increase capacity, improve operating
efficiency and reduce operating costs. Pacific Lumber's and
Britt's capital expenditures were $11.1 million, $8.7 million and
$6.4 million for the years ended December 31, 1993, 1992 and
1991, respectively. Capital expenditures for 1994 are expected
to be $10 million and for the 1995 -- 1996 period are estimated
to be between $5 million and $10 million per year. Capital
expenditures attributable to the reconstruction of Pacific
Lumber's commercial facilities destroyed by the April 1992
earthquake were approximately $1.6 million for 1993 and are
expected to be approximately $2 million to $3 million for 1994
when construction is completed. The Company anticipates that the
funds necessary to finance Pacific Lumber's and Britt's capital
expenditures will be obtained through cash flows generated by
operations and other available sources of financing.
In February 1994, Pacific Lumber received a franchise tax refund
of approximately $7.2 million, including interest, from the State
of California relating to tax years 1972 through 1985. This
amount will be recognized in investment, interest and other
income during the first quarter of 1994.
During 1991, Pacific Lumber repurchased $15.5 million principal
amount of the Old Pacific Lumber Securities for $15.0 million.
REAL ESTATE OPERATIONS
As of December 31, 1993, the Company's real estate subsidiaries
had approximately $25.8 million available for use under various
credit agreements. Substantially all of the availability was
attributable to the credit availability pursuant to the loan
agreement secured by real properties, and certain loans secured
by income producing real property, purchased from the RTC. The
Company believes that the existing cash and credit facilities of
its real estate subsidiaries are sufficient to fund their
respective working capital requirements.
In June 1991, MXM Mortgage Corp. ("MXM"), a wholly owned
subsidiary of the Company, purchased, for approximately $122.3
million, 28 loans secured by real properties and 27 parcels of
income producing real property (the "Portfolio") from the RTC.
Substantially all of the real properties were located in Texas,
with the largest concentrations in the vicinity of San Antonio,
Houston and Dallas. MXM borrowed approximately $108.3 million to
finance a portion of the purchase of the Portfolio. In December
1993, substantially all of the remaining assets in the Portfolio
and the related debt were transferred to the Company's wholly
owned partnership, MXM Mortgage L.P. ("MXM L.P."). The notes
mature on December 31, 1997 and bear interest at the prime rate
plus 3% per annum, payable monthly. The loan agreement, as
amended, provides for additional borrowings of up to $22.0
million on or before March 31, 1994. Upon the sale of any
secured property or loan, the terms of the loan agreement require
MXM L.P. to make principal payments based on the release price
(as defined) of such property or loan. In addition, the loan
agreement requires MXM L.P. to repay the entire outstanding
balance of the notes if such balance declines to less than $10.0
million or if less than 40% of such balance is allocated to
multi-family assets. Principal payments of $60.2 million were
made on the notes in December 1993 in connection with the sale of
sixteen multi-family properties. The Company received net cash
proceeds of $47.0 million after such principal payments and
related closing costs.
TRENDS
Aluminum Operations -- General
Exports from the Commonwealth of Independent States ("C.I.S."),
additions to smelter capacities during the past several years,
continued high operating rates and other factors have contributed
to a significant increase in primary aluminum inventories in the
Western world. If Western world production and exports from the
C.I.S. continue at current levels, primary aluminum inventory
levels will increase further in 1994. The foregoing factors,
among others, have contributed to a significant reduction in the
market price of primary aluminum and may continue to adversely
affect the market price of primary aluminum in the future.
Government officials from the European Union, the United States
of America, Canada, Norway, Australia and the Russian Federation
met in a multilateral conference in January 1994 to discuss the
current excess global supply of primary aluminum. All six
participating governments have ratified as a trade agreement the
resulting Memorandum which provides, in part, for (i) a reduction
in Russian Federation primary aluminum production by 300,000 tons
per year within three months of ratification of the Memorandum
and an additional 200,000 tons within the following three months,
(ii) improved availability of comprehensive data on Russian
aluminum production and (iii) certain assistance to the Russian
aluminum industry. A Russian Federation Trade Ministry official
has publicly stated that the output reduction would remain in
effect for 18 months to two years, provided that other worldwide
production cutbacks occur, existing trade restrictions on
aluminum are eliminated and no new trade restrictions on aluminum
are imposed. The Memorandum does not require specific levels of
production cutbacks by other producing nations. There can be no
assurance that the implementation of the Memorandum will
adequately address the current oversupply of primary aluminum.
If Kaiser's average realized sales prices in 1994 for substantial
quantities of its primary aluminum and alumina were based on the
current market price of primary aluminum, Kaiser would continue
to sustain net losses in 1994, which would be expected to
approximate the loss in 1993 before extraordinary losses and
cumulative effect of changes in accounting principles,
restructuring charges, reductions in the carrying value of
inventories and additions to litigation and environmental
reserves described in Notes 1 and 10 to the Consolidated
Financial Statements.
Effective October 1, 1993, an increase in the base rate the BPA
charges to its direct service industry customers for electricity
was adopted, which will increase Kaiser's production costs at the
Mead and Tacoma smelters by approximately $15.0 million per year
(approximately $11.3 million per year, based on the current
operating rate of approximately 75% of full capacity). The rate
increase is generally expected to remain in effect for two years.
Aluminum Operations -- Sensitivity to Prices and Hedging Programs
Kaiser's earnings are sensitive to changes in the prices of
alumina, primary aluminum and fabricated aluminum products, and
also depend to a significant degree upon the volume and mix of
all products sold. Consequently, Kaiser has developed strategies
to mitigate its exposure to possible further declines in the
market prices of alumina and primary aluminum while retaining the
ability to participate in favorable pricing environments that may
materialize.
Alumina. Kaiser has sold forward substantially all of the
alumina available to it in excess of its projected internal
smelting requirements for 1994, and a substantial portion of such
excess alumina for 1995. Approximately 95% of 1994 sales and
virtually all of 1995 sales were made at prices indexed to future
prices of primary aluminum. Approximately 75% of 1994 sales were
made at prices indexed to future prices of primary aluminum, but
with minimum prices that exceed Kaiser's estimated cash
production costs. The remainder of 1994 sales were made either
at fixed prices that exceed Kaiser's estimated cash production
costs or are subject to prices indexed to future prices of
primary aluminum but without minimum prices. Approximately 85%
of 1995 sales were made at prices indexed to future prices of
primary aluminum, but with minimum prices that exceed Kaiser's
estimated cash production costs.
Aluminum Processing. As of the date of this report, Kaiser has
sold forward at fixed prices approximately 75% of its primary
aluminum in excess of its projected internal fabrication
requirements in 1994 and approximately 55% of such surplus in
1995 at fixed prices that exceed the current market price of
primary aluminum. Hedging programs already in place would allow
Kaiser to participate in higher market prices, should they
materialize, for approximately 40% of Kaiser's excess primary
aluminum sold forward in 1994, and 100% of Kaiser's excess
primary aluminum sold forward in 1995.
In response to the low price of primary aluminum caused by the
current surplus, a number of companies have closed smelting
facilities. In addition, in response to certain power reductions
undertaken by the BPA in the Pacific Northwest, a number of
companies (including Kaiser) have curtailed or shut down
production capacities at their smelter facilities in the Pacific
Northwest. Furthermore, after continued assessment of its
production levels in light of market prices, industry inventory
levels, production costs and user demand, on February 25, 1994,
Kaiser announced that in April 1994 it will curtail approximately
9.3% of its primary aluminum current annual production capacity.
Fabricated aluminum prices, which vary considerably among
products, are heavily influenced by changes in the price of
primary aluminum and generally lag behind primary aluminum prices
for periods of up to six months. A significant portion of
Kaiser's fabricated product shipments consist of body, lid and
tab stock for the beverage container market. Kaiser may not be
able to receive increases in primary aluminum prices from its can
stock customers as promptly as in the recent past because of
competition from other aluminum producers and because of excess
supply in the industry. Kaiser also ships fabricated products to
customers in the aerospace market. Aluminum demand in the
aerospace market is decreasing as a result of the structural
contraction of the defense industry caused by the end of the Cold
War. In addition, the commercial aerospace market is
experiencing a cyclical downturn in business due to the recent
economic recessions in the United States, Canada, Australia and
the United Kingdom, and slow economic growth in other countries.
Forest Products Operations
The Company's forest products operations are primarily conducted
by Pacific Lumber and are subject to a variety of California and,
in some cases, federal laws and regulations dealing with timber
harvesting, endangered species, water quality and air and water
pollution. Pacific Lumber does not expect that compliance with
such existing laws and regulations will have a material adverse
effect on its future operating results. Laws and regulations
dealing with Pacific Lumber's operations are subject to change
and new laws and regulations are frequently introduced concerning
the California timber industry. A variety of bills are currently
pending in the California legislature and the U.S. Congress which
relate to the business of Pacific Lumber, including the
protection and acquisition of old growth and other timberlands,
endangered species, environmental protection and the restriction,
regulation and administration of timber harvesting practices.
For example, the U.S. Congressman for the congressional district
in which Pacific Lumber is located has introduced a bill which
would, among other things, incorporate within the boundaries of
an existing national forest approximately 42,000 acres of Pacific
Lumber's timberlands and would designate approximately 12,000
acres of Pacific Lumber's timberlands to be studied for possible
inclusion within such national forest. These 54,000 acres
constitute approximately 30% of Pacific Lumber's timberlands.
Since this and the other bills are subject to amendment, it is
premature to assess the ultimate content of these bills, the
likelihood of any of the bills passing or the impact of any of
these bills on the financial position or results of operations of
Pacific Lumber. Furthermore, any bills which are passed are
subject to executive veto and court challenge. In addition to
existing and possible new or modified statutory enactments,
regulatory requirements and administrative and legal actions, the
California timber industry remains subject to potential
California or local ballot initiatives and evolving federal and
California case law which could affect timber harvesting
practices. It is, however, impossible to assess the effect of
such matters on the future operating results or financial
position of Pacific Lumber.
Various groups and individuals have filed objections with the
California Department of Forestry ("CDF") regarding the CDF's
actions and rulings with respect to certain of Pacific Lumber's
timber harvesting plans, and Pacific Lumber expects that such
groups and individuals will continue to file objections to
Pacific Lumber's timber harvesting plans. In addition, lawsuits
are pending which seek to prevent Pacific Lumber from
implementing certain of its approved timber harvesting plans.
These challenges have severely restricted Pacific Lumber's
ability to harvest virgin old growth redwood timber on its
property during the past few years, as well as substantial
amounts of virgin Douglas-fir timber which are located in virgin
old growth redwood stands. No assurance can be given as to the
extent of such litigation in the future. Pacific Lumber believes
that environmentally focused challenges to its timber harvesting
plans are likely to occur in the future. Although such
challenges have delayed or prevented Pacific Lumber from
conducting a portion of its operations, to date such challenges
have not had a material adverse effect on Pacific Lumber's
financial position or results of operations. It is, however,
impossible to predict the future nature or degree of such
challenges or their ultimate impact on the operating results or
financial position of Pacific Lumber.
MAXXAM Inc. and Subsidiaries
Report of Independent Public Accountants
To the Stockholders and Board of Directors of MAXXAM Inc.:
We have audited the accompanying consolidated balance sheets of
MAXXAM Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1993 and 1992, and the related consolidated
statements of operations, cash flows and stockholders' equity for
each of the three years in the period ended December 31, 1993.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of MAXXAM Inc. and subsidiaries as of December 31, 1993
and 1992, and the results of their operations and their cash
flows for each of the three years in the period ended December
31, 1993, in conformity with generally accepted accounting
principles.
As explained in Notes 5 and 6 to the consolidated financial
statements, effective January 1, 1993, the Company changed its
method of accounting for income taxes, postretirement benefits
other than pensions and postemployment benefits.
Houston, Texas
February 24, 1994
MAXXAM Inc. and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31,
-------------------------
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1993 1992
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $83.9 $81.9
Marketable securities 44.7 70.6
Receivables:
Trade, net of allowance for doubtful
accounts of $3.2 and $3.5 at December
31, 1993 and 1992, respectively 175.3 196.0
Other 90.8 114.4
Inventories 503.6 503.0
Prepaid expenses and other current assets 93.3 67.3
------ ------
Total current assets 991.6 1,033.2
Property, plant and equipment, net 1,245.0 1,187.1
Timber and timberlands, net of depletion of $108.2 and $100.9 at
December 31, 1993 and 1992, respectively 338.6 383.9
Investments in and advances to unconsolidated affiliates 183.2 150.1
Real estate 113.3 182.0
Deferred income taxes 359.9 -
Long-term receivables and other assets 340.4 262.5
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $135.6 $148.5
Accrued interest 53.7 39.4
Accrued compensation and related benefits 114.2 95.4
Other accrued liabilities 161.5 147.7
Payable to affiliates 74.0 65.0
Long-term debt, current maturities 38.3 71.2
------- ------
Total current liabilities 577.3 567.2
Long-term debt, less current maturities 1,567.9 1,592.7
Accrued postretirement benefits 720.1 -
Other noncurrent liabilities 650.3 418.3
------- ------
Total liabilities 3,515.6 2,578.2
------- ------
Commitments and contingencies
Minority interests 224.3 176.7
Stockholders' equity (deficit):
Preferred stock, $.50 par value; 12,500,000 shares
authorized; Class A $.05 Non-Cumulative
Participating Convertible Preferred Stock; shares
issued: 1993 -- 679,084 and 1992 -- 681,811 .3 .3
Common stock, $.50 par value; 28,000,000 shares
authorized; shares issued: 10,063,359 5.0 5.0
Additional capital 51.2 47.9
Retained earnings (deficit) (180.8) 419.4
Pension liability adjustment (23.9) (9.0)
Treasury stock, at cost (shares held: preferred -- 845;
common: 1993 -- 1,364,895 and 1992 -- 1,367,622) (19.7) (19.7)
------- ------
Total stockholders' equity (deficit) (167.9) 443.9
------- ------
$3,572.0 $3,198.8
======= ======
<FN>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
MAXXAM Inc. and Subsidiaries
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Net sales:
Aluminum operations $1,719.1 $1,909.1 $2,000.8
Forest products operations 233.5 223.4 205.7
Real estate operations 78.5 70.1 48.0
------- ------- -------
2,031.1 2,202.6 2,254.5
------- ------- -------
Costs and expenses:
Costs of sales and operations (exclusive of
depreciation and depletion):
Aluminum operations 1,587.7 1,619.3 1,594.2
Forest products operations 134.6 113.8 103.3
Real estate operations 65.3 53.8 38.1
Depreciation and depletion 120.8 111.4 106.1
Selling, general and administrative expenses 183.0 173.5 177.3
Restructuring of aluminum operations 35.8 - -
------- ------- -------
2,127.2 2,071.8 2,019.0
------- ------- -------
Operating income (loss) (96.1) 130.8 235.5
Other income (expense):
Investment, interest and other income 69.8 51.6 42.8
Interest expense (169.5) (181.8) (198.8)
Amortization of deferred financing costs (15.6) (13.8) (12.1)
------- ------- -------
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of changes in
accounting principles (211.4) (13.2) 67.4
Credit (provision) for income taxes 82.5 9.2 (2.0)
Minority interests (3.0) (3.3) (7.9)
------- ------- -------
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles (131.9) (7.3) 57.5
Extraordinary item:
Loss on early extinguishment of debt, net of related
benefits for minority interests of $2.8 and income
taxes of $27.5 (50.6) - -
Cumulative effect of changes in accounting principles:
Postretirement benefits other than pensions and
postemployment benefits, net of related benefits
for minority interests of $64.6 and income taxes
of $240.2 (444.3) - -
Accounting for income taxes 26.6 - -
------- ------- -------
Net income (loss) $(600.2) $(7.3) $57.5
======= ======= =======
Per common and common equivalent share:
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles $(13.95) $(.77) $6.08
Extraordinary item (5.35) - -
Cumulative effect of changes in accounting principles (44.17) - -
------- ------- -------
Net income (loss) $(63.47) $(.77) $6.08
======= ======= =======
<FN>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
MAXXAM Inc. and Subsidiaries
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
(IN MILLIONS OF DOLLARS) 1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(600.2) $(7.3) $57.5
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Cumulative effect of changes in accounting principles,
net 417.7 - -
Depreciation and depletion 120.8 111.4 106.1
Extraordinary loss on early extinguishment of debt, net 50.6 - -
Amortization of deferred financing costs and
discounts on long-term debt 21.7 19.9 20.3
Equity in losses of unconsolidated affiliates 4.9 1.9 19.5
Minority interests 3.0 3.3 7.9
Incurrence of financing costs (47.9) (7.1) (12.3)
Net gain on sales of real estate, mortgage loans and
other assets (45.8) (6.4) (5.8)
Net losses (gains) on marketable securities (7.1) 6.3 .7
Recognition of previously deferred income from a
forward alumina sale (.6) (25.7) (42.0)
Increase (decrease) in payable to affiliates and other
liabilities 110.5 (72.0) (25.0)
Decrease (increase) in prepaid expenses and other
assets 18.0 9.4 (47.1)
Increase (decrease) in accrued interest 14.3 (1.6) 1.8
Decrease in inventories 10.9 66.7 30.7
Decrease (increase) in receivables 5.0 (63.1) 4.7
Decrease (increase) in accrued and deferred income
taxes (96.5) (16.3) 5.8
Decrease in accounts payable (14.1) (6.1) (.7)
Other 10.9 17.2 15.1
-------- -------- --------
Net cash provided by (used for) operating
activities (23.9) 30.5 137.2
-------- -------- --------
Cash flows from investing activities:
Net proceeds from disposition of property and investments 143.0 45.7 16.1
Net sales (purchases) of marketable securities 31.1 (7.0) (24.5)
Capital expenditures (86.2) (132.7) (130.9)
Acquisition of real estate properties and mortgages - - (16.4)
Other (12.2) 2.3 (6.8)
-------- -------- --------
Net cash provided by (used for) investing
activities 75.7 (91.7) (162.5)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,201.3 26.7 218.4
Proceeds from issuance of Kaiser Depositary Shares 119.3 - -
Redemptions, repurchase of and principal payments on long-
term debt (1,219.4) (65.3) (268.4)
Net borrowings (payments) under revolving credit agreements
and short-term borrowings (107.6) 84.1 39.7
Restricted cash deposits (33.6) - -
Redemption of preference stock (4.2) (7.3) (20.4)
Proceeds from issuance of common stock - .7 2.3
Proceeds from initial public offering of Kaiser Aluminum
Corporation common stock - - 93.2
Other (5.6) (.9) (.7)
-------- -------- --------
Net cash provided by (used for) financing
activities (49.8) 38.0 64.1
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2.0 (23.2) 38.8
Cash and cash equivalents at beginning of year 81.9 105.1 66.3
-------- -------- --------
Cash and cash equivalents at end of year $83.9 $81.9 $105.1
======== ======== ========
Supplementary schedule of non-cash investing and financing
activities:
Acquisition of real estate properties and mortgages:
Assets acquired $135.9
Issuance of long-term debt 108.3
Notes receivable exchanged 34.2
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $149.1 $177.3 $188.8
Income taxes paid 13.2 6.3 23.8
<FN>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
MAXXAM Inc. and Subsidiaries
Consolidated Statement of
Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Preferred Retained Pension
Stock Common Stock Additional Earnings Liability Treasury
--------------------
(IN MILLIONS OF DOLLARS AND ($.50 Par) Shares ($.50 Par) Capital (Deficit) Adjustment Stock Total
SHARES) --------- --------- --------- --------- --------- --------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1991 $.3 8.6 $5.0 $40.6 $369.2 $- $(19.8) $395.3
Net income - - - - 57.5 - - 57.5
Common stock issued
under
employee stock
option plans - .1 - 2.3 - - - 2.3
Gain from initial public
offering of Kaiser
Aluminum
Corporation
common stock - - - 28.5 - - - 28.5
Excess of fair value of
assets acquired
over affiliate's
basis - - - (24.0) - - - (24.0)
-------- -------- -------- -------- -------- -------- -------- -------
Balance, December 31, 1991 .3 8.7 5.0 47.4 426.7 - (19.8) 459.6
Net loss - - - - (7.3) - - (7.3)
Common stock issued
under
employee stock
option plans - - - .5 - - .1 .6
Additional pension
liability - - - - - (9.0) - (9.0)
-------- -------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1992 .3 8.7 5.0 47.9 419.4 (9.0) (19.7) 443.9
Net loss - - - - (600.2) - - (600.2)
Gain from issuance of
Kaiser Aluminum
Corporation common
stock - - - 3.3 - - - 3.3
Additional pension
liability - - - - - (14.9) - (14.9)
-------- -------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1993 $.3 8.7 $5.0 $51.2 $(180.8) $(23.9) $(19.7) $(167.9)
======== ======== ======== ======== ======== ======== ======== ========
<FN>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
MAXXAM Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
MAXXAM Inc. and its majority and wholly owned subsidiaries,
collectively referred to herein as the "Company." Investments in
unconsolidated affiliates are accounted for utilizing the equity
method of accounting. In connection with the implementation of
the new accounting standard for income taxes as described in Note
5, the Company has restated certain assets and liabilities
recorded in connection with its acquisition of various
subsidiaries in prior years. Additionally, certain
reclassifications have been made to prior years' financial
statements to be consistent with the presentation in the current
year.
The cumulative losses of Kaiser Aluminum Corporation ("Kaiser," a
majority owned subsidiary of the Company) in the first and second
quarter of 1993, principally due to the implementation of the new
accounting standard for postretirement benefits other than
pensions as described in Note 6, eliminated Kaiser's equity with
respect to its common stock; accordingly, the Company recorded
100% of Kaiser's losses in the third and fourth quarters of 1993,
without regard to the minority interests represented by Kaiser's
other common stockholders (as described in Note 7). The Company
will record 100% of Kaiser's losses and profits until such time
as the losses recorded by the Company with respect to Kaiser's
minority common stockholders are recovered.
On August 4, 1993, contemporaneously with the consummation of the
MAXXAM Group Inc. ("MGI," a wholly owned subsidiary of the
Company) refinancing transaction (as described in Note 4), MGI
(i) transferred to the Company 50 million common shares of Kaiser
held by a subsidiary of MGI, representing MGI's (and the
Company's) entire interest in Kaiser's common stock, (ii)
transferred to the Company 60,075 shares of the Company common
stock held by a subsidiary of MGI, (iii) transferred to the
Company certain notes receivable, long-term investments, and
other assets, each net of related liabilities, collectively
having a carrying value to MGI of approximately $1.1 and (iv)
exchanged with the Company 2,132,950 Depositary Shares (as
described in Note 7), acquired from Kaiser on June 30, 1993 for
$15.0, such exchange being in satisfaction of a $15.0 promissory
note evidencing a cash loan made by the Company to MGI in January
1993. On the same day, the Company assumed approximately $17.5
of certain liabilities of MGI that were unrelated to MGI's forest
products operations or were related to operations which have been
disposed of by MGI. Additionally, on September 28, 1993, MGI
transferred to the Company its interest in the real estate
management and development operation located at Palmas del Mar in
Puerto Rico. The foregoing transactions are collectively
referred to as the "Forest Products Group Formation."
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents consist of highly liquid money market
instruments with original maturities of three months or less.
The carrying amount of these instruments approximates fair value.
Marketable Securities
On December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities ("SFAS 115"). In accordance with
the provisions of SFAS 115, marketable securities are carried at
market value on December 31, 1993. Prior to that date,
marketable securities portfolios were carried at the lower of
cost or market at the balance sheet date. The cost of the
securities sold is determined using the first-in, first-out
method. Market values are determined based on quoted prices.
The cost and market values of securities held at December 31,
1992 were $72.6 and $70.6, respectively. Included in investment,
interest and other income for each of the three years ended
December 31, 1993 were: 1993 -- net realized gains of $4.2, the
recovery of $2.0 of net unrealized losses and net unrealized
gains of $.9; 1992 -- net realized losses of $6.0 and net
unrealized losses of $.3; and 1991 -- net realized losses of $1.0
and the recovery of $.3 of net unrealized losses. Net unrealized
losses represent the amount required to reduce the short-term
marketable securities portfolios from cost to market value prior
to December 31, 1993.
Inventories
Inventories are stated at the lower of cost or market. Cost for
the aluminum and forest products operations inventories is
primarily determined using the last-in, first-out (LIFO) method.
Other inventories of the aluminum operations, principally
operating supplies and repair and maintenance parts, are stated
at the lower of average cost or market. Inventory costs consist
of material, labor and manufacturing overhead, including
depreciation and depletion.
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1993 1992
--------- --------
<S> <C> <C>
Aluminum Operations:
Finished fabricated products $83.7 $91.2
Primary aluminum and work in process 141.4 128.7
Bauxite and alumina 94.0 107.4
Operating supplies and repair and maintenance parts 107.8 112.6
-------- --------
426.9 439.9
-------- --------
Forest Products Operations:
Lumber 58.4 54.2
Logs 18.3 8.9
-------- --------
76.7 63.1
-------- --------
$503.6 $503.0
======== ========
</TABLE>
The Company recorded pre-tax charges of approximately $19.4 and
$29.0 in 1993 and 1992, respectively, because of reductions in
the carrying value of its aluminum operations inventories caused
principally by prevailing lower prices for alumina, primary
aluminum and fabricated products and a reduction in LIFO
inventories which increased cost of sales by $10.2 in 1992.
Reductions in the Company's forest products operations
inventories reduced cost of sales in 1991 by $3.3.
Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of
accumulated depreciation. Depreciation is computed principally
utilizing the straight-line method at rates based upon the
estimated useful lives of the various classes of assets.
Timber and Timberlands
Depletion is computed utilizing the unit-of-production method
based upon estimates of timber values and quantities.
Deferred Financing Costs
Costs incurred to obtain financing are deferred and amortized
over the estimated term of the related borrowing.
Restricted Cash and Concentrations of Credit Risk
At December 31, 1993, cash and cash equivalents includes $20.3
reserved for debt service payments on the Company's 7.95% Timber
Collateralized Notes due 2015 (the "Timber Notes"), and long-term
receivables and other assets includes $33.6 of restricted cash
deposits held for the benefit of the Timber Note holders as
described in Note 4. Each of these deposits is held by a
different financial institution. In the event of nonperformance
by such financial institutions, the Company's exposure to credit
loss is represented by the amounts deposited plus any unpaid
accrued interest thereon. The Company mitigates its
concentrations of credit risk with respect to these restricted
cash deposits by maintaining them at high credit quality
financial institutions and monitoring the credit ratings of these
institutions.
Restructuring of Aluminum Operations
In 1993, Kaiser implemented a restructuring plan for its flat-rolled
products operation at its Trentwood plant in response to
overcapacity in the aluminum rolling industry, flat demand in the
U.S. can stock markets and declining demand for aluminum products
sold to customers in the commercial aerospace industry, all of
which have resulted in declining prices in Trentwood's key
markets. Additionally, Kaiser implemented a plan to discontinue
its casting operations, which include three facilities located in
Ohio. This entire restructuring is expected to be completed by
the end of 1995 and will affect approximately 670 employees. The
pre-tax charge for this restructuring of $35.8 includes $25.2 for
pension, severance and other termination benefits; $4.7 for a
writedown of the casting facilities to net realizable value; $3.3
for estimated 1994 casting operating losses to the expected date
of closure or sale; and $2.6 for various other items.
Investment, Interest and Other Income
Investment, interest and other income for the year ended December
31, 1993 included a fourth quarter pre-tax gain of $47.8 from the
sale of sixteen multi-family real estate properties for cash
proceeds of $113.6, and $10.8 of pre-tax charges related
principally to the establishment of additional litigation and
environmental reserves by Kaiser. Included in investment,
interest and other income for the year ended December 31, 1992
was $19.1 of pre-tax income for unrelated and non-recurring
adjustments to previously recorded liabilities and reserves.
Included in investment, interest and other income for the year
ended December 31, 1991 was the receipt of a $12.0 fee in the
first quarter from Kaiser's minority partner in consideration for
the execution of an expansion agreement for the Alumina Partners
of Jamaica ("Alpart") alumina refinery. The agreement provides
for a program of expansion and modernization of Alpart at the
existing ownership interest of 65% for Kaiser and 35% for
Kaiser's minority partner. The prior expansion agreement
provided for expansion rights of 75% for Kaiser and 25% for
Kaiser's minority partner.
Futures Contracts and Options
The Company periodically enters into forward foreign exchange,
commodity futures and commodity and currency option contracts
which are primarily accounted for as hedges of its revenues and
costs. The gains and losses on these contracts are reflected in
results of operations concurrently with the hedged revenues or
costs. The cash flows from these contracts are classified in a
manner consistent with the underlying nature of the transactions.
At December 31, 1993, the net fair market value of the Company's
position in these contracts was not material.
Foreign Currency Translation
The Company uses the United States dollar as the functional
currency for its foreign operations.
Per Share Information
Per share calculations are based on the weighted average number
of common shares outstanding in each year and, if dilutive,
weighted average common equivalent shares and common stock
options based upon the average price of the Company's common
stock during the year. The weighted average number of common and
common equivalent shares was 9,457,083 shares, 9,427,011 shares
and 9,458,253 shares for the years ended December 31, 1993, 1992
and 1991, respectively.
2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Kaiser's investments in unconsolidated affiliates are held by its
principal operating subsidiary, Kaiser Aluminum & Chemical
Corporation ("KACC"). KACC holds a 28.3% interest in Queensland
Alumina Limited ("QAL"), a leading producer of alumina, and a 49%
interest in both Kaiser Jamaica Bauxite Company, a bauxite
supplier, and Anglesey Aluminium Limited ("Anglesey"), which
produces primary aluminum. KACC provides some of its affiliates
with services such as financing, management and engineering.
Purchases from these affiliates for the acquisition and
processing of bauxite, alumina and primary aluminum aggregated
$206.6, $219.4 and $238.7 for the years ended December 31, 1993,
1992 and 1991, respectively (see Note 10). KACC's equity in
income (loss) before income taxes of such operations is treated
as a reduction (increase) in costs of sales. At December 31,
1993 and 1992, KACC's net receivables from these affiliates were
not material.
Summarized combined financial information for KACC's investees is
as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1993 1992
--------- ---------
<S> <C> <C>
Current assets $312.3 $295.0
Property, plant and equipment, net 371.1 389.4
Other assets 46.3 49.9
------- -------
Total assets $729.7 $734.3
======= =======
Current liabilities $130.4 $132.8
Long-term debt 290.0 275.0
Other liabilities 17.8 20.0
Stockholders' equity 291.5 306.5
------- -------
Total liabilities and stockholders' equity $729.7 $734.3
======= =======
Years Ended December 31,
---------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Net sales $510.3 $586.6 $589.0
Costs and expenses (527.2) (586.7) (630.7)
Credit for income taxes 1.9 6.9 9.5
------- ------- --------
Net income (loss) $(15.0) $6.8 $(32.2)
======= ======= ========
KACC's equity in losses of affiliates $(3.3) $(1.9) $(19.5)
======= ======= ========
</TABLE>
KACC's equity in losses differs from the summary net income
(loss) for unconsolidated affiliates due to various percentage
ownerships in the constituent entities and the amortization of
the excess of KACC's investment in the affiliates over its equity
in their net assets. At December 31, 1993, KACC's investment in
these affiliates exceeded its equity in their net assets by
$80.7. KACC is amortizing this amount over a twelve-year period
which results in an annual charge of approximately $11.9.
On July 8, 1993, the Company, through wholly owned subsidiaries,
acquired control of the general partner and became responsible
for the management of Sam Houston Race Park, Ltd. ("SHRP"). The
Company acquired its interest in SHRP (approximately 29.7%) and
an interest in the management contract with respect to the
facility for $9.1. Currently the track is under construction on
approximately 240 acres of land in northwest Houston and is
expected to begin operations by spring of 1994. As of December
31, 1993, SHRP had assets of $92.7 ($48.7 current), liabilities
of $90.4 ($13.9 current) and partners' equity of $2.3. SHRP
incurred losses for the year ended December 31, 1993 of $5.9.
The Company's equity in these losses was $1.6 for the period from
July 8, 1993 to December 31, 1993. The Company's investment in
SHRP exceeded its equity in SHRP's net assets at December 31,
1993 by approximately $6.5. The Company is amortizing this
amount over a period of forty years.
3. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------
Estimated
Useful Lives 1993 1992
------------- ---------- ---------
<S> <C> <C> <C>
Land and improvements 8 -- 25 years $157.2 $139.6
Buildings 15 -- 45 years 240.1 209.4
Machinery and equipment 10 -- 22 years 1,263.9 1,108.5
Construction in progress 65.1 71.1
-------- --------
1,726.3 1,528.6
Less: accumulated depreciation (481.3) (341.5)
-------- --------
$1,245.0 $1,187.1
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1993, 1992
and 1991 was $104.9, $90.2 and $82.4, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1993 1992
----------- -----------
<S> <C> <C>
Corporate:
14% Senior Subordinated Reset Notes due May 20, 2000 $25.0 $45.0
12 1/2% Subordinated Debentures due December 15, 1999, net
of discount 25.2 27.6
Other .5 1.1
Aluminum Operations:
1989 Credit Agreement:
Revolving Credit Facility 188.0 290.0
Term Loan - 36.6
Alpart CARIFA Loan 60.0 60.0
12 3/4% Senior Subordinated Notes due February 1, 2003 400.0 -
14 1/4% Senior Subordinated Notes due December 15, 1995,
net of discount - 320.5
Other 78.1 83.9
Forest Products Operations:
7.95% Timber Collateralized Notes due July 20, 2015 377.0 -
11 1/4% Senior Secured Notes due August 1, 2003 100.0 -
12 1/4% Senior Secured Discount Notes due August 1, 2003,
net of discount 73.5 -
10 1/2% Senior Notes due March 1, 2003 235.0 -
12 3/4% Notes due November 15, 1995, net of discount - 148.9
12% Series A Senior Notes due July 1, 1996, net of
discount - 159.0
12.2% Series B Senior Notes due July 1, 1996, net of - 297.3
discount
12 1/2% Senior Subordinated Debentures due July 1, 1998,
net of discount - 40.2
Other 2.9 34.3
Real Estate Operations:
Secured notes due December 31, 1997, interest at prime
plus 3% 17.2 88.4
Other notes and contracts, secured by receivables,
buildings, real estate and equipment 23.8 31.1
-------- --------
1,606.2 1,663.9
Less: current maturities (38.3) (71.2)
-------- --------
$1,567.9 $1,592.7
======== ========
</TABLE>
CORPORATE
14% Senior Subordinated Reset Notes (the "Reset Notes")
The Reset Notes have borne interest at a rate of 14% per annum
since November 20, 1991 and, prior to such date, bore interest at
a rate of 16% per annum subsequent to May 20, 1989. Pursuant to
the terms of the indenture governing the Reset Notes, no further
adjustments to the interest rate are permitted. The Reset Notes
are redeemable at the Company's option, in whole or in part, at
par.
12 1/2% Subordinated Debentures (the "12 1/2% Debentures")
The 12 1/2% Debentures, which are net of discount of $2.4 and
$2.9 at December 31, 1993 and 1992, respectively, have mandatory
redemptions of $3.3 in December of each year through 1998. The
12 1/2% Debentures are redeemable at the Company's option, in
whole or in part, at par.
ALUMINUM OPERATIONS
The 1994 Credit Agreement
On February 17, 1994, Kaiser and KACC entered into a credit
agreement with BankAmerica Business Credit, Inc. (as agent for
itself and other lenders), Bank of America National Trust and
Savings Association and certain other lenders (the "1994 Credit
Agreement"). The 1994 Credit Agreement replaced the 1989 Credit
Agreement (as defined below) and consists of a $250.0 five-year
secured, revolving line of credit, scheduled to mature in 1999.
Kaiser is able to borrow under the facility by means of revolving
credit advances and letters of credit (up to $125.0) in an
aggregate amount equal to the lesser of $250.0 or a borrowing
base relating to eligible accounts receivable and inventory. As
of February 24, 1994, KACC had $67.4 of letters of credit
outstanding under the 1994 Credit Agreement. The 1994 Credit
Agreement is unconditionally guaranteed by Kaiser and by all
significant subsidiaries of KACC which were guarantors of KACC's
obligations under the 1989 Credit Agreement. Loans under the
1994 Credit Agreement bear interest at a rate per annum, at
KACC's election, equal to (i) a Reference Rate plus 1 1/2% or
(ii) LIBOR plus 3 1/4%. After June 30, 1995, the interest rate
margins applicable to borrowings under the 1994 Credit Agreement
may be reduced by up to 1 1/2% (non-cumulatively) based upon a
financial test, determined quarterly. KACC will record a pre-tax
extraordinary loss of approximately $8.3 in the first quarter of
1994, consisting primarily of the write-off of unamortized
deferred financing costs related to the 1989 Credit Agreement.
The 1994 Credit Agreement requires KACC to maintain certain
financial covenants and places restrictions on Kaiser's and
KACC's ability to, among other things, incur debt and liens, make
investments, pay common stock dividends, undertake transactions
with affiliates, make capital expenditures and enter into
unrelated lines of business. The 1994 Credit Agreement is
secured by, among other things, (i) mortgages on KACC's major
domestic plants (excluding the Gramercy plant); (ii) subject to
certain exceptions, liens on the accounts receivable, inventory,
equipment, domestic patents and trademarks and substantially all
other personal property of KACC and certain of its subsidiaries;
(iii) a pledge of all the stock of KACC owned by Kaiser and (iv)
pledges of all of the stock of a number of KACC's wholly owned
domestic subsidiaries, pledges of a portion of the stock of
certain foreign subsidiaries and pledges of a portion of the
stock of certain partially owned foreign affiliates.
Substantially all of the identifiable assets of the bauxite and
alumina and aluminum processing segments (see Note 11) are
attributable to KACC and collateralize the 1994 Credit Agreement
indebtedness.
The 1989 Credit Agreement
Kaiser and KACC entered into a credit agreement with a syndicate
of commercial banks and other financial institutions comprised of
a Revolving Credit Facility, a five-year Term Loan and certain
other agreements (as amended, the "1989 Credit Agreement"). The
obligations of KACC in respect of the credit facilities were
guaranteed by Kaiser, and by a number of wholly owned
subsidiaries of KACC. The five-year Revolving Credit Facility
under the 1989 Credit Agreement provided for loans not to exceed
the lesser of $350.0 or a borrowing base relating to the amount
of eligible accounts receivable and inventory of KACC and certain
of its subsidiaries. Up to $50.0 of availability under the
Revolving Credit Facility could have been used for letters of
credit. As of December 31, 1993, $113.6 of borrowing capacity
was unused under the Revolving Credit Facility of the 1989 Credit
Agreement (of which $12.8 could also have been used for letters
of credit). The five-year Term Loan component of the 1989 Credit
Agreement, which was originally to be repaid in ten equal semi-annual
installments, commencing May 31, 1990, was prepaid in June
1993 with funds provided from the issuance of the Depositary
Shares (as described in Note 7).
9 7/8% Senior Notes due 2002 (the "KACC Senior Notes")
Concurrent with the offering of the 8.255% Preferred Redeemable
Increased Dividend Equity Securities (the "PRIDES") on February
17, 1994 (see Note 7), KACC issued $225.0 of the KACC Senior
Notes. The net proceeds from the offering of the KACC Senior
Notes were used to reduce outstanding borrowings under the
Revolving Credit Facility of the 1989 Credit Agreement
immediately prior to the effectiveness of the 1994 Credit
Agreement and for working capital and general corporate purposes.
12 3/4% Senior Subordinated Notes (the "KACC Notes")
On February 1, 1993, KACC issued $400.0 of the KACC Notes. The
net proceeds from the sale of the KACC Notes were used to retire
KACC's 14 1/4% Senior Subordinated Notes due 1995, to prepay
$18.0 of the Term Loan under KACC's 1989 Credit Agreement and to
reduce outstanding borrowings under the Revolving Credit Facility
of the 1989 Credit Agreement. These transactions resulted in a
pre-tax extraordinary loss of $33.0, consisting primarily of the
payment of premiums and the write-off of unamortized discount and
deferred financing costs on the 14 1/4% Senior Subordinated
Notes.
The obligations of KACC with respect to the KACC Senior Notes and
the KACC Notes are guaranteed, jointly and severally, by certain
subsidiaries of KACC. The indentures governing the KACC
Senior Notes and the KACC Notes and the 1994 Credit Agreement
restrict, among other things, KACC's and Kaiser's ability to
incur debt, undertake transactions with affiliates and pay
dividends. At December 31, 1993, under the most restrictive of
these covenants, Kaiser was not permitted to pay dividends on its
common stock.
Alpart CARIFA Loan
In December 1991, Alpart entered into a loan agreement with the
Caribbean Basin Projects Financing Authority ("CARIFA") under
which CARIFA loaned Alpart the proceeds from the issuance of
CARIFA's Industrial Revenue bonds. The terms of the loan
parallel the bonds' repayment terms. The $38.0 aggregate
principal amount of Series A bonds matures on June 1, 2008. The
Series A bonds bear interest at a floating rate of 87% of the
applicable LIBID rate (LIBOR less 1/8 of 1%) on $37.5 of the
principal amount (2.9% at December 31, 1993) with the remaining
$.5 bearing interest at a fixed rate of 6.35%. The $22.0
aggregate principal amount of Series B bonds matures on June 1,
2007 and bears interest at a fixed rate of 8.25%. Proceeds from
the sale of the bonds were used by Alpart to refinance interim
loans from the partners in Alpart, to pay eligible project costs
for the expansion and modernization of its alumina refinery and
related port and bauxite mining facilities and to pay certain
costs of issuance. Under the terms of the loan agreement, Alpart
must remain a qualified recipient for Caribbean Basin Initiative
funds as defined by applicable laws. Alpart has agreed to
indemnify bondholders of CARIFA for certain tax payments that
could result from events, as defined, that adversely affect the
tax treatment of the interest income on the bonds. Alpart's
obligations under the loan agreement are secured by a $64.2
letter of credit guaranteed by the partners in Alpart (of which
$22.5 is guaranteed by Kaiser's minority partner).
FOREST PRODUCTS OPERATIONS
Timber Notes and 10 1/2% Senior Notes (the "Pacific Lumber Senior
Notes")
On March 23, 1993, The Pacific Lumber Company ("Pacific Lumber")
issued $235.0 of the Pacific Lumber Senior Notes and its newly-formed
wholly owned subsidiary, Scotia Pacific Holding Company
("SPHC"), issued $385.0 of the Timber Notes. Pacific Lumber and
SPHC used the net proceeds from the sale of the Pacific Lumber
Senior Notes and the Timber Notes, together with Pacific Lumber's
cash and marketable securities, to (i) retire (a) $163.8
aggregate principal amount of Pacific Lumber's 12% Series A
Senior Notes due July 1, 1996 (the "Series A Notes"), (b) $299.7
aggregate principal amount of Pacific Lumber's 12.2% Series B
Senior Notes due July 1, 1996 (the "Series B Notes") and (c)
$41.7 aggregate principal amount of Pacific Lumber's 12 1/2%
Senior Subordinated Debentures due July 1, 1998 (the
"Debentures;" the Series A Notes, the Series B Notes and the
Debentures are referred to collectively as the "Old Pacific
Lumber Securities"); (ii) pay accrued interest on the Old Pacific
Lumber Securities through the date of redemption thereof; (iii)
pay the applicable redemption premiums on the Old Pacific Lumber
Securities; (iv) repay Pacific Lumber's $28.9 cogeneration
facility loan; (v) fund the initial deposit of $35.0 to an
account held by the trustee for the Timber Notes (the "Liquidity
Account"); and (vi) pay a $25.0 dividend to a subsidiary of MGI.
These transactions resulted in a pre-tax extraordinary loss of
$38.1, consisting primarily of the payment of premiums and the
write-off of unamortized discounts and deferred financing costs
on the Old Pacific Lumber Securities.
The indenture governing the Timber Notes (the "Timber Note
Indenture") prohibits SPHC from incurring any additional
indebtedness for borrowed money and limits the business
activities of SPHC to the ownership and operation of its timber
and timberlands. The Timber Notes are senior secured obligations
of SPHC and are not obligations of, or guaranteed by, Pacific
Lumber or any other person. The Timber Notes are secured by a
lien on (i) SPHC's timber and timberlands, (ii) substantially all
of SPHC's property and equipment, (iii) SPHC's contract rights
and certain other assets and (iv) cash equivalents reserved for
debt service payments and the funds deposited in the Liquidity
Account.
The Timber Notes are structured to link, to the extent of cash
available, the deemed depletion of SPHC's timber (through the
harvest and sale of logs) to required amortization of the Timber
Notes. The actual required amount of such amortization due on
any Timber Note payment date is determined by various
mathematical formulas set forth in the Timber Note Indenture. The
minimum amount of principal which SPHC must pay (on a cumulative
basis) through any Timber Note payment date in order to avoid an
Event of Default (as defined in the Timber Note Indenture) is
referred to as rated amortization ("Rated Amortization"). If all
payments of principal are made in accordance with Rated
Amortization, the payment date on which SPHC will pay the final
installment of principal is July 20, 2015. The amount of
principal which SPHC must pay through each Timber Note payment
date in order to avoid payment of prepayment or deficiency
premiums is referred to as scheduled amortization ("Scheduled
Amortization"). If all payments of principal are made in
accordance with Scheduled Amortization, the payment date on which
SPHC will pay the final installment of principal is July 20,
2009.
Principal and interest on the Timber Notes is payable semi-annually on
January 20 and July 20. The Timber Notes are
redeemable at the option of SPHC, in whole but not in part, at
any time. The redemption price of the Timber Notes is equal to
the sum of the principal amount, accrued interest and a
prepayment premium calculated based upon the yield of like term
Treasury securities plus 50 basis points.
Interest on the Pacific Lumber Senior Notes is payable semi-annually on
March 1 and September 1. The Pacific Lumber Senior
Notes are redeemable at the option of Pacific Lumber, in whole or
in part, on or after March 1, 1998 at a price of 103% of the
principal amount plus accrued interest. The redemption price is
reduced annually until March 1, 2000, after which time the
Pacific Lumber Senior Notes are redeemable at par.
The indentures governing the Pacific Lumber Senior Notes and the
Timber Notes and Pacific Lumber's other debt contain various
covenants which, among other things, limit the payment of
dividends and restrict transactions between Pacific Lumber and
its affiliates. On February 24, 1994, Pacific Lumber paid
dividends of $5.7 which represents the entire amount permitted at
December 31, 1993.
11 1/4% Senior Secured Notes (the "MGI Senior Notes") and 12 1/4%
Senior Secured Discount Notes (the "MGI Discount Notes")
On August 4, 1993, MGI issued $100.0 aggregate principal amount
of the MGI Senior Notes and $126.7 aggregate principal amount
(approximately $70.0 net of original issue discount) of the MGI
Discount Notes (together, the "MGI Notes"). The MGI Notes are
secured by MGI's pledge of 100% of the common stock of Pacific
Lumber, Britt Lumber Co., Inc. ("Britt") and MAXXAM Properties
Inc. ("MPI," a wholly owned subsidiary of MGI) and by the
Company's pledge of 28 million shares of Kaiser's common stock it
received as a result of the Forest Products Group Formation. The
indenture governing the MGI Notes, among other things, restricts
the ability of MGI to incur additional indebtedness, engage in
transactions with affiliates, pay dividends and make investments.
At December 31, 1993, under the most restrictive of these
covenants, no dividends may be paid by MGI. The MGI Notes are
senior indebtedness of MGI; however, they are effectively
subordinate to the liabilities of MGI's subsidiaries, which
includes the Timber Notes and the Pacific Lumber Senior Notes.
The MGI Discount Notes are net of discount of $53.2 at December
31, 1993.
The MGI Senior Notes will pay interest semiannually on February 1
and August 1 of each year beginning on February 1, 1994. The MGI
Discount Notes will not pay any interest until February 1, 1999,
at which time semiannual interest payments will become due on
each February 1 and August 1 thereafter.
MGI used a portion of the net proceeds from the sale of the MGI
Notes to retire the entire outstanding balance of its 12 3/4%
Notes at 101% of their principal amount, plus accrued interest
through November 14, 1993. MGI used the remaining portion of the
net proceeds from the sale of the MGI Notes, together with a
portion of its existing cash resources, to pay a $20.0 dividend
to the Company. The Company used such proceeds to redeem, on
August 20, 1993, $20.0 aggregate principal amount of its Reset
Notes at 100% of their principal amount plus accrued interest
thereon.
The early retirement of the 12 3/4% Notes and the redemption of
$20.0 aggregate principal amount of the Reset Notes resulted in a
pre-tax extraordinary loss of $9.8 consisting of net interest
cost, the write-off of unamortized deferred financing costs,
premiums and the write-off of unamortized original issue
discount.
REAL ESTATE OPERATIONS
Secured Notes
The secured notes represent borrowings of the Company's wholly
owned partnership, MXM Mortgage L.P. ("MXM L.P."). The proceeds
from the notes were originally used by MXM Mortgage Corp., a
wholly owned subsidiary of the Company, to finance a portion of
the purchase for $122.3 of certain loans secured by real
properties and certain parcels of income producing real property
from the Resolution Trust Corporation. The notes mature on
December 31, 1997 and bear interest at the prime rate plus 3% per
annum, payable monthly. The amended loan agreement provides for
additional borrowings of up to $22.0 on or before March 31, 1994.
Upon the sale of any secured property or loan, the terms of the
loan agreement require MXM L.P. to make principal payments based
on the release price (as defined) of such property or loan. In
addition, the loan agreement requires MXM L.P. to repay the
entire outstanding balance of the notes if such balance declines
to less than $10.0 or if less than 40% of such balance is
allocated to multi-family assets. Principal payments of $60.2
were made in December 1993 in connection with the sale of multi-family
properties discussed in Note 1 -- "Investment, Interest
and Other Income."
OTHER
Repurchase of Debt
In 1991, the Company redeemed $170.9 of corporate debt and
repurchased $16.0 of its other debt. A significant portion of
the funds used to redeem the corporate debt was provided through
the sale of the MGI 12 3/4% Notes and proceeds from the initial
public offering of Kaiser's common stock as described in Note 8.
The funds used to repurchase debt were provided by operations.
Maturities
Scheduled maturities of long-term debt outstanding at December
31, 1993 are as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
---------------------------------------------------------------
There-
1994 1995 1996 1997 1998 after
--------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
14% Senior Subordinated Reset
Notes $- $- $- $- $- $25.0
12 1/2% Subordinated Debentures 3.3 3.3 3.3 3.3 3.3 11.1
1989 Credit Agreement - - - - - 188.0
Alpart CARIFA Loan - - - - - 60.0
12 3/4% Senior Subordinated Notes - - - - - 400.0
7.95% Timber Collateralized Notes 13.1 13.6 14.1 16.2 19.3 300.7
11 1/4% Senior Secured Notes - - - - - 100.0
12 1/4% Senior Secured Discount
Notes - - - - - 126.7
10 1/2% Senior Notes - - - - - 235.0
Secured real estate notes - - - 17.2 - -
Other 21.9 16.6 9.6 9.4 9.4 38.4
-------- -------- -------- -------- -------- --------
$38.3 $33.5 $27.0 $46.1 $32.0 $1,484.9
======== ======== ======== ======== ======== ========
</TABLE>
Capitalized Interest
Interest capitalized during the years ended December 31, 1993,
1992 and 1991 was $4.4, $5.2 and $5.1, respectively.
Restricted Net Assets of Subsidiaries
Certain debt instruments restrict the ability of the Company's
subsidiaries to transfer assets, make loans and advances and pay
dividends to the Company. As of December 31, 1993, all of the
assets relating to the Company's aluminum and forest products
operations are subject to such restrictions. The restricted net
assets of the Company's real estate subsidiaries totaled $4.0 at
December 31, 1993. Under the most restrictive covenants
governing debt of the Company's real estate subsidiaries,
approximately $24.0 could be paid as of December 31, 1993.
Fair Value
The estimated fair value of the Company's long-term debt is based
on the quoted market prices for the publicly-traded issues
(except for the KACC 14 1/4% Senior Subordinated Notes, where
fair value is based on the amount used to retire the notes in
February 1993) and on the current rates offered for borrowings
similar to the other debt. At December 31, 1993 and 1992, the
fair value of the Company's long-term debt is estimated to be
$1,647.0 and $1,709.1, respectively.
5. INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income
Taxes ("SFAS 109"). The adoption of SFAS 109 changes the
Company's method of accounting for income taxes to an asset and
liability approach from the deferral method prescribed by
Accounting Principles Board Opinion No. 11, Accounting for Income
Taxes. The asset and liability approach requires the
recognition of deferred income tax assets and liabilities for the
expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns.
Under this method, deferred income tax assets and liabilities are
determined based on the temporary differences between the
financial statement and tax bases of assets and liabilities using
enacted tax rates. The cumulative effect of the change in
accounting principle, as of January 1, 1993, increased the
Company's results of operations by $26.6.
The implementation of SFAS 109 required the Company to restate
certain assets and liabilities to their pre-tax amounts from
their net-of-tax amounts originally recorded in connection with
the acquisitions of various subsidiaries in prior years. The
restatement of the assigned values with respect to assets and
liabilities recorded as a result of the acquisitions and the
recomputation of deferred income tax liabilities under SFAS 109
resulted in: (i) an increase of $101.6 in the net carrying value
of property, plant, and equipment, (ii) an increase of $47.8 in
investments in and advances to unconsolidated affiliates, (iii) a
decrease of $29.7 in the net carrying value of timber and
timberlands, (iv) an increase of $21.7 in deferred income tax
liabilities (a substantial portion of which has been netted
against deferred income tax assets on the Consolidated Balance
Sheet), (v) a decrease of $11.4 in other assets, (vi) an increase
of $56.0 in other noncurrent liabilities and (vii) an increase of
$4.3 in other liabilities. As a result of restating the assets
and liabilities as described above, the loss before income taxes,
minority interests, extraordinary item and cumulative effect of
changes in accounting principles for the year ended December 31,
1993 was increased by $5.9.
Concurrent with the adoption of SFAS 109, the Company implemented
the changes in accounting methods for postretirement and
postemployment benefits pursuant to Statement of Financial
Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions ("SFAS 106") and
Statement of Financial Accounting Standards No. 112, Employers'
Accounting for Postemployment Benefits ("SFAS 112"). The pre-tax
cumulative effect of the changes in accounting principles
relating to SFAS 106 and SFAS 112 was a charge of $684.5, net of
benefits for minority interests of $64.6. These accounting
method changes resulted in the recognition of deferred income tax
assets of $240.2, net of valuation allowances.
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of changes in accounting
principles by geographic area is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1993 1992 1991
---------- ----------- -----------
<S> <C> <C> <C>
Domestic $(223.4) $(112.3) $(47.5)
Foreign 12.0 99.1 114.9
-------- -------- --------
$(211.4) $(13.2) $67.4
======== ======== ========
</TABLE>
The credit (provision) for income taxes on income (loss) before
income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles consists of
the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $(.1) $(.4) $(.5)
State and local (1.3) 1.2 (1.3)
Foreign (7.9) (11.4) (8.9)
----- ----- --------
(9.3) (10.6) (10.7)
----- ----- --------
Deferred:
Federal 77.1 4.9 7.5
State and local 2.7 11.6 2.6
Foreign 12.0 3.3 (1.4)
----- ----- --------
91.8 19.8 8.7
----- ----- --------
$82.5 $9.2 $(2.0)
===== ===== ========
</TABLE>
The Omnibus Budget Reconciliation Act of 1993 (the "Act"),
enacted on August 10, 1993, retroactively increased the maximum
federal statutory income tax rate from 34% to 35% for periods
beginning on or after January 1, 1993. The 1993 federal deferred
credit for income taxes of $77.1 includes $29.2 for the benefit
of operating loss carryforwards generated in 1993 and includes a
$7.0 benefit for increasing net deferred income tax assets
(liabilities) as of the date of enactment of the Act due to the
increase in the federal statutory income tax rate.
The deferred credit (provision) for income taxes results from the
following timing differences for 1992 and 1991:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1992 1991
------------ ---------
<S> <C> <C>
Revision of prior years' tax estimates $14.9 $8.7
Undistributed earnings or losses of foreign and
unconsolidated affiliates 12.3 12.4
Inventory costing differences 4.6 (3.0)
Employee benefit plans 1.9 (.1)
Income from forward sales (9.0) (7.9)
Depreciation and depletion (7.1) (5.6)
State taxes (.4) 2.4
Change in unrealized losses on short-term marketable
securities (.2) (.5)
Other 2.8 2.3
----- ----
$19.8 $8.7
===== ====
</TABLE>
A reconciliation between the credit (provision) for income taxes
and the amount computed by applying the federal statutory income
tax rate to income (loss) before income taxes, minority
interests, extraordinary item and cumulative effect of changes in
accounting principles is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of changes in
accounting principles $(211.4) $(13.2) $67.4
======= ======= =======
Amount of federal income tax based upon the statutory rate $74.0 $4.5 $(22.9)
Increase in net deferred income tax assets due to tax rate
change 7.0 - -
Percentage depletion 6.4 6.3 6.0
Removal of Kaiser from the Company's consolidated federal
return group 3.5 - -
State and local taxes, net of federal tax benefit .9 .6 2.1
Foreign taxes, net of federal tax benefit (5.0) (8.1) (1.5)
Revision of prior years' tax estimates and other changes in
valuation allowances (.6) 14.9 8.7
Financial reporting/tax basis differences - .1 9.4
Losses and expenses for which no federal tax benefit was
recognized - (9.2) -
Other (3.7) .1 (3.8)
------- ------- -------
$82.5 $9.2 $(2.0)
======= ======= =======
</TABLE>
As shown in the Consolidated Statement of Operations for the year
ended December 31, 1993, the Company reported an extraordinary
loss related to the early extinguishment of debt. The Company
reported the loss net of related deferred federal income taxes of
$27.5 which approximated the federal statutory income tax rate in
effect on the dates the transactions occurred. The related
deferred income tax benefits recorded by the Company in respect
of SFAS 106 and SFAS 112 were recorded at the federal statutory
rate in effect on the dates the accounting standards were adopted
before giving effect to certain valuation allowances. At
December 31, 1993 and 1992, the Company recorded a charge to
equity for additional pension liabilities pursuant to Statement
of Financial Accounting Standards No. 87, Employers' Accounting
for Pensions. The Company recorded the 1993 charge net of
related deferred federal and state income taxes of $8.7, which
approximated the federal and state statutory rate. The Company
did not record a tax benefit with respect to the 1992 charge.
The components of the Company's net deferred income tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
January 1,
1993
(date of
December 31, 1993 adoption)
---------------- ----------------
<S> <C> <C>
Deferred income tax assets:
Postretirement benefits other than pensions $288.2 $273.6
Loss and credit carryforwards 161.5 137.3
Other liabilities 116.8 75.0
Real estate 75.9 39.1
Pensions 60.7 46.2
Timber and timberlands 46.5 41.2
Foreign and state deferred income tax liabilities 33.0 44.6
Property, plant and equipment 24.1 24.5
Other 36.1 45.0
Valuation allowances (149.3) (160.4)
-------- --------
Total deferred income tax assets, net 693.5 566.1
-------- --------
Deferred income tax liabilities:
Property, plant and equipment (224.2) (215.6)
Investments in and advances to unconsolidated
affiliates (60.6) (60.9)
Inventories (33.3) (36.3)
Other (31.2) (44.2)
-------- --------
Total deferred income tax liabilities (349.3) (357.0)
-------- --------
Net deferred income tax assets $344.2 $209.1
======== ========
</TABLE>
The valuation allowances listed above relate primarily to loss
and credit carryforwards and postretirement benefits other than
pensions. As of December 31, 1993, approximately $206.8 of the
net deferred income tax assets listed above are attributable to
Kaiser. Of this amount, approximately $82.4 relate to the
benefit of loss and credit carryforwards, net of valuation
allowances. The Company evaluated all appropriate factors to
determine the proper valuation allowances for these
carryforwards, including any limitations concerning their use,
the year the carryforwards expire and the levels of taxable
income necessary for utilization. For example, full valuation
allowances were provided for certain credit carryforwards that
expire in the near term. With regard to future levels of income,
the Company believes that Kaiser, based on the cyclical nature of
its business, its history of prior operating earnings and its
expectations for future years, will more likely than not generate
sufficient taxable income to realize the benefit attributable to
the loss and credit carryforwards for which valuation allowances
were not provided. The remaining portion of Kaiser's net
deferred income tax assets is approximately $124.4. A principal
component of this amount is the tax benefit associated with the
accrual for postretirement benefits other than pensions. The
future tax deductions with respect to the turnaround of this
accrual will occur over a thirty to forty year period. If such
deductions create or increase a net operating loss in any one
year, Kaiser has the ability to carry forward such loss for
fifteen taxable years. For these reasons, the Company believes a
long-term view of profitability is appropriate and has concluded
that this net deferred income tax asset will more likely than not
be realized despite Kaiser's recent decline in profitability. The
net deferred income tax assets listed above which are not
attributable to Kaiser are approximately $137.4, as of
December 31, 1993. This amount includes approximately $122.4
which relates to the excess of the tax basis over financial
statement basis with respect to timber and timberlands and real
estate. The Company has concluded that it is more likely than
not that these net deferred income tax assets will be realized
based in part upon the estimated values of the underlying assets
which are in excess of their tax basis.
Certain of the deferred income tax assets and liabilities listed
above are included on the Consolidated Balance Sheet in the
captions entitled prepaid expenses and other current assets,
other accrued liabilities and other noncurrent liabilities.
The Company files consolidated federal income tax returns
together with its domestic subsidiaries. As a consequence of
Kaiser's public offering of shares on June 30, 1993, as discussed
in Note 7, Kaiser and its subsidiaries are no longer included in
the consolidated federal income tax return group of the Company.
Kaiser and its subsidiaries have become members of a new
consolidated return group of which Kaiser is the common parent
corporation (the "New Kaiser Tax Group"). The New Kaiser Tax
Group will file a consolidated federal income tax return for
taxable periods beginning on or after July 1, 1993.
Income taxes are classified as either domestic or foreign based
on whether payment is made or due to the United States or a
foreign country. Certain income classified as foreign is subject
to domestic income taxes.
The following table presents the tax attributes for federal
income tax purposes at December 31, 1993 attributable to the
Company and to the New Kaiser Tax Group. The allocation of these
attributes among the companies, as well as the amounts listed,
may change based upon the final 1993 tax returns. The
utilization of certain of these tax attributes are subject to
limitations.
<TABLE>
<CAPTION>
The Company New Kaiser Tax Group
---------------------- ------------------------
Expiring Expiring
Through Through
---------- ------------
<S> <C> <C> <C> <C>
Regular Tax Attribute Carryforwards:
Current year net operating loss $14.0 2008 $83.4 2008
Prior year net operating losses 16.0 2007 54.9 2006
General business tax credits .9 2002 41.6 2006
Foreign tax credits - - 19.8 1998
Alternative minimum tax credits 1.6 Indefinite 15.3 Indefinite
Alternative Minimum Tax Attribute
Carryforwards:
Current year net operating loss $- - $56.0 2008
Prior year net operating losses 8.5 2007 24.0 2002
Foreign tax credits - - 12.0 1998
</TABLE>
6. EMPLOYEE BENEFIT AND INCENTIVE PLANS
Postretirement Benefits Other Than Pensions
The Company has unfunded defined postretirement benefit plans
which cover most of its employees. Under the plans, employees
are eligible for health care benefits (and life insurance
benefits for Kaiser employees) upon retirement. Retirees from
companies other than Kaiser make contributions for a portion of
the cost of their health care benefits. Kaiser amended certain
salaried retiree group insurance benefits effective January 1,
1994 to provide for additional cost-sharing features, such as
reducing certain reimbursements and requiring future retiree
contributions which will lower salaried retiree medical expenses.
The Company adopted SFAS 106 as of January 1, 1993. The costs of
postretirement benefits other than pensions are now accrued over
the period the employees provide services to the date of their
full eligibility for such benefits. Previously, such costs were
expensed as actual claims were incurred. The cumulative effect
of the change in accounting principle for the adoption of SFAS
106 was recorded as a charge to results of operations of $437.9,
net of related benefits for minority interests of $63.6 and
income taxes of $236.8.
A summary of the components of net periodic postretirement
benefit cost for the year ended December 31, 1993 is as follows:
<TABLE>
<S> <C>
Service cost -- benefits earned during the year $7.4
Interest cost on accumulated postretirement benefit 59.0
obligation -----
Net periodic postretirement benefit cost $66.4
=====
</TABLE>
The adoption of SFAS 106 increased the Company's loss before
extraordinary item and cumulative effect of changes in accounting
principles by $13.3, or $1.41 per share ($19.9 before income
taxes), for the year ended December 31, 1993. Kaiser's cost of
providing postretirement health care and life insurance benefits
to retired employees was $47.2 and $40.2 for the years ended
December 31, 1992 and 1991, respectively.
The postretirement benefit liability recognized in the Company's
Consolidated Balance Sheet was:
<TABLE>
<CAPTION>
January 1,
1993
December 31, (date of
1993 adoption)
----------- ---------
<S> <C> <C>
Retirees $631.2 $583.5
Actives eligible for benefits 35.1 32.7
Actives not eligible for benefits 133.2 122.1
------- -------
Accumulated postretirement benefit
obligation 799.5 738.3
Unrecognized prior service cost 35.0 -
Unrecognized net loss (66.8) -
------- -------
Postretirement benefit liability $767.7 $738.3
======= =======
</TABLE>
The annual assumed rates of increase in the per capita cost of
covered benefits (i.e., health care cost trend rates) are
approximately 9.5% and 8.0% for retirees under age 65 and over
age 65, respectively, and are assumed to decrease gradually to
approximately 5.25% for 2006 and remain at that level thereafter.
Each one percentage point increase in the assumed health care
cost trend rate would increase the accumulated postretirement
benefit obligation as of December 31, 1993 by approximately $97.0
and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost by approximately $9.6.
The discount rate and rate of compensation increase used in
determining the accumulated postretirement benefit obligation
were 7.5% and 5.0% at December 31, 1993, respectively, and 8.25%
and 5.0% at January 1, 1993, respectively.
Retirement Plans
The Company has various retirement plans which cover essentially
all employees. Most of the Company's employees are covered by
defined benefit plans. The benefits are determined under
formulas based on years of service and the employee's
compensation. The Company's funding policy is to contribute
annually an amount at least equal to the minimum cash
contribution required by ERISA.
The Company has various defined contribution savings plans
designed to enhance the existing retirement programs of
participating employees. Under the MAXXAM Inc. Savings Plan,
employees may elect to contribute up to 16% of their compensation
to the plan. For those participants who have elected to make
voluntary contributions to the plan, the Company's contributions
consist of a matching contribution of up to 4% of the
compensation of participants for each calendar quarter. Under
the Kaiser Aluminum Savings and Retirement Plan, salaried
employees may elect to contribute from 2% to 18% of their
compensation to the plan. For those eligible participants who
have elected to make contributions to the plan, Kaiser's
contributions are determined based on earnings and net worth
formulas.
A summary of the components of net periodic pension costs for the
defined benefit plans and total pension costs for the defined
contribution plans and non-qualified retirement and incentive
plans is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Defined benefit plans:
Service cost-benefits earned during the year $13.0 $13.1 $11.5
Interest cost on projected benefit obligations 60.8 60.2 60.4
Return on assets:
Actual gain (73.9) (28.2) (102.4)
Deferred gain (loss) 15.9 (31.2) 49.9
Net amortization and deferral 4.7 2.9 1.9
------ ------ -------
Net periodic pension cost 20.5 16.8 21.3
Defined contribution plans 1.7 1.7 3.6
Non-qualified retirement and incentive plans 4.3 5.5 4.8
------ ------ -------
$26.5 $24.0 $29.7
====== ====== =======
</TABLE>
The following table sets forth the funded status and amounts
recognized for the defined benefit plans in the Consolidated
Balance Sheet:
<TABLE>
<CAPTION>
December 31,
---------------------
1993 1992
--------- ---------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation $724.1 $678.2
Non-vested benefit obligation 42.2 51.4
------- -------
Total accumulated benefit obligation $766.3 $729.6
======= =======
Projected benefit obligation $816.8 $767.1
Plan assets at fair value, primarily fixed income (590.8) (588.6)
securities and common stocks ------- -------
Projected benefit obligation in excess of plan assets 226.0 178.5
Unrecognized net transition obligation (1.7) (2.7)
Unrecognized net loss (76.2) (34.9)
Unrecognized prior service cost (17.8) (17.0)
Adjustment required to recognize minimum liability 47.7 25.3
------- -------
Accrued pension cost $178.0 $149.2
======= =======
</TABLE>
The assumptions used in accounting for the defined benefit plans were
as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Rate of increase in compensation levels 5.0% 5.0% 5.0%
Discount rate 7.5% 8.25% 8.25%
Expected long-term rate of return on assets 10.0% 10.0% 10.0%
</TABLE>
The Company has recorded an additional pension liability equal to
the excess of the accumulated benefit obligation over the fair
value of plan assets. The amount of the additional pension
liability in excess of unrecognized prior service cost is
recorded as a charge to stockholders' equity. In 1993 and 1992,
the additional pension liability charged to stockholders' equity
amounted to $14.9 and $9.0, respectively.
Postemployment Benefits
The Company adopted SFAS 112 as of January 1, 1993. The costs of
postemployment benefits are now accrued over the period the
employees provide services to the date of their full eligibility
for such benefits. Previously, such costs were expensed as
actual claims were incurred. The cumulative effect of the change
in accounting principle for the adoption of SFAS 112 was recorded
as a charge to results of operations of $6.4, net of related
benefits for minority interests of $1.0 and income taxes of $3.4.
Incentive Plans
Kaiser has an unfunded Long-Term Incentive Plan (the "LTIP") for
certain key employees. All compensation vested as of December
31, 1992 under the LTIP, as amended in 1991 and 1992, has been
paid to the participants in cash or common stock of Kaiser as of
December 31, 1993. Under the LTIP, as amended, 764,092 shares of
Kaiser common stock were distributed to participants during 1993
which will generally vest at the rate of 25% per year. Kaiser
will record the related expense of approximately $6.5 over the
four-year period ending December 31, 1996.
In 1993, Kaiser adopted the Kaiser 1993 Omnibus Stock Incentive
Plan. At December 31, 1993, Kaiser had 1,151,608 shares of its
common stock reserved for awards or for payment of rights granted
under this plan. In 1993, the stockholders approved the award of
584,300 shares as "nonqualified stock options" to members of
management other than those participating in the LTIP. These
options will generally vest at the rate of 20% per year over the
next five years, commencing May 18, 1994. The exercise price of
these shares is $7.25 per share (the quoted market price at the
date of grant).
7. MINORITY INTERESTS
Minority interests represent the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1993 1992
--------- ---------
<S> <C> <C>
Kaiser Aluminum Corporation:
Common stock, par $.01 (Note 8) $ - $71.8
$.65 Depositary Shares 119.3 -
Subsidiary redeemable preference stock:
KACC Series A and B Cumulative Preference Stock, par $1 33.6 32.8
KACC Cumulative Convertible Preference Stock, par $100 1.8 2.0
KACC Minority Interest:
Alumina Partners of Jamaica 56.9 58.8
Volta Aluminium Company Limited 11.5 11.3
Kaiser LaRoche Hydrate Partners 1.2 -
------ ------
$224.3 $176.7
====== ======
</TABLE>
As a result of Kaiser's public offering of its common stock in
1991, the issuance of preferred stock in 1993 and 1994 (each as
described below) and, to a lesser extent, the issuance of common
stock in connection with the LTIP (as described above), the
Company's voting interest in Kaiser has decreased to
approximately 61% on a fully diluted basis, as of February 17,
1994.
$.65 Depositary Shares
On June 30, 1993, Kaiser issued 17,250,000 of its $.65 Depositary
Shares (the "Depositary Shares"), each representing one-tenth of
a share of Series A Mandatory Conversion Premium Dividend
Preferred Stock (the "Series A Shares"). In connection with the
issuance of the Depositary Shares, Kaiser issued an additional
2,132,950 of its Depositary Shares to MGI in exchange for a $15.0
promissory note issued by KACC which evidenced a $15.0 cash loan
made by MGI to KACC in January 1993 (the "MGI Loan"). Kaiser
used approximately $81.5 of the net proceeds it received from the
sale of the Depositary Shares together with the MGI Loan to make
a capital contribution to KACC, and $37.8 of the net proceeds it
received from the sale of the Depositary Shares to make a non-interest
bearing loan to KACC (evidenced by a note) which is
designed to provide sufficient funds to make the required
dividend payments on the Series A Shares until June 30, 1996 (the
"Series A Shares Mandatory Conversion Date"). KACC used
approximately $13.7 of such funds to prepay the remaining balance
of the Term Loan under the 1989 Credit Agreement and $105.6 of
such funds to reduce outstanding borrowings under the Revolving
Credit Facility of the 1989 Credit Agreement. On June 30, 1996,
each of the outstanding Depositary Shares will automatically
convert (upon the automatic conversion of the Series A Shares)
into (i) one share of Kaiser's common stock, plus (ii) the right
to receive an amount in cash equal to the accrued and unpaid
dividends payable with respect to such Depositary Shares.
Automatic conversion of the outstanding Depositary Shares (and
the Series A Shares) will occur upon certain mergers or
consolidations of Kaiser (as defined). At any time or from time
to time prior to June 30, 1996, Kaiser may call the outstanding
Depositary Shares (by calling the Series A Shares) for
redemption, in whole or in part, at a call price per Depositary
Share initially equal to $12.46, declining by $.0018 on each day
following the date of issue to $10.624 on April 30, 1996, and
equal to $10.51 thereafter, payable in shares of common stock
having an aggregate Current Market Price (as defined) equal to
the applicable call price, plus an amount in cash equal to all
accrued and unpaid dividends payable with respect to such
Depositary Share. Holders of Depositary Shares (based on the
voting rights of the Series A Shares) have one vote for each
Depositary Share held of record, except as required by law, and
are entitled to vote with the holders of common stock on all
matters submitted to a vote of Kaiser's common stockholders. The
Depositary Shares call for the payment of quarterly dividends
(when and as declared by Kaiser's Board of Directors) of
approximately $3.2 ($.1625 per share). The Company has accounted
for Kaiser's issuance of the Depositary Shares as additional
minority interest.
On October 13, 1993, Kaiser filed a registration statement with
the Securities and Exchange Commission for the sale to the public
of the 2,132,950 Depositary Shares the Company exchanged for the
MGI Loan, as described above. The registration statement was
declared effective by the Securities and Exchange Commission on
November 15, 1993. The Company may consummate the sale of all or
any portion of such Depositary Shares at any time.
Subsidiary Redeemable Preference Stock
In March 1985, KACC entered into a three-year agreement with the
United Steelworkers of America ("USWA") whereby shares of a new
series of KACC Cumulative (1985 Series A) Preference Stock (the
"Series A Stock") would be issued to an employee stock ownership
plan in exchange for certain elements of wages and benefits.
Concurrently, a similar plan was established for certain
nonbargaining employees which provided for the issuance of KACC
Cumulative (1985 Series B) Preference Stock (the "Series B
Stock"). The Series A Stock and the Series B Stock ("Series A
and B Stock") each have a liquidation and redemption value of $50
per share plus accrued dividends, if any, and have a total
redemption value of $54.1 at December 31, 1993. Issuances and
redemptions of Series A and B Stock are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Shares:
Beginning of year 1,163,221 1,305,550 1,718,051
Issued - - 1,868
Redeemed (81,673) (142,329) (414,369)
---------- ---------- ----------
End of year 1,081,548 1,163,221 1,305,550
========== ========== ==========
</TABLE>
No additional Series A or B Stock will be issued based on
compensation earned in 1992 or subsequent years. While held by
the plan trustee, Series B Stock is entitled to cumulative annual
dividends, when and as declared by KACC's Board of Directors,
payable in Series B Stock or in cash at the option of KACC on or
after March 1, 1991, with respect to years commencing January 1,
1990, based on a formula tied to KACC's income before tax from
aluminum operations. When distributed to plan participants
(generally upon separation from KACC), the Series A and B Stock
is entitled to an annual cash dividend of $5 per share, payable
quarterly, when and as declared by KACC's Board of Directors.
Redemption fund agreements require KACC to make annual payments
by March 31 of each year based on a formula tied to KACC's
consolidated net income until the redemption funds are sufficient
to redeem all Series A and B Stock. On an annual basis, the
minimum payment is $4.3 and the maximum payment is $7.3. In
March 1992 and 1993, KACC contributed $7.0 and $4.3 for the years
ended December 31, 1991 and 1992, respectively, and will
contribute $4.3 in March 1994 for the year ended
December 31, 1993.
Under the USWA labor contract effective November 1, 1990, KACC
was obligated to offer to purchase up to 80 shares of Series A
Stock from each active participant in 1991 at a price equal to
its redemption value of $50 per share. KACC also agreed to offer
to purchase up to an additional 40 shares from each participant
in 1994. The employees may elect to receive their shares, accept
cash or place the proceeds into KACC's 401(k) savings plan.
Under separate action, KACC also offered to purchase 80 shares of
Series B Stock from active participants in 1991 and 40 shares in
1994. Under the provisions of these contracts, in February 1994,
KACC purchased $4.6 and $.8 of the Series A Stock and Series B
Stock, respectively.
The Series A and B Stock is distributed in the event of death or
retirement of the plan participant, or in other specified
circumstances. KACC may also redeem such stock at $50 per share
plus accrued dividends, if any. At the option of the plan
participant, the trustee shall redeem stock distributed from the
plans at the redemption value to the extent funds are available
in the redemption fund. Under the Tax Reform Act of 1986, at the
option of the plan participant, KACC must purchase distributed
shares earned after December 31, 1985 at the redemption value on
a five-year installment basis with interest at market rates. The
obligation of KACC to make such installment payments must be
secured.
The Series A and B Stock is entitled to the same voting rights as
KACC common stock and to certain additional voting rights under
certain circumstances, including the right to elect, along with
other KACC preference stockholders, two directors whenever
accrued dividends have not been paid on two annual dividend
payment dates, or when accrued dividends in an amount equivalent
to six full quarterly dividends are in arrears. The Series A and
B Stock restricts the ability of KACC to redeem or pay dividends
on its common stock if KACC is in default on any dividends
payable on the Series A and B Stock.
8.255% Preferred Redeemable Increased Dividend Equity Securities
On February 17, 1994, Kaiser consummated a public offering for
the sale of 8,000,000 shares of its PRIDES. The net proceeds
from the sale of the PRIDES were approximately $90.6. Kaiser
used $30.0 of such net proceeds to make a non-interest bearing
loan to KACC (evidenced by a note) which is designed to provide
sufficient funds to make the required dividend payments on the
PRIDES until December 31, 1997 (the "PRIDES Mandatory Conversion
Date") and $60.6 of such net proceeds to make a capital
contribution to KACC. Holders of shares of PRIDES have a 4/5
vote for each share held of record and, except as required by
law, are entitled to vote together with the holders of Kaiser's
common stock and together with the holders of any other classes
or series of Kaiser's stock (including the Series A Shares) who
are entitled to vote in such manner on all matters submitted to a
vote of common stockholders. On December 31, 1997, unless either
previously redeemed or converted at the option of the holder,
each of the outstanding shares of PRIDES will mandatorily convert
into (i) one share of Kaiser's common stock, subject to
adjustment in certain events, and (ii) the right to receive an
amount in cash equal to all accrued and unpaid dividends thereon.
Shares of PRIDES are not redeemable prior to December 31, 1996.
At any time and from time to time on or after December 31, 1996,
Kaiser may redeem any or all of the outstanding shares of PRIDES.
Upon any such redemption, each holder will receive, in exchange
for each share of PRIDES, the number of shares of Kaiser's common
stock equal to (A) the sum of (i) $11.9925, declining after
December 31, 1996 to $11.75 until December 31, 1997, plus, in the
event Kaiser does not elect to pay cash dividends to the
redemption date, (ii) all accrued and unpaid dividends thereon
divided by (B) the Current Market Price (as defined) on the
applicable date of determination, but in no event less than .8333
of a share of Kaiser's common stock, subject to adjustment in
certain events. At any time prior to December 31, 1997, unless
previously redeemed, each share of PRIDES is convertible at the
option of the holder thereof into .8333 of a share of Kaiser's
common stock (equivalent to a conversion price of $14.10 per
share of Kaiser's common stock), subject to adjustment in certain
events. The number of shares of Kaiser's common stock a holder
will receive upon redemption, and the value of the shares
received upon conversion, will vary depending on the market price
of Kaiser's common stock from time to time. The PRIDES call for
the payment of quarterly dividends of approximately $1.9 ($.2425
per share). The Company will account for Kaiser's issuance of
the PRIDES as additional minority interest in 1994.
8. STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
The holders of the Company's Class A Preferred Stock are entitled
to receive, if and when declared, preferential cash dividends at
the rate of $.05 per share per annum and will participate
thereafter on a share for share basis with the holders of common
stock in all cash dividends, other than cash dividends on the
common stock in any fiscal year to the extent not exceeding $.05
per share. Stock dividends declared on the common stock will
result in the holders of the Class A Preferred Stock receiving an
identical stock dividend payable in shares of Class A Preferred
Stock. At the option of the holder, the Class A Preferred Stock
is convertible at any time into shares of common stock at the
rate of one share of common stock for each share of Class A
Preferred Stock. Each holder of Class A Preferred Stock is
generally entitled to ten votes per share on all matters
presented to a vote of the Company's stockholders.
Sale of Subsidiary Stock
On July 18, 1991, Kaiser consummated its initial public offering
of 7.25 million shares of its common stock at a price of $14 per
share. The 7.25 million shares represented approximately a 12.7%
interest in Kaiser. Kaiser received approximately $93.2, net of
related offering costs, from the sale. Seventy-five percent of
the net proceeds were used to prepay certain notes together with
accrued interest thereon to MGI, and the remaining 25% was used
to prepay a portion of the indebtedness under Kaiser's 1989
Credit Agreement. As a result of the sale of Kaiser's common
stock, the Company's equity in Kaiser's net assets immediately
after the sale was approximately $28.5 higher than its historical
cost. The Company has accounted for this difference as an
increase in additional capital.
Stock Option Plans
The 1980 Incentive Plan authorized the granting of options to
purchase up to 750,000 shares of the Company's common stock
through June 1990. Options granted were exercisable at the
market price at the date of grant and became exercisable in five
equal annual installments, commencing one year from the date of
grant, and expiring ten years from the date of grant. On July 1,
1988, pursuant to the terms of the 1980 Incentive Plan, holders
of the 1980 Incentive Plan options were granted stock
appreciation rights. During the years ended December 31, 1992
and 1991, 63,000 options and 110,000 options were exercised at
prices ranging from $7.875 to $15.75 per share resulting in the
issuance of 19,761 shares and 54,037 shares, respectively. At
December 31, 1992, all options to purchase shares under the 1980
Incentive Plan had been exercised.
In 1988, 354,000 options granted under MGI's 1976 Stock Option
Plan (the "MGI 1976 Plan"), at prices ranging from $7.875 to
$18.75 per share, were converted into the right to receive, upon
exercise of each option, $6.11 in cash, .25 shares of the
Company's common stock (88,500 shares) and $6.00 principal amount
of the Reset Notes. Options granted under the MGI 1976 Plan
generally were exercisable for a period of ten years from the
date of grant. During 1993 and 1992, 60,000 options and 100,000
options granted under the MGI 1976 Plan at prices of $10.875 and
$11.625 per share, respectively, were surrendered for a cash
payment in lieu of the consideration referred to above. At
December 31, 1993, all options granted under the MGI 1976 Plan
had been exercised.
Shares Reserved for Issuance
At December 31, 1993, the Company had 678,239 common shares
reserved for future issuance upon conversion of the Class A
Preferred Stock.
Rights
On November 29, 1989, the Board of Directors of the Company
declared a dividend to its stockholders consisting of (i) one
Series A Preferred Stock Purchase Right (the "Series A Right")
for each outstanding share of the Company's Class A Preferred
Stock and (ii) one Series B Preferred Stock Purchase Right (the
"Series B Right") for each outstanding share of the Company's
common stock. The Series A Right and the Series B Right are
collectively referred to herein as the "Rights."The Rights are
exercisable only if a person or group of affiliated or associated
persons (an "Acquiring Person") acquires beneficial ownership, or
the right to acquire beneficial ownership, of 15% or more of the
Company's common stock, or announces a tender offer that would
result in beneficial ownership of 15% or more of the outstanding
common stock. Any person or group of affiliated or associated
persons who, as of November 29, 1989, was the beneficial owner of
at least 15% of the outstanding common stock will not be deemed
to be an Acquiring Person unless such person or group acquires
beneficial ownership of additional shares of common stock
(subject to certain exceptions). Each Series A Right, when
exercisable, entitles the registered holder to purchase from the
Company one share of Class A Preferred Stock at an exercise price
of $165.00, subject to adjustment. Each Series B Right, when
exercisable, entitles the registered holder to purchase from the
Company one one-hundredth of a share of the Company's new Class B
Junior Participating Preferred Stock, with a par value of $.50
per share (the "Junior Preferred Stock"), at an exercise price of
$165.00, subject to adjustment.
Under certain circumstances, including if any person becomes an
Acquiring Person other than through certain offers for all
outstanding shares of stock of the Company, or if an Acquiring
Person engages in certain "self-dealing" transactions, each
Series A Right would enable its holder to buy Class A Preferred
Stock (or, under certain circumstances, preferred stock of an
acquiring company) having a value equal to two times the exercise
price of the Series A Right, and each Series B Right shall enable
its holder to buy common stock of the Company (or, under certain
circumstances, common stock of an acquiring company) having a
value equal to two times the exercise price of the Series B
Right. Under certain circumstances, Rights held by an Acquiring
Person will be null and void. In addition, under certain
circumstances, the Board is authorized to exchange all
outstanding and exercisable Rights for stock, in the ratio of one
share of Class A Preferred Stock per Series A Right and one share
of common stock of the Company per Series B Right. The Rights,
which do not have voting privileges, expire in 1999, but may be
redeemed by action of the Board prior to that time for $.01 per
right, subject to certain restrictions.
Voting Control
Federated Development Company ("Federated") and Mr. Charles E.
Hurwitz collectively own 97.0% of the Company's Class A Preferred
Stock and 31.3% of the Company's common stock (resulting in
combined voting control of approximately 60.0% of the Company).
Mr. Hurwitz is the Chairman of the Board, President and Chief
Executive Officer of the Company and Chairman and Chief Executive
Officer of Federated. Federated is wholly owned by Mr. Hurwitz,
members of his immediate family and trusts for the benefit
thereof.
9. RELATED PARTY TRANSACTIONS
In 1987, the Company entered into loan agreements with Federated
for up to $26.0 of nonrecourse loans, secured by real estate
located in Rancho Mirage, California ("Mirada"). In July 1991,
these loans were assumed by MCO Properties Inc. ("MCOP"), a
wholly owned subsidiary of the Company (see "Exchange" below).
The Company recorded interest income on these loans amounting to
$1.1 for the year ended December 31, 1991.
In July 1991, an exchange agreement (the "Exchange") was
consummated by and among the Company, MCOP and Federated.
Pursuant to the terms of the Exchange, MCOP paid Federated $1.4
in cash, issued to Federated 394 shares of its 7% Cumulative
Exchangeable Preferred Stock (having a liquidation value of $3.9)
and assumed liabilities of $36.2, of which $34.2 was due the
Company. The MCOP Preferred Stock is exchangeable into shares of
the Company's common stock at an exchange price of approximately
$55.40 per share, subject to various antidilution provisions.
MCOP received the Mirada real estate assets, with an appraised
value of approximately $42.9, and 801,941 common shares and
47,702 Series E preferred shares of United Financial Group, Inc.
Due to the commonality of the ownership of the Company and
Federated, the Mirada assets acquired by MCOP were valued for
financial accounting purposes at Federated's basis immediately
before the transaction of $13.6. Accordingly, the Exchange
resulted in a charge to the Company's additional capital of
approximately $24.0.
Certain affiliated parties of the Company, including Mr. Charles
E. Hurwitz, collectively hold less than an 11% equity interest in
SHRP.
10. COMMITMENTS AND CONTINGENCIES
Commitments
The Company, principally through Kaiser, has financial
commitments, including purchase agreements, tolling arrangements,
forward foreign exchange contracts and forward sales contracts,
letters of credit and other guarantees. Purchase agreements and
tolling arrangements include agreements for the supply of alumina
to, and the purchase of aluminum from, Anglesey.
Similarly, KACC has long-term agreements for the purchase and
tolling of bauxite into alumina in Australia by QAL. These
obligations expire in 2008. Under the agreements, KACC is
unconditionally obligated to pay its proportional share of debt,
operating costs and certain other costs of this joint venture.
The aggregate minimum amount of required future principal
payments at December 31, 1993 is $73.6, due in 1997. KACC's
share of payments, including operating costs and certain other
expenses under the agreement, was $86.7, $99.2 and $107.6 for the
years ended December 31, 1993, 1992 and 1991, respectively.
Minimum rental commitments under operating leases at December 31,
1993 are as follows: years ending December 31, 1994 -- $27.9;
1995 -- $27.0; 1996 -- $26.3; 1997 -- $24.6; 1998 -- $26.1;
thereafter -- $248.8. Rental expense for operating leases was
$31.3, $29.2 and $29.1 for the years ended December 31, 1993,
1992 and 1991, respectively. The minimum future rentals
receivable under noncancelable subleases at December 31, 1993
were $92.8.
Environmental Contingencies
Kaiser and KACC are subject to a wide variety of environmental
laws and regulations and to fines or penalties assessed for
alleged breaches of the environmental laws and to claims and
litigation based upon such laws. KACC is currently subject to a
number of lawsuits under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments Reauthorization Act of 1986 ("CERCLA")
and, along with certain other entities, has been named as a
potentially responsible party for remedial costs at certain
third-party sites listed on the National Priorities List under
CERCLA.
Based upon Kaiser's evaluation of these and other environmental
matters, Kaiser has established environmental accruals primarily
related to potential solid waste disposal and soil and
groundwater remediation matters. The following table presents
the changes in such accruals, which are primarily included in
other noncurrent liabilities:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year $46.4 $51.5 $57.7
Additional amounts 1.7 4.5 7.8
Less expenditures (7.2) (9.6) (14.0)
------ ------ ------
Balance at end of year $40.9 $46.4 $51.5
====== ====== ======
</TABLE>
These environmental accruals represent Kaiser's estimate of costs
reasonably expected to be incurred based upon presently enacted
laws and regulations, currently available facts, existing
technology and Kaiser's assessment of the likely remediation
action to be taken. Kaiser expects that these remediation
actions will be taken over the next several years and estimates
that expenditures to be charged to the environmental accrual will
be approximately $4.0 to $8.0 for the years 1994 through 1998 and
an aggregate of approximately $12.8 thereafter.
As additional facts are developed and definitive remediation
plans and necessary regulatory approvals for implementation of
remediation are established, or alternative technologies are
developed, changes in these and other factors may result in
actual costs exceeding the current environmental accruals by
amounts which cannot presently be estimated. While uncertainties
are inherent in the ultimate outcome of these matters and it is
impossible to presently determine the actual costs that
ultimately may be incurred, management believes that the
resolution of such uncertainties should not have a material
adverse effect upon Kaiser's consolidated financial position or
results of operations.
Asbestos Contingencies
KACC is a defendant in a number of lawsuits in which the
plaintiffs allege that certain of their injuries were caused by
exposure to asbestos during, and as a result of, their employment
with KACC or to products containing asbestos produced or sold by
KACC. The lawsuits generally relate to products KACC has not
manufactured for at least 15 years.
At year-end 1993, the number of such lawsuits pending was
approximately 23,400 (approximately 11,400 of which were received
in 1993). The number of such lawsuits instituted against KACC
increased substantially in 1993, and management believes the
number of such lawsuits will continue at approximately the same
rate for the next few years.
In connection with such litigation, during 1993, 1992, and 1991,
KACC made cash payments for settlement and other related costs of
$7.0, $7.1 and $6.1, respectively. Based upon prior experience,
Kaiser estimates annual future cash payments in connection with
such litigation of approximately $8.0 to $13.0 for the years 1994
through 1998, and will aggregate approximately $88.4 thereafter
through 2006. Based upon past experience and reasonably
anticipated future activity, Kaiser has established an accrual
for estimated asbestos-related costs for claims filed and
estimated to be filed and settled through 2006. Kaiser does not
presently believe there is a reasonable basis for estimating such
costs beyond 2006 and, accordingly, no accrual has been recorded
for such costs which may be incurred. This accrual was
calculated based upon the current and anticipated number of
asbestos-related claims, the prior timing and amounts of
asbestos-related payments, the current state of case law related
to asbestos claims, the advice of counsel and the anticipated
effects of inflation and discounting at an estimated risk-free
rate (5.25% at December 31, 1993). Accordingly, an accrual of
$102.8 for asbestos-related expenditures is included primarily in
other noncurrent liabilities at December 31, 1993. The aggregate
amount of the undiscounted liability at December 31, 1993 of
$141.5, before considerations for insurance recoveries, reflects
an increase of $56.6 from the prior year, resulting primarily
from an increase in claims filed during 1993 and Kaiser's belief
that the number of such lawsuits will continue at approximately
the same rate for the next few years.
Kaiser believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs.
While claims for recovery from one of KACC's insurance carriers
are currently subject to pending litigation and other carriers
have raised certain defenses, Kaiser believes, based upon prior
insurance-related recoveries in respect of asbestos-related
claims, existing insurance policies and the advice of counsel,
that substantial recoveries from the insurance carriers are
probable. Accordingly, estimated insurance recoveries of $94.0,
determined on the same basis as the asbestos-related cost
accrual, are recorded primarily in long-term receivables and
other assets as of December 31, 1993.
Based upon the factors discussed in the two preceding paragraphs,
management currently believes that there is no more than a remote
possibility (under generally accepted accounting principles) that
Kaiser's asbestos-related costs net of related insurance
recoveries will exceed those accrued as of December 31, 1993 and,
accordingly, that the resolution of such uncertainties and the
incurrence of such net costs should not have a material adverse
effect upon Kaiser's consolidated financial position or results
of operations.
Other Contingencies
The Company is involved in various other claims, lawsuits and
other proceedings relating to a wide variety of matters. While
there are uncertainties inherent in the ultimate outcome of such
matters and it is impossible to presently determine the actual
costs that may be incurred, management believes that the
resolution of such uncertainties and the incurrence of such costs
should not have a material adverse effect upon the Company's
consolidated financial position or results of operations.
11. SEGMENT INFORMATION
The following tables present financial information by industry
segment and by geographic area at December 31, 1993 and 1992 and
and for the three years ended December 31, 1993, 1992 and 1991. As a
result of the Forest Products Group Formation described in Note
1, the Company has restated its presentation of operating income
(loss) and identifiable assets of the forest products and
corporate segments for the years ended December 31, 1992 and
1991.
Industry Segments
<TABLE>
<CAPTION>
Bauxite Forest Real
Years and Aluminum Products Estate
Ended Alumina Processing Operations Operations Corporate Total
------- ----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers 1993 $423.4 $1,295.7 $233.5 $78.5 $- $2,031.1
1992 466.5 1,442.6 223.4 70.1 - 2,202.6
1991 550.8 1,450.0 205.7 48.0 - 2,254.5
Operating income (loss) 1993 (20.1) (97.3) 54.3 (13.5) (19.5) (96.1)
1992 44.6 47.0 64.1 (9.3) (15.6) 130.8
1991 127.7 88.7 55.3 (18.8) (17.4) 235.5
Effect of changes in
accounting principles on
operating income (loss):
Postretirement
benefits other
than pensions 1993 (2.3) (16.9) (.4) (.2) (.1) (19.9)
Income taxes 1993 (6.3) (5.6) .1 .7 - (11.1)
Equity in earnings
(losses) of
unconsolidated
affiliates 1993 (2.5) (.8) - - (1.6) (4.9)
1992 1.8 (3.7) - - - (1.9)
1991 (4.4) (15.1) - - - (19.5)
Depreciation and
depletion 1993 33.8 57.3 24.5 4.1 1.1 120.8
1992 29.4 49.2 28.4 3.5 .9 111.4
1991 25.8 47.0 30.4 2.2 .7 106.1
Capital expenditures 1993 35.8 31.9 11.1 7.1 .3 86.2
1992 60.0 54.4 8.7 8.1 1.5 132.7
1991 51.8 66.3 6.1 5.1 1.6 130.9
Investments in and
advances
to unconsolidated
affiliates 1993 151.9 31.3 - - - 183.2
1992 136.7 13.4 - - - 150.1
Identifiable assets 1993 930.7 1,540.5 676.8 215.7 208.3 3,572.0
1992 816.0 1,341.8 666.0 308.3 66.7 3,198.8
</TABLE>
Sales to unaffiliated customers excludes intersegment sales
between bauxite and alumina and aluminum processing of $129.4,
$179.9 and $194.6 for the years ended December 31, 1993, 1992 and
1991, respectively. Intersegment sales are made on a basis
intended to reflect the market value of the products.
Operating losses for Corporate represent general and
administrative expenses of MAXXAM Inc. that are not allocated to
the Company's industry segments. General and administrative
expenses of subsidiary companies are allocated in the Company's
industry segment presentation based upon those segments' ratio of
sales to unaffiliated customers.
Geographical Information
<TABLE>
<CAPTION>
Years Other
Ended Domestic Caribbean Africa Foreign Eliminations Total
--------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers 1993 $1,515.8 $123.2 $207.5 $184.6 $- $2,031.1
1992 1,625.6 120.4 263.5 193.1 - 2,202.6
1991 1,614.8 172.3 269.2 198.2 - 2,254.5
Sales and transfers among
geographic
areas 1993 - 92.3 - 79.6 (171.9) -
1992 - 111.8 - 93.5 (205.3) -
1991 - 116.4 - 112.3 (228.7) -
Operating income (loss) 1993 (125.2) (9.3) 34.1 4.3 - (96.1)
1992 21.2 12.8 78.8 18.0 - 130.8
1991 84.6 42.4 72.1 36.4 - 235.5
Equity in earnings (losses) of
unconsolidated affiliates 1993 (1.6) - - (3.3) - (4.9)
1992 - - - (1.9) - (1.9)
1991 - - - (19.5) - (19.5)
Investments in and advances
to unconsolidated
affiliates 1993 1.0 30.5 - 151.7 - 183.2
1992 1.4 29.5 - 119.2 - 150.1
Identifiable assets 1993 2,740.8 421.7 223.0 186.5 - 3,572.0
1992 2,326.1 433.3 227.5 211.9 - 3,198.8
</TABLE>
Sales and transfers among geographic areas are made on a basis
intended to reflect the market value of the products.
Included in results of operations are aggregate foreign currency
translation and transaction gains of $4.9, $12.0 and $1.2 for the
years ended December 31, 1993, 1992 and 1991, respectively.
Export sales were less than 10% of total revenues during the
years ended December 31, 1993, 1992 and 1991. There was no
single customer which accounted for more than 10% of total net
sales for the year ended December 31, 1993. For the years ended
December 31, 1992 and 1991, the Company had bauxite and alumina
sales of $135.3 and $155.9 and aluminum processing sales of
$144.9 and $160.9 to one customer, respectively.
MAXXAM Inc. and Subsidiaries
Quarterly Financial Information (unaudited)
Summary quarterly financial information for the years ended
December 31, 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------
(IN MILLIONS OF DOLLARS, EXCEPT SHARE March 31 June 30 September 30 December 31
AMOUNTS) ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
1993:
Net sales $513.7 $507.9 $506.5 $503.0
Operating loss (1.8) (1.1) (10.8) (82.4)
Loss before extraordinary item
and cumulative effect of
changes in accounting
principles (25.9) (15.8) (26.8) (63.4)
Extraordinary item, net (44.1) - (6.5) -
Cumulative effect of changes in
accounting principles, net (417.7) - - -
Net loss (487.7) (15.8) (33.3) (63.4)
Per common and common equivalent
share:
Loss before extraordinary
item and cumulative effect
of changes in accounting
principles (2.74) (1.67) (2.83) (6.71)
Extraordinary item, net (4.66) - (.69) -
Cumulative effect of changes
in accounting
principles, net (44.14) - - -
Net loss (51.54) (1.67) (3.52) (6.71)
1992:
Net sales $529.5 $565.0 $531.7 $576.4
Operating income 36.5 44.9 37.7 11.7
Net income (loss) .9 1.4 .7 (10.3)
Per common and common equivalent
share .10 .15 .07 (1.09)
</TABLE>
MAXXAM Inc. and Subsidiaries
Market for the Company's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the American, Pacific and
Philadelphia Stock Exchanges. 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.
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
1993:
First Quarter $35 3/4 $26 5/8
Second Quarter 27 1/4 21 3/4
Third Quarter 34 25 3/8
Fourth Quarter 38 7/8 28 3/8
1992:
First Quarter $43 1/2 $29 3/8
Second Quarter 42 1/2 29 5/8
Third Quarter 33 1/4 24 1/4
Fourth Quarter 29 3/4 22 1/4
</TABLE>
The following table sets forth the number of record holders of
the Company's publicly-owned equity securities as of
March 1, 1994.
<TABLE>
<CAPTION>
Number of
TITLE OF CLASS Record Holders
-------------
<S> <C>
Common Stock 6,413
Class A $.05 Non-Cumulative
Participating Convertible Preferred
Stock 44
</TABLE>
The Company has not declared any cash dividends on its common
stock or its Class A Preferred Stock and has no present intention
of paying such dividends in the immediate future.
CONSENT AND ASSUMPTION AGREEMENT
THIS CONSENT AND ASSUMPTION AGREEMENT is entered into as of
December 10, 1993 by and among GENERAL ELECTRIC CAPITAL CORPORATION, a
New York corporation ("Lender"), MXM MORTGAGE CORP., a Delaware
corporation ("Old Borrower"), MXM MORTGAGE L.P., a Delaware limited
partnership ("New Borrower"), MAXXAM INC., a Delaware corporation, and
MAXXAM GROUP INC., a Delaware corporation (MAXXAM Inc. and MAXXAM
Group Inc. being herein together called "Guarantors"), on the
following terms and conditions:
R E C I T A L S:
A. Lender made a loan to Old Borrower in the principal amount
of up to $132,670,000 (the "Loan"), governed by that Loan Agreement
dated June 17, 1991 as amended by that Loan Increase, Extension and
Modification Agreement (the "Increase Modification") dated
December 30, 1992 between Lender and Old Borrower (as amended, the
"Loan Agreement") between Old Borrower and Lender, and evidenced by
that Promissory Note, dated June 17, 1992, in the stated principal
amount of $115,200,000, executed by Old Borrower, bearing interest and
being payable to the order of Lender as therein provided (the "Note"),
as amended by that First Renewal, Extension and Modification Agreement
(the "First Extension") dated as of June 17, 1992, between Lender and
Old Borrower, and further amended by the Increase Modification; and
further evidenced by that Increase Promissory Note dated December 30,
1992, in the stated principal amount of $17,470,000, executed by Old
Borrower and payable to the order of Lender as therein provided (the
"Increase Note"; the Original Note and the Increase Note being herein
together called the "Note");
B. The indebtedness evidenced by the Note is secured by, among
other collateral, the following:
(1) the following instruments styled First Deed of Trust and
Security Agreement (collectively called the "First Deed of Trust"):
(a) that First Deed of Trust and Security Agreement of even
date with the Loan Agreement, executed by Borrower, recorded in Volume
5091, Page 0751, et seq., of the Official Public Records of Real
Property of Bexar County, Texas, in Volume 91120, Page 2603, et seq.,
of the Deed of Trust Records of Dallas County, Texas, in Volume 3002,
Page 1, et seq., of the Deed of Trust Records of Denton County, Texas,
in Volume 2262, Page 494, et seq., of the Deed of Trust Records of
Gregg County, Texas, under
<PAGE>
Film Code No. 037-12-1689 and corrected and refiled under Film Code
No. ###-##-#### of the Official Public Records of Real Property of
Harris County, Texas, in Volume 878, Page 805, et seq., of the
Official Public Records of Hays County, Texas, in Volume 727, Page
416, et seq., of the Deed of Trust Records of Midland County, Texas,
in Volume 10293, Page 1892, et seq., of the Deed of Trust Records of
Tarrant County, Texas, in Volume 11462, Page 0662, et seq., of the
Real Property Records of Travis County, Texas, and in Volume 2026,
Page 871, et seq., of the Official Records of Williamson County,
Texas,
(b) that First Deed of Trust and Security Agreement dated
October 18, 1991, executed by Borrower and recorded at Volume 5191,
Page 1394, et seq., of the Official Public Records of Real Property of
Bexar County, Texas;
(c) that First Deed of Trust and Security Agreement dated
November 5, 1991, executed by Borrower, filed for recording in the
Office of the County Clerk of Harris County, Texas under Clerk's File
No. N403252 and recorded at Film Code No. 006-52-1287, et seq., of the
Official Public Records of Real Property of Harris County, Texas;
(d) that First Deed of Trust and Security Agreement dated
February 4, 1992, executed by Borrower, filed for recording in the
Office of the County Clerk of Harris County, Texas under Clerk's File
No. N527998 and recorded at Film Code No. 014-55-1789, et seq., of the
Official Public Records of Real Property of Harris County, Texas;
(e) that First Deed of Trust and Security Agreement dated
June 2, 1992, executed by Borrower and recorded at Volume 10683, Page
2382, et seq., of the Deed of Trust Records of Tarrant County, Texas;
(f) that First Deed of Trust and Security Agreement dated
August 4, 1992, executed by Borrower, filed for recording in the
Office of the County Clerk of Harris County, Texas under Clerk's File
No. N803821 and recorded at Film Code No. 106-59-2987, et seq., of the
Official Public Records of Real Property of Harris County, Texas; and
<PAGE>
(g) that First Deed of Trust and Security Agreement dated
September 7, 1993, executed by Old Borrower, recorded at Volume 5792,
Page 1933, et seq., of the Official Public Records of Real Property of
Bexar County, Texas, filed for recording in the Office of the County
Clerk of Harris County, Texas under Clerk's File No. P442690 and
recorded at Film Code No. 169-55-3591, et seq., of the Official Public
Records of Real Property of Harris County, Texas, and recorded at
Volume 11231, Page 0137, et seq., of the Deed of Trust Records of
Tarrant County, Texas;
each such instrument encumbering the real and other property
described therein (the "Real Property"); and
(2) that Second Deed of Trust and Security Agreement dated
December 30, 1992, executed by Old Borrower and recorded in Volume
5581, Page 1347, et seq., of the Real Property Records of Bexar
County, Texas, in Volume 3455, Page 0496, et seq., of the Real
Property Records of Denton County, Texas, in Volume 2475, Page 1, et
seq., of the Real Property Records of Gregg County, Texas, at Clerk's
File No. P101069 and Film Code No. 120-51-2685, et seq., of the Real
Property Records of Harris County, Texas, in Volume 976, Page 272, et
seq., of the Real Property Records of Hays County, Texas, in Volume
778, Page 175, et seq., of the Deed of Trust Records of Midland
County, Texas, in Volume 10957, Page 2238, et seq., of the Real
Property Records of Tarrant County, Texas, and in Volume 2261, Page
292, et seq., of the Real Property Records of Williamson County, Texas
(the "Second Deed of Trust"; the First Deed of Trust and the Second
Deed of Trust being herein collectively called the "Deed of Trust")
(3) the following instruments styled Assignment of Rents and
Leases (collectively called the "Rental Assignment"):
(a) that Assignment of Rents and Leases dated of even date
with the Loan Agreement, executed by Borrower and recorded in Volume
5091, Page 0826, et seq., of the Official Public Records of Real
Property of Bexar County, Texas, in Volume 91120, Page 2678, et seq.,
of the Deed of Trust Records of Dallas County, Texas, in Volume 3002,
Page 0076, et seq., of the Deed of Trust Records of Denton County,
Texas, in Volume 2262, Page 568, et seq., of the Deed of Trust Records
of Gregg County, Texas, under Film Code No. 037-12-1763 of the
Official
<PAGE>
Public Records of Real Property of Harris County, Texas, in Volume
879, Page 1, et seq., of the Official Public Records of Hays County,
Texas, in Volume 1085, Page 176, et seq., of the Deed Records of
Midland County, Texas, in Volume 10293, Page 1967, et seq., of the
Deed of Trust Records of Tarrant County, Texas, in Volume 11462, Page
0736, et seq., of the Real Property Records of Travis County, Texas,
and in Volume 2026, Page 943, et seq., of the Official Records of
Williamson County, Texas;
(b) that Assignment of Rents and Leases dated October 18,
1991, executed by Borrower and recorded at Volume 5191, Page 1421, et
seq., of the Official Public Records of Real Property of Bexar County,
Texas;
(c) that Assignment of Rents and Leases dated November 5,
1991, executed by Borrower, filed for recording in the Office of the
County Clerk of Harris County, Texas under Clerk's File No. N403253
and recorded at Film Code No. 006-52-1312, et seq., of the Official
Public Records of Real Property of Harris County, Texas;
(d) that Assignment of Rents and Leases dated February 4,
1992, executed by Borrower, filed for recording in the Office of the
County Clerk of Harris County, Texas under Clerk's File No. N527999
and recorded at Film Code No. 014-55-1816, et seq., of the Official
Public Records of Real Property of Harris County, Texas;
(e) that Assignment of Rents and Leases dated June 2, 1992,
executed by Borrower and recorded at Volume 10684, Page 0004, et
seq., of the Deed Records of Tarrant County, Texas;
(f) that Assignment of Rents and Leases dated August 4,
1992, executed by Borrower, filed for recording in the Office of the
County Clerk of Harris County, Texas under Clerk's File No. N803822
and recorded at Film Code No. 106-59-3015, et seq., of the Official
Public Records of Real Property of Harris County, Texas; and
(g) that Assignment of Rents and Leases dated September 7,
1993, executed by Old Borrower, recorded at Volume 5792, Page 1961, et
seq., of
<PAGE>
the Official Public Records of Real Property of Bexar County, Texas,
filed for recording in the Office of the County Clerk of Harris
County, Texas under Clerk's File No. P442691, and recorded at Film
Code No. ###-##-####, et seq., of the Official Public Records of Real
Property of Harris County, Texas, and recorded at Volume 11231, Page
0179, et seq., of the Deed Records of Tarrant County, Texas;
(4) that Security Agreement and Pledge of Mortgage Loans and
Mortgage Loan Documents (the "Mortgage Pledge Agreement") of even date
with the Loan Agreement executed by Borrower and Lender and pledging
to Lender, as security for the Loan, certain mortgage loans (the
"Mortgage Loans"), as amended by the First Extension and the Increase
Modification; and
(5) that Unconditional Guarantee of Payment and Performance (the
"Guaranty") dated June 17, 1991, executed by Guarantors, guaranteeing
the payment and performance of the indebtedness and obligations of
Borrower under the Loan;
C. The Loan Agreement, the Notes, the Deed of Trust, the Rental
Assignment, the Mortgage Pledge Agreement, the Guaranty, and all other
documents evidencing, governing, guaranteeing, securing, or otherwise
pertaining to the Loan (collectively, the "Loan Documents") have been
modified and amended under the First Extension which is recorded in
Volume 5465, Page 0671, et seq., of the Real Property Records of Bexar
County, Texas, in Volume 92197, Page 6394, et seq., of the Real
Property Records of Dallas County, Texas, in Volume 3346, Page 0215,
et seq., of the Real Property Records of Denton County, Texas, in
Volume 2426, Page 340, of the Real Property Records of Gregg County,
Texas, in Film Code No. 111-43-2705, et seq., of the Real Property
Records of Harris County, Texas, in Volume 952, Page 336, et seq., of
the Real Property Records of Hays County, Texas, in Volume 767, Page
1, et seq., of the Real Property Records of Midland County, Texas, in
Volume 10803, Page 0100, et seq., of the Real Property Records of
Tarrant County, Texas, in Volume 11787, Page 1482, et seq., of the
Real Property Records of Travis County, Texas, and in Volume 2201,
Page 085, et seq., of the Real Property Records of Williamson County,
Texas, and under the Increase Modification which is recorded at Volume
5581, Page 1386, et seq., of the Real Property Records of Bexar
County, Texas, in Volume 3455, Page 0444, et seq., of the Real
Property Records of Denton County, Texas, in Volume 2474, Page 598, et
seq., of the Real Property Records of Gregg County, Texas, under
Clerk's File No. P101068, Film Code No. 120-51-2633, et seq., of the
Real Property Records of Harris County, Texas, in Volume 976, Page
221, et seq., of the Real Property Records of Hays County, Texas, in
Volume 778, Page 125, et seq., of the Real Property Records of Midland
County, Texas, in Volume 10957, Page
<PAGE>
2186, et seq., of the Real Property Records of Tarrant County, Texas,
and in Volume 2281, Page 241, et seq., of the Real Property Records of
Williamson County, Texas;
D. In connection with the Loan, Old Borrower and Guarantors
executed and delivered to Lender that Hazardous Substances Indemnity
Agreement and that Special Hazardous Substances Indemnity Agreement of
even date with the Loan Agreement (together, the "Enviromental
Indemnity");
E. Old Borrower has agreed to convey, transfer, and assign the
Real Property, the Mortgage Loans, and its interest in the Loan
Agreement and the other Loan Documents to New Borrower and New
Borrower has agreed to accept such conveyance, transfer, and
assignment subject to the consent of Lender, which consent is required
in order that the conveyance, transfer and assignment of the Real
Property, the Mortgage Loans, and the interest of Old Borrower in the
Loan Agreement and the other Loan Documents to New Borrower will not
be an Event of Default under Section 2.01(h) of the Deed of Trust or
Section 10.5 of the Mortgage Pledge Agreement, or a violation of
Section 4.19 of the Loan Agreement, or a default or breach of any
other provision of any of the Loan Documents;
F. Old Borrower and New Borrower have requested that Lender
consent to the conveyance, assignment and transfer of the Property and
the interest of Old Borrower in the Loan Agreement and the other Loan
Documents to Old Borrower and the assumption by New Borrower of all of
Old Borrower's obligations to Lender under the Loan Documents, and
Lender has agreed to issue its consent subject to the terms and
conditions set forth below:
CONSENT AND ASSUMPTION:
NOW, THEREFORE, for the premises considered, and for other good
and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Lender, Old Borrower, New Borrower, and
Guarantors agree as follows:
1. New Borrower hereby assumes and agrees to pay and perform
all the obligations of Old Borrower under and pursuant to the Loan
Agreement, the Note, the Deed of Trust, the Mortgage Pledge Agreement,
the Assignment, and all other Loan Documents, and New Borrower and
Lender agree that all references in the Loan Agreement, the Note, or
the Environmental Indemnity to "Borrower," all references in the Deed
of Trust to "Grantor," all references in the Assignment to "Assignor,"
all references in the Mortgage Pledge Agreement to "Debtor," and all
other references in the Loan Documents to Old Borrower shall hereafter
refer and relate to New Borrower.
<PAGE>
2. New Borrower agrees to execute such Uniform Commercial Code
financing statements, change forms and continuation statements and
other documents as Lender, in its sole discretion, deems necessary to
maintain and continue the perfection and priority of the liens and
security interests under the Loan Documents.
3. Lender hereby consents to the conveyance, transfers and
assignments of the Real Property, the Mortgage Loans, and the
interests of Old Borrower in the Loan Agreement to New Borrower, and
Lender acknowledges and confirms that such conveyance, transfer and
assignment shall not constitute an Event of Default under the Loan
Agreement, the Deed of Trust, the Mortgage Pledge Agreement, or any of
the other Loan Documents.
4. Old Borrower and New Borrower agree to pay all costs
incurred in the execution and consummation of this Agreement,
including but not limited to, all recording costs, the reasonable fees
and actual expenses of Lender's legal counsel, premiums for
endorsements requested by Lender to the Mortgagee Policy(ies) of Title
Insurance insuring the validity and priority of the Deed of Trust, the
Mortgage Pledge Agreement, and the other Loan Documents, as required
by Lender in connection with this Agreement.
5. Old Borrower joins in this Agreement for the purpose of
consenting hereto and agreeing to be bound hereby, and, in particular,
agreeing to the terms of Section 4 of this agreement.
6. Guarantors join in the execution of this Agreement for
purposes of consenting hereto, agreeing to be bound hereby and
confirming that the Guaranty and the Environmental Indemnity remain in
full force and effect notwithstanding the transfer of the Real
Property and the Mortgage Loans to New Borrower and notwithstanding
this Agreement, and further agreeing that the Guaranty does and shall
guarantee the obligations of New Borrower under the Loan Documents in
accordance with its terms.
7. As modified by the First Extension and the Increase
Modification, and as modified hereby, all of the terms and conditions
of the Loan Agreement, the Note, the Deed of Trust, the Mortgage
Pledge Agreement, the Assignment, the Environmental Indemnity, and all
other Loan Documents shall remain in full force and effect.
EXECUTED as of the date and year first above written.
GECC: GENERAL ELECTRIC CAPITAL CORPORATION,
a New York corporation
By:
Ty Albright, Project Manager
<PAGE>
New Borrower: MXM MORTGAGE L.P.,
a Delaware limited partnership
By: MXM GENERAL PARTNER, INC.,
a Delaware corporation,
General Partner
By:
Erik Eriksson, Jr., Vice President
Old Borrower: MXM MORTGAGE CORP.,
a Delaware corporation
By:
Erik Eriksson, Jr., Vice President
Guarantors: MAXXAM INC.,
a Delaware corporation
By:
Byron L. Wade, Vice President,
Secretary and Deputy General Counsel
MAXXAM GROUP INC.,
a Delaware corporation
By:
Byron L. Wade, Vice President,
Secretary and Deputy General Counsel
<PAGE>
STATE OF TEXAS
COUNTY OF DALLAS
This instrument was acknowledged before me this _____ day of
December, 1993, by TY ALBRIGHT, Project Manager of GENERAL ELECTRIC
CAPITAL CORPORATION, a New York corporation, on behalf of said
corporation.
(S E A L)
Notary Public in and for
the State of Texas
Printed/Typed Name of Notary
My Commission Expires:
STATE OF TEXAS
COUNTY OF HARRIS
This instrument was acknowledged before me this _____ day of
December, 1993 by ERIK ERIKSSON, JR., Vice President of MXM GENERAL
PARTNER, INC., a Delaware corporation and General Partner of MXM
MORTGAGE L.P., a Delaware limited partnership, on behalf of said
corporation and said limited partnership.
(S E A L)
Notary Public in and for
the State of Texas
Printed/Typed Name of Notary
My Commission Expires:
<PAGE>
STATE OF TEXAS
COUNTY OF HARRIS
This instrument was acknowledged before me this _____ day of
December, 1993, by ERIK ERIKSSON, JR., Vice President of MXM MORTGAGE
CORP., a Delaware corporation, on behalf of said corporation.
(S E A L)
Notary Public in and for
the State of Texas
Printed/Typed Name of Notary
My Commission Expires:
STATE OF TEXAS
COUNTY OF HARRIS
This instrument was acknowledged before me this _____ day of
December, 1993, by BYRON L. WADE, Vice President, Secretary and Deputy
General Counsel of MAXXAM INC., a Delaware corporation, on behalf of
said corporation.
(S E A L)
Notary Public in and for
the State of Texas
Printed/Typed Name of Notary
My Commission Expires:
<PAGE>
STATE OF TEXAS
COUNTY OF HARRIS
This instrument was acknowledged before me this _____ day of
December, 1993, by BYRON L. WADE, Vice President, Secretary and Deputy
General Counsel of MAXXAM GROUP INC., a Delaware corporation, on
behalf of said corporation.
(S E A L)
Notary Public in and for
the State of Texas
Printed/Typed Name of Notary
My Commission Expires:
THIRD MODIFICATION AGREEMENT
THIS THIRD MODIFICATION AGREEMENT (this "Agreement") is executed
as of December __, 1993, by and among GENERAL ELECTRIC CAPITAL
CORPORATION, a New York corporation ("Lender"), MXM MORTGAGE, L.P., a
Delaware limited partnership ("New Borrower"), MXM MORTGAGE CORP., a
Delaware corporation ("Old Borrower"; New Borrower and Old Borrower
being herein together called "Borrower"), on the following terms and
conditions:
RECITALS:
A. Lender and Old Borrower entered into that Loan Agreement
dated June 17, 1991, as amended by letter amendment dated August 22,
1991, as further amended by First Renewal, Extension and Modification
Agreement (the "First Modification") dated June 17, 1992 among Lender,
Old Borrower, Maxxam Inc. and Maxxam Group Inc. (Maxxam Inc. and
Maxxam Group Inc. being herein together called "Guarantors"), and as
further amended by Loan Increase, Extension and Modification Agreement
dated December 30, 1992 among Lender, Old Borrower and Guarantors (the
"Increase Modification"; the Loan Agreement, as amended, being herein
called the "Loan Agreement"), pursuant to which Lender has agreed to
make a loan to Borrower (the "Loan"), as evidenced by a $115,220,000
Promissory Note dated June 17, 1991, (the "Original Note"), and a
$17,740,000 Promissory Note dated December 30, 1992 (the "Increase
Note"; the Original Note and the Increase Note being herein
collectively called the "Notes"), the Notes bearing interest and being
payable to the order of Lender as therein provided.
B. Taking into account releases of collateral, the indebtedness
evidenced by the Original Note and the Increase Note is secured by,
among other collateral, the following:
(1) the following instruments styled First Deed of Trust and
Security Agreement (collectively called the "First Lien Deed of
Trust"):
(a) that First Deed of Trust and Security Agreement of even
date with the Loan Agreement, executed by Old Borrower, recorded in
Volume 5091, Page 0751, et seq., of the Official Public Records of
Real Property of Bexar County, Texas [Southwest Medical, Redondo
Place, Med Centre Pointe, Nacon Plaza], under Film Code No. 037-12-
1689 and corrected and refiled under Film Code No. 038-03-0657 of the
Official Public Records of Real Property of Harris County, Texas
[Spring Valley, Westminster], in Volume 727, Page 416, et seq., of the
Deed of Trust
<PAGE>
Records of Midland County, Texas [Oak Ridge], and in Volume 10293,
Page 1892, et seq., of the Deed of Trust Records of Tarrant County,
Texas [West Lake Gardens];
(b) that First Deed of Trust and Security Agreement dated
November 5, 1991, executed by Old Borrower, filed for recording in the
Office of the County Clerk of Harris County, Texas under Clerk's File
No. N403252 and recorded at Film Code No. 006-52-1287, et seq., of the
Official Public Records of Real Property of Harris County, Texas
[Richmond Square];
(c) that First Deed of Trust and Security Agreement dated
February 4, 1992, executed by Old Borrower, filed for recording in the
Office of the County Clerk of Harris County, Texas under Clerk's File
No. N527998 and recorded at Film Code No. 014-55-1789, et seq., of the
Official Public Records of Real Property of Harris County, Texas
[Westchase];
(d) that First Deed of Trust and Security Agreement dated
May 5, 1992, executed by Old Borrower and recorded at Volume 5356,
Page 1511, et seq., of the Official Public Records of Real Property of
Bexar County, Texas [San Antonio Imaging]; and
(e) that First Deed of Trust and Security Agreement dated
September 7, 1993, executed by Old Borrower, recorded at Volume 5792,
Page 1933, et seq., of the Official Public Records of Real Property of
Bexar County, Texas [Pipers Creek, Shadow Valley], filed for recording
in the Office of the County Clerk of Harris County, Texas under
Clerk's File No. P442690 and recorded at Film Code No. 169-55-3591, et
seq., of the Official Public Records of Real Property of Harris
County, Texas [Westbrook, Colonies], and recorded at Volume 11231,
Page 0137, et seq., of the Deed of Trust Records of Tarrant County,
Texas [Bentley Village];
each such instrument encumbering the real and other property
described therein (the "Real Property"); and
(2) the following instruments styled Assignment of Rents and
Leases (collectively called the "Rental Assignment"):
(a) that Assignment of Rents and Leases dated of even date
with the Loan Agreement, executed by
<PAGE>
Old Borrower and recorded in Volume 5091, Page 0826, et seq., of the
Official Public Records of Real Property of Bexar County, Texas
[Southwest Medical, Redondo Place, Med Centre Pointe, Nacon Plaza],
under Film Code No. 037-12-1762 of the Official Public Records of Real
Property of Harris County, Texas [Spring Valley, Westminster], in
Volume 1085, Page 176, et seq., of the Deed Records of Midland County,
Texas [Oak Ridge], and in Volume 10293, Page 1967, et seq., of the
Deed of Trust Records of Tarrant County, Texas [West Lake Gardens],
Texas;
(b) that Assignment of Rents and Leases dated November 5,
1991, executed by Old Borrower, filed for recording in the Office of
the County Clerk of Harris County, Texas under Clerk's File No.
N403253 and recorded at Film Code No. 006-52-1312, et seq., of the
Official Public Records of Real Property of Harris County, Texas
[Richmond Square];
(c) that Assignment of Rents and Leases dated February 4,
1992, executed by Old Borrower, filed for recording in the Office of
the County Clerk of Harris County, Texas under Clerk's File No.
N527999 and recorded at Film Code No. 014-55-1816, et seq., of the
Official Public Records of Real Property of Harris County, Texas
[Westchase];
(d) that Assignment of Rents and Leases dated May 5, 1992,
executed by Old Borrower, recorded in Volume 5356, Page 1538, et seq.,
of the Official Public Records of Real Property of Bexar County, Texas
[San Antonio Imaging]; and
(e) that Assignment of Rents and Leases dated September 7,
1993, executed by Old Borrower, recorded at Volume 5792, Page 1961, et
seq., of the Official Public Records of Real Property of Bexar County,
Texas [Pipers Creek, Shadow Valley], filed for recording in the Office
of the County Clerk of Harris County, Texas under Clerk's File No.
P442691, and recorded at Film Code No. 169-55-3618, et seq., of the
Official Public Records of Real Property of Harris County, Texas
[Westbrook, Colonies], and recorded at Volume 11231, Page 0179, et
seq., of the Deed Records of Tarrant County, Texas [Bentley Village];
<PAGE>
(3) that Second Deed of Trust and Security Agreement dated
December 30, 1992, executed by Old Borrower and recorded in Volume
5581, Page 1347, et seq., of the Real Property Records of Bexar
County, Texas [Southwest Medical, Redondo Place, Med Centre Pointe,
Nacon Plaza, San Antonio Imaging], at Clerk's File No. P101069 and
Film Code No. 120-51-2685, et seq., of the Real Property Records of
Harris County, Texas [Spring Valley, Westminster, Richmond Square,
Westchase], in Volume 778, Page 175, et seq., of the Deed of Trust
Records of Midland County, Texas [Oak Ridge], and in Volume 10957,
Page 2238, et seq., of the Real Property Records of Tarrant County,
Texas [Westlake Gardens] (the "Second Deed of Trust"; the First Deed
of Trust and the Second Deed of Trust being herein collectively called
the "Deed of Trust"); and
(4) that Security Agreement and Pledge of Mortgage Loans and
Mortgage Loan Documents (the "Mortgage Pledge Agreement") of even date
with the Loan Agreement executed by Old Borrower and Lender and
pledging to Lender, as security for the Loan, certain mortgage loans
(the "Mortgage Loans") [Balcones, Enfield Courts, Park North Tech,
Parc Bay, Turtle Creek, Trestles]
(the Loan Agreement, the Notes, the Deed of Trust, the Rental
Assignment, the Mortgage Pledge Agreement, the First Modification, the
Increase Modification, and all other Security Instruments (as such
term is defined in the Loan Agreement) or other documents evidencing,
governing, guaranteeing, securing, or otherwise pertaining to the Loan
being hereinafter collectively referred to as the "Loan Documents");
C. Lender, Old Borrower, New Borrower and Guarantors entered
into that Consent and Assumption Agreement dated December 10, 1993,
under which Lender consented to the transfer and conveyance of the
Real Property and the Mortgage Loans to New Borrower (and pursuant to
which Old Borrower has transferred and conveyed the Real Property, the
Mortgage Loans, and the rights of Old Borrower under the Loan
Agreement to New Borrower), and New Borrower has assumed the
obligations and liabilities of Old Borrower under the Loan and the
Loan Documents; and
D. Borrower has requested that Lender make available
$25,000,000 to Borrower as additional Subsequent Advances under the
Loan Agreement, through re-advances of principal reductions of the
Original Note, and Lender is agreeable to such additional Subsequent
Advances on the terms of that Fourth Amendment to Loan Agreement of
even date herewith between Lender and Borrower (the "Fourth
Amendment"), and the modification of the Notes and the other Loan
Documents as hereinafter set forth;
<PAGE>
AGREEMENT:
NOW, THEREFORE, in consideration of Ten and No/100 Dollars
($10.00) and other good and valuable consideration, Lender, Borrower,
and Guarantors do hereby agree as follows:
1. Revolving Line of Credit. The last two (2) sentences of the
first paragraph of the Original Note are amended and restated as
follows:
To the extent of payments against the principal balance from
applications of sales of Projects and Mortgage Loans and from payments
made in satisfaction or partial satisfaction of Mortgage Loans, and
other principal reductions, the Loan shall be a "revolving line of
credit"; that is, subject to the terms of the Loan Agreement, and any
amendments to the Loan Agreement, portions of the principal sum of
this Note may be advanced, repaid, and readvanced. The books and
records of GECC shall be prima facie evidence of all sums due GECC
under this Note and the Other Security Documents.
2. Maturity Date. Borrower and Lender confirm that the
Maturity Date (as defined in the Original Note and last amended in the
Increase Modification) is and continues to be December 31, 1997, and
that the Maturity Obligations (as defined in the Original Note) shall
be fully payable on that date.
3. Payment Terms. Borrower and Lender agree (a) that from and
after the date hereof, interest only on the outstanding principal
balance of the Original Note shall be payable monthly on the first day
of each month beginning January 1, 1994 and continuing to and
including December 1, 1997, at the Contract Rate (as such rate was
modified and redefined in Section 3 of the First Modification), and
(b) that the obligation of Borrower to make quarterly payments from
Excess Cash Flow for application to the outstanding principal balance
of the Original Note, as agreed and established in Section 4 of the
First Modification, is hereby waived.
4. Prepayment. The prepayment provisions set forth on pages 2
and 3 of the Note, as amended and restated in Section 4 of the First
Modification, and further amended and restated in Section 17 of the
Increase Modification, are further amended and restated as follows:
Borrower may prepay the Note in part so long as
<PAGE>
(a) such prepayment would not reduce the unpaid principal
balance of the Note below $10,000,000, and
(b) the aggregate Loan allocation of that portion of the
Mortgaged Property comprised of multi-family apartment projects, as
determined in accordance with that Fourth Amendment to Loan Agreement
between Borrower and GECC dated December 30, 1993 (the "Fourth
Amendment to Loan Agreement"), is not less than forty percent (40%) of
the aggregate Loan allocation of all of the Mortgaged Property and the
Mortgage Loans, as determined in accordance with the Fourth Amendment
to Loan Agreement (the "Apartments Percentage Requirement"),
with proceeds from the payment or prepayment of any Mortgage
Loan, or with proceeds of any sale of any Mortgage Loan to a third
party, or with proceeds of any sale of any Project to any third party,
upon ten (10) days prior written notice to Lender, by paying to GECC
the Minimum Release Amount for such Mortgage Loan or Project (as
defined and specified in the Loan Agreement, as modified in the Fourth
Amendment to Loan Agreement); provided, however, and it is understood
and agreed, (i) that Borrower shall have no right to prepay any
portion of the principal balance of this Note before July 1, 1995
except through application of proceeds of the payment or prepayment of
Mortgage Loans or the sale of Mortgage Loans and Projects to third
parties, and (ii) that prior to July 1, 1995 Borrower shall not be
entitled to prepay any portion of the principal balance of this Note
through any whole or partial refinancing of the indebtedness under
this Note; provided, however, that if as a result of any prepayment of
the principal balance of this Note either (x) the outstanding
principal balance of this Note would be less than $10,000,000, or (y)
the Apartments Percentage Requirement would not be satisfied, then
Borrower shall pay to GECC the entire outstanding principal balance
of, and all accrued and unpaid interest, on this Note.
All prepayments of the Note shall otherwise comply with
the requirements for releases under the Loan Agreement, as modified by
the Fourth Amendment to Loan Agreement. GECC reserves the right to
require any payment of the indebtedness evidenced by this Note,
whether such payment is of a regular installment or represents a
prepayment, prepayment
<PAGE>
charge, or final payment, to be wired via federal funds or other
immediately available funds.
5. Ratification and Confirmation of Loan Documents. Borrower
and Lender agree that the Loan Agreement, the Notes, the Deed of
Trust, the Rental Assignment, the Mortgage Pledge Agreement, and the
other Loan Documents are hereby ratified and confirmed as valid and
continuing obligations of Borrower, and that the Deed of Trust, the
Rental Assignment, and the Mortgage Pledge Agreement shall continue to
secure and/or provide payment for the Notes, as modified by this
Agreement, and Borrower promises to pay to the order of Lender at P.
O. Box 102771, Atlanta, Georgia 30368-0771, the indebtedness evidenced
by the Notes, as herein modified.
6. No Impairment of Security. Borrower hereby agrees that the
agreements contained herein shall in no manner affect or impair the
Original Note or the Increase Note, the liens or security interests
securing same, and that said liens and security interests shall not in
any manner be waived, altered or vitiated by such agreements, and
Borrower further agrees that, as expressly modified hereby, all terms
and provisions of the Loan Documents shall be and remain in full force
and effect.
7. No Default, Defenses, Counterclaims, Etc. Borrower hereby
covenants and warrants that none of the Loan Documents are in default;
that there are no defenses, counterclaims or offsets to such Loan
Documents.
8. Costs and Expenses. Borrower agrees to pay all costs
incurred in connection with the execution and consummation of this
Agreement, including but not limited to, all recording costs, the
premium for such endorsements to the policies of title insurance
insuring the Deed of Trust as may be required by Lender with respect
to this Agreement, and the reasonable fees and actual expenses of
Lender's counsel. Borrower further covenants and agrees to deliver or
cause to be delivered such evidence of existence, capacity,
authorization, qualification, or enforceability of its obligations as
Lender may require.
9. Limitation on Interest. All agreements between Borrower and
Lender, whether now existing or hereafter arising and whether written
or oral, are hereby expressly limited so that in no contingency,
whether by reason of acceleration of the maturity of the Notes, or
otherwise, shall the interest contracted for, charged, received, paid
or agreed to be paid to the holder of the Notes exceed the maximum
amount permissible under applicable law. If, from any circumstance
whatsoever, interest would otherwise be payable to the holder of the
Notes in excess of the maximum lawful amount, the interest payable to
the holder of the Notes shall be reduced to the maximum amount
permitted by applicable law; and if from any circumstance the holder
of the Notes shall ever receive anything of value deemed interest by
applicable law in excess of the maximum amount allowed by law, an
amount equal to any excessive
<PAGE>
interest shall be applied to the reduction of the principal amount
owing under the Notes, and not to the payment of interest, or if such
excessive interest exceeds such unpaid balance of principal of the
Notes, such excess shall be refunded to Borrower. All interest paid
or agreed to be paid to the holder of the Notes, shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and
spread throughout the full term of the Notes (including the period of
any renewal or extension thereof) so that the interest on the Notes
shall not exceed the maximum amount permitted by applicable law. This
paragraph shall control all agreements between Borrower and the holder
of the Notes.
EXECUTED by the parties hereto as of the date and year first
above written.
BORROWER:
OLD BORROWER: MXM MORTGAGE CORP.,
a Delaware corporation
By:
Erik Eriksson, Jr.,
Vice President
NEW BORROWER: MXM MORTGAGE, L.P.,
a Delaware limited partnership
By: MXM GENERAL PARTNER, INC.,
a Delaware corporation,
General Partner
By:
Erik Eriksson, Jr.,
Vice President
LENDER: GENERAL ELECTRIC CAPITAL CORPORATION,
a New York corporation
By:
Ty Albright, Project Manager
<PAGE>
STATE OF TEXAS
COUNTY OF HARRIS
This instrument was acknowledged before me this _____ day of
December 1993, by ERIK ERIKSSON, JR., Vice President of MXM MORTGAGE
CORP., a Delaware corporation, on behalf of said corporation.
(SEAL)
Notary Public in and for
the State of Texas
Print name of notary
My Commission Expires:
STATE OF TEXAS
COUNTY OF HARRIS
This instrument was acknowledged before me this _____ day of
December 1993, by ERIK ERIKSSON, JR., Vice President of MXM GENERAL
PARTNER, INC., a Delaware corporation and General Partner of MXM
MORTGAGE, L.P., a Delaware limited partnership, on behalf of said
corporation and said limited partnership.
(SEAL)
Notary Public in and for
the State of Texas
Print name of notary
My Commission Expires:
<PAGE>
STATE OF TEXAS
COUNTY OF DALLAS
This instrument was acknowledged before me this _____ day of
December, 1993, by TY ALBRIGHT, Project Manager of GENERAL ELECTRIC
CAPITAL CORPORATION, a New York corporation, on behalf of said
corporation.
(SEAL)
Notary Public in and for
the State of Texas
Print name of notary
My Commission Expires:
RELEASE AND TERMINATION
OF UNCONDITIONAL GUARANTEE
OF PAYMENT AND PERFORMANCE
THIS RELEASE AND TERMINATION OF UNCONDITIONAL GUARANTEE OF
PAYMENT AND PERFORMANCE (this "Release") is made as of December ___,
1993, by GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation
("GECC"), on the following terms and conditions:
RECITALS:
A. GECC has made a loan (the "Loan") to MXM Mortgage Corp. and
MXM Mortgage L.P. (collectively, "Borrower"), as evidenced by
Promissory Note dated June 17, 1991, in the stated principal amount of
$115,220,000, executed by MXM Mortgage Corp., bearing interest and
being payable to the order of GECC as therein provided, and by
Promissory Note dated December 30, 1992, in the stated principal
amount of $17,740,000, executed by MXM Mortgage Corp., bearing
interest and being payable to the order of GECC as therein provided
(collectively, the "Note");
B. As a condition to GECC making the Loan, MAXXAM INC., a
Delaware corporation, and MAXXAM GROUP INC., a Delaware corporation
(Maxxam Inc. and Maxxam Group Inc. being herein collectively called
"Guarantors"), executed and delivered to GECC that Unconditional
Guarantee of Payment and Performance dated June 17, 1991 (the
"Guarantee"), guaranteeing to GECC the payment and performance of
certain obligations of Borrower relating to the Loan;
C. All capitalized terms in this Release, unless otherwise
defined herein, shall have the same meanings assigned to such terms in
the Guarantee;
D. Section 1.14 of the Guarantee provides that when Borrower
and Guarantors shall have demonstrated that the annualized Net
Operating Income of the Mortgage Loans and the Real Property, over a
consecutive six (6)-month period, is greater than the annual accrual
of interest on the Note and any Funding Availability (the "Income
Achievement Requirement"), then on request by Borrower, GECC will
deliver a release and termination of Guarantors' guarantee of the
Guaranteed Indebtedness under the Guarantee;
E. Section 1.15 of the Guarantee provides that when GECC
acknowledges to Borrower and Guarantors that Mandatory Principal
Reductions are no longer required, the Asset Enhancement Guarantee
under the Guarantee shall be suspended or released; and
<PAGE>
F. Borrower and Guarantors have satisfied the Income
Achievement Requirement and have requested the release and termination
of the guarantee of the Guaranteed Indebtedness in accordance with
Section 1.14 of the Guarantee and GECC has determined that Mandatory
Principal Reductions are no longer required;
RELEASE AND TERMINATION
NOW, THEREFORE, for the premises considered, GECC has released
and terminated and does hereby release and terminate Guarantors'
guarantee of the Guaranteed Indebtedness under the Guarantee and
further has released and terminated and does hereby release and
terminate the Asset Enhancement Guarantee under the Guarantee.
EXECUTED as of the date and year first above recited.
GENERAL ELECTRIC CAPITAL CORPORATION,
a New York corporation
By:
Ty Albright, Project Manager
FOURTH AMENDMENT TO LOAN AGREEMENT
THIS FOURTH AMENDMENT TO LOAN AGREEMENT (this "Amendment") is
executed as of December __, 1993, by and among GENERAL ELECTRIC
CAPITAL CORPORATION, a New York corporation ("Lender"), MXM MORTGAGE,
L.P., a Delaware limited partnership ("New Borrower"), and MXM
MORTGAGE CORP., a Delaware corporation ("Old Borrower"; New Borrower
and Old Borrower being herein together sometimes called "Borrower"),
on the following terms and conditions:
RECITALS:
A. Lender and Old Borrower entered into that Loan Agreement
dated June 17, 1991, as amended by letter amendment dated August 22,
1991, as further amended by First Renewal, Extension and Modification
Agreement (the "First Modification") dated June 17, 1992 among Lender,
Old Borrower, and Maxxam Inc. and Maxxam Group Inc., and as further
amended by Loan Increase, Extension and Modification Agreement (the
"Increase Modification") dated December 30, 1992 among Lender, Old
Borrower, Maxxam Inc. and Maxxam Group Inc. (said Loan Agreement, as
amended, being herein called the "Loan Agreement"), pursuant to which
Lender has agreed to make a loan to Borrower (the "Loan"), as
evidenced by a $115,220,000 Promissory Note dated June 17, 1991, (the
"Original Note"), and a $17,740,000 Promissory Note dated December 30,
1992 (the "Increase Note"; the Original Note and the Increase Note
being herein together called the "Notes"), each of the Notes bearing
interest and being payable to the order of Lender as therein provided;
B. Unless otherwise defined herein, all capitalized terms in
this Agreement shall have the same meanings assigned to such terms in
the Loan Agreement, and, as applicable, in the First Modification and
the Increase Modification;
C. Taking into account releases of collateral, the indebtedness
evidenced by the Original Note and the Increase Note is secured by,
among other collateral, the following:
(1) the following instruments styled First Deed of Trust and
Security Agreement (collectively called the "First Lien Deed of
Trust"):
(a) that First Deed of Trust and Security Agreement of even
date with the Loan Agreement, executed by Old Borrower, recorded in
Volume 5091, Page 0751, et seq., of the Official Public Records of
Real Property of Bexar County, Texas [Southwest Medical, Redondo
Place, Med Centre Pointe, Nacon Plaza], under Film Code No. 037-
<PAGE>
12-1689 and corrected and refiled under Film Code No. 038-03-0657 of
the Official Public Records of Real Property of Harris County, Texas
[Spring Valley, Westminster], in Volume 727, Page 416, et seq., of the
Deed of Trust Records of Midland County, Texas [Oak Ridge], and in
Volume 10293, Page 1892, et seq., of the Deed of Trust Records of
Tarrant County, Texas [West Lake Gardens];
(b) that First Deed of Trust and Security Agreement dated
November 5, 1991, executed by Old Borrower, filed for recording in the
Office of the County Clerk of Harris County, Texas under Clerk's File
No. N403252 and recorded at Film Code No. 006-52-1287, et seq., of the
Official Public Records of Real Property of Harris County, Texas
[Richmond Square];
(c) that First Deed of Trust and Security Agreement dated
February 4, 1992, executed by Old Borrower, filed for recording in the
Office of the County Clerk of Harris County, Texas under Clerk's File
No. N527998 and recorded at Film Code No. 014-55-1789, et seq., of the
Official Public Records of Real Property of Harris County, Texas
[Westchase];
(d) that First Deed of Trust and Security Agreement dated
May 5, 1992, executed by Old Borrower and recorded at Volume 5356,
Page 1511, et seq., of the Official Public Records of Real Property of
Bexar County, Texas [San Antonio Imaging]; and
(e) that First Deed of Trust and Security Agreement dated
September 7, 1993, executed by Old Borrower, recorded at Volume 5792,
Page 1933, et seq., of the Official Public Records of Real Property of
Bexar County, Texas [Pipers Creek, Shadow Valley], filed for recording
in the Office of the County Clerk of Harris County, Texas under
Clerk's File No. P442690 and recorded at Film Code No. 169-55-3591, et
seq., of the Official Public Records of Real Property of Harris
County, Texas [Westbrook, Colonies], and recorded at Volume 11231,
Page 0137, et seq., of the Deed of Trust Records of Tarrant County,
Texas [Bentley Village];
each such instrument encumbering the real and other property
described therein (the "Real Property"); and
<PAGE>
(2) the following instruments styled Assignment of Rents and
Leases (collectively called the "Rental Assignment"):
(a) that Assignment of Rents and Leases dated of even date
with the Loan Agreement, executed by Old Borrower and recorded in
Volume 5091, Page 0826, et seq., of the Official Public Records of
Real Property of Bexar County, Texas [Southwest Medical, Redondo
Place, Med Centre Pointe, Nacon Plaza], under Film Code No. 037-12-
1762 of the Official Public Records of Real Property of Harris County,
Texas [Spring Valley, Westminster], in Volume 1085, Page 176, et seq.,
of the Deed Records of Midland County, Texas [Oak Ridge], and in
Volume 10293, Page 1967, et seq., of the Deed of Trust Records of
Tarrant County, Texas [West Lake Gardens], Texas;
(b) that Assignment of Rents and Leases dated November 5,
1991, executed by Old Borrower, filed for recording in the Office of
the County Clerk of Harris County, Texas under Clerk's File No.
N403253 and recorded at Film Code No. 006-52-1312, et seq., of the
Official Public Records of Real Property of Harris County, Texas
[Richmond Square];
(c) that Assignment of Rents and Leases dated February 4,
1992, executed by Old Borrower, filed for recording in the Office of
the County Clerk of Harris County, Texas under Clerk's File No.
N527999 and recorded at Film Code No. 014-55-1816, et seq., of the
Official Public Records of Real Property of Harris County, Texas
[Westchase];
(d) that Assignment of Rents and Leases dated May 5, 1992,
executed by Old Borrower, recorded in Volume 5356, Page 1538, et seq.,
of the Official Public Records of Real Property of Bexar County, Texas
[San Antonio Imaging]; and
(e) that Assignment of Rents and Leases dated September 7,
1993, executed by Old Borrower, recorded at Volume 5792, Page 1961, et
seq., of the Official Public Records of Real Property of Bexar County,
Texas [Pipers Creek, Shadow Valley], filed for recording in the Office
of the County Clerk of Harris County, Texas under Clerk's File No.
P442691, and recorded at Film Code No. 169-55-3618, et seq., of the
Official Public
<PAGE>
Records of Real Property of Harris County, Texas [Westbrook,
Colonies], and recorded at Volume 11231, Page 0179, et seq., of the
Deed Records of Tarrant County, Texas [Bentley Village];
(3) that Second Deed of Trust and Security Agreement dated
December 30, 1992, executed by Old Borrower and recorded in Volume
5581, Page 1347, et seq., of the Real Property Records of Bexar
County, Texas [Southwest Medical, Redondo Place, Med Centre Pointe,
Nacon Plaza, San Antonio Imaging], at Clerk's File No. P101069 and
Film Code No. 120-51-2685, et seq., of the Real Property Records of
Harris County, Texas [Spring Valley, Westminster, Richmond Square,
Westchase], in Volume 778, Page 175, et seq., of the Deed of Trust
Records of Midland County, Texas [Oak Ridge], and in Volume 10957,
Page 2238, et seq., of the Real Property Records of Tarrant County,
Texas [Westlake Gardens] (the "Second Deed of Trust"; the First Deed
of Trust and the Second Deed of Trust being herein collectively called
the "Deed of Trust"); and
(4) that Security Agreement and Pledge of Mortgage Loans and
Mortgage Loan Documents (the "Mortgage Pledge Agreement") of even date
with the Loan Agreement executed by Old Borrower and Lender and
pledging to Lender, as security for the Loan, certain mortgage loans
(the "Mortgage Loans") [Balcones, Enfield Courts, Park North Tech,
Parc Bay, Turtle Creek, Trestles];
(the Loan Agreement, the Notes, the Deed of Trust, the Rental
Assignment, the Mortgage Pledge Agreement, the First Modification, the
Increase Modification, and all other Security Instruments (as such
term is defined in the Loan Agreement) or other documents evidencing,
governing, guaranteeing, securing, or otherwise pertaining to the Loan
being hereinafter collectively referred to as the "Security
Instruments");
D. Lender, Old Borrower, New Borrower, Maxxam Inc. and Maxxam
Group Inc. entered into that Consent and Assumption Agreement dated
December 10, 1993, under which Lender consented to the transfer and
conveyance of the Real Property, the Mortgage Loans, and the rights of
Old Borrower under the Loan Agreement to New Borrower (and pursuant to
which Old Borrower has transferred and conveyed the Real Property, the
Mortgage Loans, and the rights of Old Borrower under the Loan
Agreement to New Borrower), and New Borrower has assumed the
obligations and liabilities of Old Borrower under the Loan and the
Security Instruments;
E. Section 2.1 of the Loan Agreement provides that to the
extent of certain principal reductions the Loan shall be a
<PAGE>
revolving line of credit and that subject to the terms of the Loan
Agreement portions of the principal sum of the Original Note may be
advanced, repaid, and readvanced;
F. Through application of proceeds from the sale of Assets and
the payment and satisfaction of Mortgage Loans:
(1) the principal balance of the Loan has been reduced to
$15,000,000, and
(2) the existing Funding Availability under the Loan is
$6,645,819.98, of which (a) $2,224,897.08 has been approved for an
Advance for renovation of the Real Property, and (b) $1,440,842.90 has
been approved for an Advance for payment of Taxes,
leaving an existing Funding Availability for Advances not yet approved
of $2,730,080 for renovation of Real Property, and of $250,000 as a
holdback for abatement and removal of environmental hazards;
G. Borrower has requested that, after approved Advances of
$2,224,897.08 for renovation of the Real Property and $1,440,842.90
for the payment of Taxes, Lender make available for readvances under
the Loan Agreement up to $25,000,000 of principal reductions of the
Loan, and Lender is agreeable to such funding availability on the
terms of this Agreement and the terms of that Third Modification
Agreement of even date herewith between Lender and Borrower (the
"Third Modification");
AGREEMENT:
NOW, THEREFORE, in consideration of Ten and No/100 Dollars
($10.00) and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Lender and Borrower
agree as follows:
1. Additional Re-Advances. Provided Borrower is not then in
default under the Loan Documents, Lender will make available to
Borrower, as Subsequent Advances to be re-advanced under the Loan, up
to $25,000,000 of principal reductions of the Original Note,
(a) $22,019,920 of which shall be available for general
business purposes, which amount Borrower agrees to borrow and, subject
to the applicable conditions to Subsequent Advances, Lender shall fund
on or before March 31, 1994,
<PAGE>
(b) $2,730,080 of which shall be available for Subsequent
Advances for Leasing Costs, and
(c) $250,000 of which shall be available for Subsequent
Advances for abatement and removal of environmental hazards.
Borrower shall initiate requests for such Subsequent Advances in
accordance with the application procedure set forth in Section 2.4 of
the Loan Agreement and funding for such Subsequent Advances shall
originate from re-advances of principal reductions of the Original
Note. Borrower and Lender acknowledge and agree that the principal
balance of the Loan as of the date hereof is $15,000,000, and that, in
addition to the $25,000,000 which is made available for Subsequent
Advances under this Amendment, Borrower has requested and Lender has
approved $3,665,739.98 for Subsequent Advances under the Loan
Agreement. In accordance with the foregoing, Section 2.1 of the Loan
Agreement is amended and restated as follows:
2.1 Commitment of Lender; Revolving Line of Credit.
Subject to the provisions of this Agreement, and provided that an
Event of Default does not then exist, Lender will make Advances to
Borrower subject to the conditions of this Agreement. As the first
Advance hereunder, Lender shall disburse $109,864,700. Thereafter,
Lender shall make Advances for, among other purposes, the Renovation
of the Real Property and Leasing Costs, in accordance with Approved
Budget in the amount of up to the sum of all principal reductions
which actually have been paid to Lender; provided, however, (a) that
the sum of all Subsequent Advances from and after December 31, 1993
shall not exceed $25,000,000 (exclusive of Subsequent Advances for
Taxes under Section 2.21 of this Agreement), (b) that of said
$25,000,000 which is available for Subsequent Advances after
December 31, 1993, (i) $22,019,920 shall only be available to be
advanced prior to March 31, 1994, but may be advanced for Borrower's
general business purposes and shall not be subject to the requirements
of Section 1.64 of this Agreement, regarding the purpose of Subsequent
Advances, Section 2.2(c) and Subsections 2.2(d)(ii) and 2.2(d)(iii) of
this Agreement in connection with renovation of the Real Property,
Section 2.4, Section 2.5, and Section 2.10 of this Agreement relating
to Renovation Requirements and Leasing Costs, or the use requirements
of Section 2.6 of this Agreement, (ii) of the remaining $2,980,080,
$2,730,080 shall be available only for Leasing Costs, and $250,000
shall be available for payment of costs of abating or removing
environmental
<PAGE>
hazards affecting the Real Property; and (iii) Subsequent Advances
from and after December 31, 1993 shall not under any circumstances be
available, except for Borrower's general business purposes, for paying
costs of renovation of the Real Property. To the extent reductions of
principal are made available for Subsequent Advances under this
Agreement, the Loan shall be a "revolving line of credit"; that is,
subject to the terms hereof, portions of the principal sum of the Note
may be advanced, repaid, and readvanced. The books and records of
Lender shall be prima facie evidence of all sums due Lender under the
Note and the other Security Instruments. Notwithstanding the
foregoing, Borrower shall continue to be entitled to Subsequent
Advances for Taxes in the amount of aggregate monthly principal
reductions and in accordance with Section 2.21 of this Agreement.
2. Maximum Loan Amount. Borrower and Lender agree that from
and after the date hereof the maximum amount which at any time can be
outstanding under the Loan, whether evidenced by the Original Note or
the Increase Note, is $43,665,739.98.
3. Release Prices. Section 8.1(b)(1) of the Loan Agreement is
deleted and in lieu thereof is inserted the following:
(1) an amount to be applied as a prepayment in
reduction of the indebtedness evidenced by the Note equal to:
(A) One hundred fifty percent (150%) of the
amount allocated by Lender to the following Assets:
Bentley Village Trestles (Mortgage
Westbrook Place Loan)
Colonies Landing Shadow Valley
Pipers Creek
(B) One hundred five percent (105%) of the amount
allocated by Lender for the following Real Property Assets:
West Lake Gardens
Oak Ridge
(C) One hundred twenty-five percent (125%) of the
amount allocated by Lender for the following Assets:
<PAGE>
Southwest Medical Westchase
Richmond Square San Antonio Imaging
Westminster Spring Valley
Medcentre Pointe Redondo Place
Nacon Plaza Park North Tech
Balcones (Mortgage (Mortgage Loan)
Loan)
(D) Greater of (i) GECC Loan Allocation or (ii)
seventy percent (70%) of the face amount of the following Mortgage
Loans:
Enfield Courts Turtle Creek
Parc Bay
Each such amount being herein called, for the Asset to
which it relates, the "Minimum Release Amount."
Provided further, Exhibit AA to the Loan Agreement, as adopted in the
Increase Modification, is hereby deleted and replaced with Exhibit AAA
to this Amendment.
4. Security Instruments. Section 1.63 of the Loan Agreement is
hereby modified to include in the definitions of Security Instruments
under the Loan Agreement, this Amendment and the Third Modification.
5. Prepayment Charges. Borrower and Lender acknowledge and
agree (a) that, in accordance with Section 4 of the First
Modification, the prepayment of the principal of the Loan on
December 15, 1993 to a remaining principal balance of $15,000,000
required a prepayment charge of $621,016.40 and (b) that Lender agreed
to accept only $500,000 of the prepayment charge at that time,
reserving the right to charge the remaining $121,016.40 of the
prepayment charge at any time in the future. Borrower and Lender
further agree that if Borrower requests and satisfies all conditions
precedent for additional Subsequent Advances of $22,019,920 for
general business purposes on or before March 31, 1994, and $22,019,920
of additional Subsequent Advances for general business purposes
actually are made on or before March 31, 1994, Lender shall waive its
right to receive any further prepayment charge as a result of the
partial prepayment of the principal balance of the Loan on
December 15, 1993 or any subsequent prepayment. Otherwise, on
April 1, 1994, Borrower shall pay to Lender the remaining $121,016.40
portion of the prepayment charge owing as a result of the December 15,
1993 partial prepayment and the prepayment charge shall continue to be
applicable to all future prepayments.
6. Mandatory Prepayment. Borrower covenants and agrees to
prepay the entire principal balance of the Loan and all accrued and
<PAGE>
unpaid interest thereon if either (c) the principal amount of the Loan
shall have been reduced to less than $10,000,000, or (d) the aggregate
Loan allocation of those Real Property Assets comprising multi-family
apartment projects, as determined in accordance with Exhibit A, shall
ever be less than forty percent (40%) of the aggregate Loan allocation
of all Assets, also as determined in accordance with Exhibit A.
7. Costs and Expenses. Borrower agrees to pay all costs
incurred in connection with the execution and consummation of this
Amendment and the Third Modification, including but not limited to,
all recording costs, the premium for such endorsements to the policies
of title insurance insuring the First Lien Deed of Trust and the
Second Lien Deed of Trust as may be required by Lender with respect to
this Amendment and the Third Modification, and the reasonable fees and
actual expenses of Lender's counsel. Borrower further covenants to
deliver or cause to be delivered such evidence of existence, capacity,
authorization, qualification, or enforceability of its obligations as
Lender may require in connection with this Amendment and the Third
Modification.
8. Limitation on Interest. All agreements between Borrower and
Lender, whether now existing or hereafter arising and whether written
or oral, are hereby expressly limited so that in no contingency,
whether by reason of acceleration of the maturity of the Notes or
otherwise, shall the interest contracted for, charged, received, paid
or agreed to be paid to the holder of the Notes exceed the maximum
amount permissible under applicable law. If, from any circumstance
whatsoever, interest would otherwise be payable to the holder of the
Notes in excess of the maximum lawful amount, the interest payable to
the holder of the Notes shall be reduced to the maximum amount
permitted by applicable law; and if from any circumstance the holder
of the Notes shall ever receive anything of value deemed interest by
applicable law in excess of the maximum amount allowed by law, an
amount equal to any excessive interest shall be applied to the
reduction of the principal amount owing under the Notes, and not to
the payment of interest, or if such excessive interest exceeds such
unpaid balance of principal of the Notes, such excess shall be
refunded to Borrower. All interest paid or agreed to be paid to the
holder of the Notes, shall, to the extent permitted by applicable law,
be amortized, prorated, allocated and spread throughout the full term
of the Notes (including the period of any renewal or extension
thereof) so that the interest on the Notes shall not exceed the
maximum amount permitted by applicable law. This Section shall
control all agreements between Borrower and the holder of the Notes.
<PAGE>
EXECUTED as of the date and year first above written.
BORROWER:
OLD BORROWER: MXM MORTGAGE CORP.,
a Delaware corporation
By:
Erik Eriksson, Jr.,
Vice President
NEW BORROWER: MXM MORTGAGE, L.P.,
a Delaware limited partnership
By: MXM GENERAL PARTNER, INC.,
a Delaware corporation,
General Partner
By:
Erik Eriksson, Jr.,
Vice President
LENDER: GENERAL ELECTRIC CAPITAL CORPORATION,
a New York corporation
By:
Ty Albright, Project Manager
CONSULTING AGREEMENT
THIS AGREEMENT is made as of the 19th day of November, 1993, by and
between Kaiser Aluminum & Chemical Corporation, a Delaware corporation
(the "Company"), and A. Stephens Hutchcraft, Jr. (the "Consultant").
In consideration of the mutual promises contained in this
Agreement, the Company and Consultant hereby agree as follows:
1. TERM
The term of this Consulting Agreement shall commence on
January 1, 1994, and shall continue through December 31, 1994;
provided, however, that the term of this Agreement may be extended for
additional one-year periods, or such shorter periods as the parties
hereto may agree upon, in the event that the parties hereto mutually
agree, in writing, to any such extension prior to the expiration of
the term hereof.
2. CONSULTATION SERVICES
(a) The Company hereby contracts for the services of
Consultant and the Consultant hereby agrees to advise and consult with
the Company and certain of its affiliates in such positions and
activities as the President and Chief Executive Officer of the Company
shall direct. Consultant shall provide consulting services to the
Company hereunder during such times and at such place or places as
shall be mutually agreed upon by the Company and Consultant.
(b) As an independent contractor, Consultant agrees to
provide such consulting advice and assistance to the Company during an
average fifty percent (50%) of the customary business hours in any
given month during the term of this Agreement.
(c) Consultant shall have the right to designate periods of
time during which he will be unavailable (such as periods of vacation
and for other desired absences), provided Consultant has informed the
President and Chief Executive Officer of the Company in advance of any
periods during which he will be unavailable for more than two
consecutive weeks.
(d) In the event Consultant is temporarily unable by reason
of disability to perform consulting services, such performance shall
be excused during such period of disability, provided that
Consultant's physician advises the Company that the Consultant's
recovery is likely to occur within the remaining term of this
Consulting Agreement.
<PAGE>
(e) To the extent consistent with Section 2(f) and Section
5 hereof, Consultant shall be free to engage in business activity of
his choice when not providing consulting services to the Company
hereunder.
(f) Consultant acknowledges receipt of a copy and agrees
during the term hereof to comply with the terms and conditions of the
MAXXAM Inc. "Code of Business Conduct" insofar as said Code applies to
Consultant providing services to the Company and certain of its
affiliates.
3. COMPENSATION
(a) During the term of this Agreement, the Company shall
pay to Consultant for the services rendered by Consultant a total fee
of $225,000, payable in installments of $9,375.00 on the 15th and on
the final day of each month.
(b) The Company shall reimburse Consultant for all
reasonable out-of-pocket business expenses incurred by him relating to
consulting services provided by Consultant under this Consulting
Agreement. Consultant shall furnish such evidence or documentation to
support his requests for reimbursement of expenses as is customarily
provided by executives of the Company in connection with reimbursement
of expenses.
(c) The Company shall provide Consultant with an office,
secretarial services and an automobile of such make and model as shall
be agreed upon between the Company and Consultant, including costs of
fuel and maintenance, and the Company shall also provide credit cards
for payment of expenses that are otherwise reimbursable under this
Agreement.
4. INDEPENDENT CONTRACTOR STATUS
(a) The Consultant shall act in the capacity of an
independent contractor with respect to the Company. The Consultant
shall not be, nor represent himself as being, an agent of the Company,
and he shall not be, nor represent himself as being, authorized to
bind the Company.
(b) Nothing contained herein shall be deemed to create an
employer/employee relationship between the Company and Consultant, and
in all respects Consultant shall be an independent
<PAGE>
contractor with respect to all of his activities on behalf of the
Company hereunder. The Company shall not treat Consultant as an
employee for purposes of employment taxes, income tax withholding or
employee benefits. Consultant acknowledges that he is responsible for
payment of all Federal and State self-employment and income taxes.
(c) consultant understand that no employee benefits
provided by the Company for its employees, including, but not limited
to the Kaiser Retirement Plan, Plan B, Severance Pay, Life Insurance
and Medical or Dental insurance, unemployment insurance, compensation
for holidays or illness, pension benefits, or health and welfare
benefits shall be available to Consultant as a result of his services
under this Agreement. However, nothing herein shall affect benefits
accrued or to which Consultant is otherwise entitled by virtue of his
prior employment by the Company.
5. NON-COMPETITION
Throughout the term hereof, the Consultant shall not,
directly or indirectly, engage in any business or activity in which
the Company is engaged ("Competitive Business") nor be employed by,
render services of any kind to, advise or receive compensation in any
form from, any entity or person which directly or indirectly engages
in a Competitive Business without first advising the Company in
writing of the nature of the services contemplated and the party for
whom they are to be performed.
6. INDEMNIFICATION
The Company shall indemnify and hold harmless Consultant
from and against any and all expenses, costs, or liabilities
(including court costs and reasonable attorneys' fees) actually
incurred by Consultant arising out of any threatened, pending or
completed action, suit or proceeding whether civil, criminal,
administrative or investigative by reason of the performance of
consulting services by Consultant under this Agreement, except to the
extent that (a) such liabilities were caused by Consultant's gross
negligence or bad faith, or (b) such indemnification is prohibited by
law, whether by statute, court decision or otherwise.
7. PROTECTION OF PROPRIETARY AND CONFIDENTIAL INFORMATION
<PAGE>
(a) All analyses, reports, photographs, data and other
information prepared by Consultant in connection with this Agreement
or disclosed to Consultant by or on behalf of the Company in
connection with the services hereunder shall, as between Consultant
and the Company, become or remain as the case may be, the property of
the Company; and, except as authorized in writing, no such information
shall be disclosed by Consultant to any other person, firm or
corporation or be used by Consultant for any other purpose than the
performance of the services hereunder. All such material shall be
delivered to the Company by Consultant upon request.
(b) The Consultant shall not at any time, either during the
term of this Agreement or thereafter, directly or indirectly use,
disseminate or disclose to any person or entity any information,
trade secrets, customer lists or other customer information, technical
data or know-how relating to the products, developments, inventions,
services, processes, methods, designs, equipment or business practices
of the Company, whether acquired in the performance of services under
this Agreement or in any other capacity.
8. SUCCESSORS AND ASSIGNS
This Agreement shall not be assigned by either party without
the prior written consent of the other party, except that the Company
may, without consent, assign this agreement to any successor to all or
substantially all of the assets of the Company. Except as so limited,
this Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, legal representatives,
successors and assigns. Nothing herein expressed or implied is
intended to confer upon any person, other than the parties hereto or
their respective successors, assigns, heirs or legal representatives,
any rights, remedies, obligations, or any liabilities under or by
reason of this Agreement.
9. AMENDMENTS
This Agreement may be changed, amended or modified only by
an agreement in writing signed by each of the parties.
<PAGE>
10. TERMINATION
This Agreement may be terminated by the Company prior to its
expiration date for cause should Consultant be convicted of any crime
involving moral turpitude.
11. NOTICES
All notices provided for in this Agreement shall be sent to
the parties addressed as follows:
TO THE COMPANY: Kaiser Aluminum & Chemical Corporation
Attention: Anthony R. Pierno
5847 San Felipe, Suite 2600
Houston, Texas 77057
TO CONSULTANT: A. Stephens Hutchcraft, Jr.
15 Hillside Drive
Danville, California 94526
All notices shall be deemed to have been given when personally
delivered or five (5) days after being sent by certified or registered
first-class mail, return receipt requested, postage prepaid and
properly addressed to the designated address of the party to whom the
notice is directed.
12. WAIVER OF BREACH
The waiver by any party of any breach by the other party of
any term or condition of this Agreement shall not be deemed to
constitute the waiver by such first party of any other breach by the
other party of the same or any other term or condition.
13. ARBITRATION OF DISPUTES
Any dispute under this Agreement shall be resolved by
binding arbitration in San Francisco, California, pursuant to the
rules of the American Arbitration Association in effect at the time of
the arbitration or such other rules as to which the parties may
mutually agree.
14. GOVERNING LAW
<PAGE>
This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
15. ENTIRE AGREEMENT: SURVIVAL OF OBLIGATIONS
This Agreement, as to the matters herein set forth,
supersedes any contrary or inconsistent provisions of any prior
agreement between Consultant and the Company. The parties acknowledge
that the Consultant's employment agreement with the Company dated
October 1, 1992, is for a term ending on December 31, 1993, and that
Consultant will thereupon be retiring from his long term employment
with the Company. This Agreement contains the entire agreement
between the parties concerning the subject matters herein set forth
and supersedes all prior agreements and understandings concerning
such subject matters. The obligations of Consultant under paragraph 7
shall survive the expiration or termination of this Agreement, and
nothing herein contained shall limit or impair Consultant's rights
under the aforesaid employment agreement including but not limited to
his right thereunder to any amounts payable after the conclusion of
the term of that agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of November 19, 1993. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of
which shall together constitute one and the same Agreement for all
purposes.
KAISER ALUMINUM & CHEMICAL CORPORATION
By:
CONSULTANT
A. Stephens Hutchcraft, Jr.
COMMERCIAL GUARANTY
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
62 24 SSJ15
<CAPTION>
References in the shaded area are for Lender's use only and do
not limit the applicability of this document to any particular
loan or item.
<S> <C> <S> <C>
Borrower: Anthony R. Pierno Lender: Charter National Bank-Houston
(SSN: ###-##-####) Westheimer
5374 Tilbury Drive P.O. Box 4525
Houston, TX 77056 Houston, TX 77210-4525
Guarantor: MAXXAM, INC.
2600 SAN FELIPE
HOUSTON, TX 77057
</TABLE>
AMOUNT OF GUARANTY. This is a guaranty of payment of the Note, including
without limitation the principal Note amount of One Hundred Fifty
Thousand & 00/100 Dollars ($150,000.00).
GUARANTY. For good and valuable consideration, MAXXAM, INC.
("Guarantor") absolutely and unconditionally guarantees and promises to
pay to Charter National Bank-Houston ("Lender") or its order, in legal
tender of the United States of America, the Indebtedness (as that term is
defined below) of Anthony R. Pierno ("Borrower") to Lender on the terms
and conditions set forth in this Guaranty.
DEFINITIONS. The following words shall have the following meanings when
used in this Guaranty:
Borrower: The word "Borrower" means Anthony R. Pierno.
Guarantor: The word "Guarantor" means MAXXAM, INC.
Guaranty: The word "Guaranty" means this Guaranty made by Guarantor
for the benefit of Lender dated January 28, 1994.
Indebtedness. The word "Indebtedness" means the Note, including (a)
all principal, (b) all interest, (c) all late charges, (d) all loan fees
and loan changes, and (e) all collection costs and expenses relating to
the Note or to any collateral for the Note. Collection costs and
expenses include without limitation all of Lender's attorneys' fees and
Lender's legal expenses, whether or not suit is instituted, and
attorneys' fees and legal expenses for bankruptcy proceedings (including
efforts to modify or vacate any automatic stay or injunction), appeals,
and any anticipated post-judgment collection services.
Lender. The word "Lender" means Charter National Bank-Houston, its
successors and assigns.
Note. The word "Note" means the promissory note or credit agreement
dated January 28, 1994, in the original principal amount of $150,000.00
from Borrower to Lender, together with all renewals of, extensions of,
modifications of, refinancing of, consolidations of, and substitutions
for the promissory note or agreement. Notice to Guarantor: The Note
evidences a revolving line of credit from Lender to Borrower.
Related Documents. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, guaranties, security agreements, mortgages, deeds of trust,
and all other instruments, agreements and documents, whether now or
hereafter existing, execution in connection with the Indebtedness.
MAXIMUM LIABILITY. The maximum liability of Guarantor under this
Guaranty shall not exceed at any one time the amount of the Indebtedness
described above, plus all costs and expenses of (a) enforcement of this
Guaranty and (b) collection and sale of any collateral securing this
Guaranty.
The above limitation on liability is not a restriction on the amount of
the Indebtedness of Borrower to Lender either in the aggregate or at any
one time. If Lender presently holds one or more guaranties, or hereafter
receives additional guaranties from Guarantor, the rights of Lender under
all guaranties shall be cumulative. This Guaranty shall not (unless
specifically provided below to the contrary) affect or invalidate any
such other guaranties. The liability of Guarantor will be the aggregate
liability of Guarantor under the terms of this Guaranty and any such
other unterminated guaranties.
NATURE OF GUARANTY. Guarantor intends to guarantee at all times the
performance and prompt payment when due, whether at maturity or earlier
by reasons of acceleration or otherwise, of all Indebtedness within the
limits set forth in the preceding section of this Guaranty. This
Guaranty covers a revolving line of credit and guarantor understands and
agrees that this guarantee shall be open and continuous until the line of
credit is terminated and the Indebtedness is paid in full, as provided
below.
DURATION OF GUARANTY. This Guaranty will take effect when received by
Lender without the necessity of any acceptance by Lender, or any notice
to Guarantor or to Borrower, and will continue in full force until all
Indebtedness shall have been fully and finally paid and satisfied and all
other obligations of Guarantor under this Guaranty shall have been
performed in full. Release of any other guarantor or termination of any
other guaranty of the Indebtedness shall not affect the liability of
Guarantor under this Guaranty. A revocation receivable by Lender from
any one or more Guarantors shall not affect the liability of any
remaining Guarantors under this Guaranty. This Guaranty covers a
revolving line of credit and it is specifically anticipated that
fluctuations will occur in the aggregate amount of Indebtedness owing
from Borrower to Lender. Grantor specifically acknowledges and agrees
that fluctuations in the amount of Indebtedness, even to zero dollars
($0.00), shall not constitute a termination of this Guaranty.
Guarantor's liability under this Guaranty shall terminate only upon (a)
termination in writing by Borrower and Lender of the line of credit, (b)
payment of the Indebtedness in full in legal tender, and (c) payment in
full in legal tender of all other obligations of Guarantor under this
Guaranty.
GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender,
without notice or demand and without lessening or otherwise affecting
Guarantor's liability under this Guaranty, from time to time: (a) to make
one or more additional secured or unsecured loans to Borrower, to lease
equipment or other goods to Borrower, or otherwise to extend additional
credit to Borrower; (b) to alter, compromise, renew, extend, accelerate,
or otherwise change one or more times the time for payment or other terms
of the Indebtedness or any part of the Indebtedness, including increases
and decreases of the rate of interest on the Indebtedness; extensions may
be repeated and may be for longer than the original loan term; (c) to
take and hold security for the payment of this Guaranty or the
Indebtedness, and exchange, enforce, waive, fall or decide not to
perfect; and release any such security, with or without the substitution
of new collateral; (d) to release, substitute, agree not to sue, or deal
with any one or more of Borrower's sureties, endorsers, or other
guarantors on any terms or in any manner Lender may choose; (e) to
determine how, when and what application of payments and credits shall be
made on the Indebtedness; (f) to apply such security and direct the order
or manner of sale thereof, including without limitation, any nonjudicial
sale permitted by the terms of the controlling security agreement or deed
of trust, as Lender in its discretion may determine; (g) to sell,
transfer, assign, or grant participations in all or any part of the
Indebtedness; and (h) to assign or transfer this Guaranty in whole or in
part.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and
warrants to Lender that (a) no representation or agreements of any kind
have been made to Guarantor which would limit or qualify in any way the
terms of this Guaranty; (b) this Guaranty is executed at Borrower's
request and not at the request of Lender; (c) Guarantor has not and will
not, without the prior written consent of Lender, sell lease, assign,
encumber, hypothecate, transfer, or otherwise dispose of all or
substantially all of Guarantor's assets*, or any interest therein; (d)
Lender has made no representation to Guarantor as to the creditworthiness
of Borrower; (e) upon Lender's request, Guarantor will provide to Lender
financial and credit information in form acceptable to Lender**, and all
such financial information provided to Lender is true and correct in all
material respects and fairly presents the financial condition of
Guarantor as of the dates thereof, and no material adverse change has
occurred in the financial condition of Guarantor since the date of the
financial statements; and (f) Guarantor has established adequate means of
obtaining from Borrower on a continuing basis information regarding
Borrower's financial condition. Guarantor agrees to keep adequately
informed from such means of any facts, events, or circumstances which
might in any way affect Guarantor's risks under this Guaranty, and
Guarantor further agrees that, absent a request for information, Lender
shall have no obligation to disclose to Guarantor any information or
documents acquired by Lender in the course of its relationship with
Borrower.
GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor
waives any right to require Lender (a) to continue lending money or to
extend other credit to Borrower; (b) to make any presentment, protest,
demand, or notice of any kind, including notice of any nonpayment of the
Indebtedness or of any nonpayment related to any collateral, or notice of
any action or nonaction on the part of Borrower, Lender, any surety,
endorser, or other guarantor in connection with the Indebtedness or in
connection with the creation of new or additional loans or obligations;
(c) to resort for payment or to proceed directly or at once against any
person, including Borrower or any other guarantor; (d) to proceed
directly against or exhaust any collateral held by Lender from Borrower,
any other guarantor, or any other person; (e) to give notice of the
terms, time, and place of any public or private sale of personal property
security held by Lender from Borrower or to comply with any other
applicable provisions of the Uniform Commercial Code; (f) to pursue any
other remedy within Lender's power; or (g) to commit any act or omission
of any kind, or at any time, with respect to any matter whatsoever.
If now or hereafter (a) Borrower shall be or become insolvent, and (b)
the Indebtedness shall not at all times until paid be fully secured by
collateral pledged by Borrower, Guarantor hereby forever waives and
relinquishes in favor of Lender and Borrower, and their respective
successors, any claim or right to payment Guarantor may now have or
hereafter have or acquire against Borrower, by subrogation or otherwise,
so that at no time shall Guarantor be or become a "creditor" of Borrower
within the meaning of 11 U.S.C. section 547(b), or any successor
provision of the Federal bankruptcy laws.
<PAGE>
Guarantor waives all rights of Guarantor under Chapter 34 of the Texas
Business and Commerce Code. Guarantor also waives any and all rights or
defenses arising by reason of (a) any "one action" or "anti-deficiency"
law or any other law which may prevent Lender from bringing any action,
including a claim for deficiency, against Guarantor, before or after
Lender's commencement or completion of any foreclosure action, either
judicially or by exercise of a power of sale; (b) any election of
remedies by Lender which destroys or otherwise adversely affects
Guarantor's subrogation rights or Guarantor's rights to proceed against
Borrower for reimbursement, including without limitation, any loss of
rights Guarantor may suffer by reason of any law limiting, qualifying, or
discharging the Indebtedness; (c) any disability or other defense of
Borrower, of any other guarantor, or of any other person, or by reason of
the cessation of Borrower's liability from any cause whatsoever, other
than payment in full in legal tender, of the Indebtedness; (d) any right
to claim discharge of the Indebtedness on the basis of unjustified
impairment of any collateral for the Indebtedness; (e) any statute of
limitations, if at any time any action or suit brought by Lender against
Guarantor is commenced there is outstanding Indebtedness of Borrower to
Lender which is not barred by any applicable statute of limitations; or
(f) any defenses given to guarantors at law or in equity other than
actual payment and performance of the Indebtedness. If payment is made
by Borrower, whether voluntarily or otherwise, or by any third party, on
the Indebtedness and thereafter Lender is forced to remit the amount of
that payment to Borrower's trustee in bankruptcy or to any similar person
under any federal or state bankruptcy law or law for the relief of
debtors, the Indebtedness shall be considered unpaid for the purpose of
enforcement of this Guaranty.
Guaranty further waives and agrees not to assert or claim at any time any
deductions to the amount guaranteed under this Guaranty for any claim of
setoff, counterclaim, counter demand, recoupment or similar right,
whether such claim, demand or right may be asserted by the Borrower, the
Guarantor, or both.
GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants
and agrees that each of the waivers set forth above is made with
Guarantor's full knowledge of its significance and consequences and that,
under the circumstances, the waivers are reasonable and not contrary to
public policy or law. If any such waiver is determined to be contrary to
any applicable law or public policy, such waiver shall be effective only
to the extent permitted by law or public policy.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of
setoff against the moneys, securities or other property of Guarantor
given to Lender by law, Lender shall have, with respect to Guarantor's
obligations to Lender under this Guaranty and to the extent permitted by
law, a contractual possessory security interest in and a right of setoff
against, and Guarantor hereby assigns, conveys, delivers, pledges, and
transfers to Lender all of Guarantor's right, title and interest in and
to, all deposits, moneys, securities and other property of Guarantor now
or hereafter in the possession of or on deposit with Lender, whether held
in a general or special account or deposit, whether held jointly with
someone else, or whether held for safekeeping or otherwise, excluding
however all IRA, Keogh, and trust accounts. Every such security interest
and right of setoff may be exercised without demand upon or notice to
Guarantor. No security interest or right of setoff shall be deemed to
have been waived by any act or conduct on the part of Lender or by any
neglect to exercise such right of setoff or to enforce such security
interest or by any delay in so doing. Every right of setoff and security
interest shall continue in full force and effect until such right of
setoff or security interest is specifically waived or released by an
instrument in writing executed by Lender.
SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that
the Indebtedness of Borrower to Lender, whether now existing or hereafter
created, shall be prior to any claim that Guarantor may now have or
hereafter acquire against Borrower, whether or not Borrower becomes
insolvent. Guarantor hereby expressly subordinates any claim Guarantor
may have against Borrower, upon any account whatsoever, to any claim that
Lender may now or hereafter have against Borrower. In the event of
insolvency and consequent liquidation of the assets of Borrower, through
bankruptcy, by an assignment for the benefit of creditors, by voluntary
liquidation, or otherwise, the assets of Borrower applicable to the
payment of the claims of both Lender and Guarantor shall be paid to
Lender and shall be first applied by Lender to the Indebtedness of
Borrower to Lender. Guarantor does hereby assign to Lender all claims
which it may have or acquire against Borrower or against any assignee or
trustee in bankruptcy of Borrower; provided however, that such assignment
shall be effective only for the purpose of assuring to Lender full
payment in legal tender of the Indebtedness. If Lender so requests, any
notes or credit agreements now or hereafter evidencing any debts or
obligations of Borrower to Guarantor shall be marked with a legend that
the same are subject to this Guaranty and shall be delivered to Lender.
Guarantor agrees, and Lender hereby is authorized, in the name of
Guarantor, from time to time to execute and file financing statements and
continuation statements and to execute such other documents and to take
such other actions as Lender deems necessary or appropriate to perfect,
preserve and enforce its rights under this Guaranty.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a
part of this Guaranty:
Amendments. This Guaranty, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Guaranty. No alteration of or amendment to
this Guaranty shall be effective unless given in writing and signed by
the party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Guaranty has been delivered to Lender and
accepted by Lender in the State of Texas. If there is a lawsuit, and if
the transaction evidenced by this Guaranty occurred in Harris County,
Guarantor agrees upon Lender's request to submit to the jurisdiction of
the courts of Harris County, State of Texas. This Guaranty shall be
governed by and construed in accordance with the laws of the State of
Texas and applicable Federal laws.
Attorneys' Fees. In addition to the amount of this Guaranty set
forth above, Lender may hire an attorney to help enforce this Guaranty if
Guarantor does not pay, and Guarantor will pay all of Lender's attorneys'
fees assessed by the court. Guarantor also will pay Lender all other
amounts actually incurred by Lender as court costs, lawful fees for
filing, recording, or releasing to any public office any instrument
securing this Guaranty; the reasonable cost actually expended for
repossessing, storing, preparing for sale, and selling any security; and
fees for noting a lien on or transferring a certificate of title to any
motor vehicle offered as security for this Guaranty.
Notices. All notices required to be given by either party to the
other under this Guaranty shall be in writing and shall be effective when
actually delivered or when deposited with a nationally recognized
overnight courier, or when deposited in the United States mail, first
class postage prepaid, addressed to the party to whom the notice is to be
given at the address shown above or to such other addresses as either
party may designate to the other in writing. If there is more than one
Guarantor, notice to any Guarantor will constitute notice to all
Guarantors. For notice purposes, Guarantor agrees to keep Lender
informed at all times of Guarantor's current address.
Interpretation. In all cases where there is more than one Borrower
or Guarantor, then all words used in this Guaranty in the singular shall
be deemed to have been used in the plural where the context and
construction so require; and where there is more than one Borrower named
in this Guaranty or when this Guaranty is executed by more than one
Guarantor, the words "Borrower" and "Guarantor" respectively shall mean
all and any one or more of them. The words "Guarantor," "Borrower," and
"Lender" include the heirs, successors, assigns, and transferees of each
of them. Caption headings in this Guaranty are for convenience purposes
only and are not to be used to interpret or define the provisions of this
Guaranty. If a court of competent jurisdiction finds any provision of
this Guaranty to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances, and all
provisions of this Guaranty in all other respects shall remain valid and
enforceable. If any one or more of Borrower or Guarantor are
corporations or partnerships, it is not necessary for Lender to inquire
into the powers of Borrower or Guarantor or of the officers, directors,
partners, or agents acting or purporting to act on their behalf, and any
Indebtedness made or created in reliance upon the professed exercise of
such powers shall be guaranteed under this Guaranty.
Waiver. Lender shall not be deemed to have waived any rights under
this Guaranty unless such waiver is given in writing and signed by
Lender. No delay or omission on the part of Lender in exercising any
right shall operate as a waiver of such right or any other right. A
waiver by Lender of a provision of this Guaranty shall not prejudice or
constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this Guaranty.
No prior waiver by Lender, nor any course of dealing between Lender and
Guarantor, shall constitute a waiver of any of Lender's rights or of any
of Guarantor's obligations as to any future transactions. Whenever the
consent of Lender is required under this Guaranty, the granting of such
consent by Lender in any instance shall not constitute continuing consent
to subsequent instances where such consent is required and in all cases
such consent may be granted or withheld in the sole discretion of Lender.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. *Except to an affiliate or
to another assignee or transferee which agrees to become substitute
Guarantor of this Guaranty and to assume all of the obligations of
Guarantor set forth in this Guaranty. **It is recognized that Guarantor
is a corporation with securities traded on a national securities exchange
and, as such, is governed by the Securities Exchange Act of 1934 as
amended (the "Act"). It is agreed that financial information as filed by
the Guarantor pursuant to the Act is deemed to be (i) adequate
information and (ii) in a form acceptable to Lender for the purposes of
this provision.
<PAGE>
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF
THIS GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR
UNDERSTANDS THAT THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION
AND DELIVERY OF THIS GUARANTY TO LENDER AND THAT THE GUARANTY WILL
CONTINUE UNTIL TERMINATED IN THE MANNER SET FORTH IN THE SECTION TITLED
"DURATION OF GUARANTY." NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO
MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY IS DATED JANUARY 28, 1994.
GUARANTOR:
MAXXAM, INC.
By:/s/ Charles Hurwitz
CHARLES HURWITZ
PRESIDENT AND CHIEF EXECUTIVE OFFICER
January 28, 1994
Charter National Bank-Houston
P. O. Box 4525
Houston, Texas 772104525
RE: Collateral assignment of certain contract rights.
Gentlemen:
Concurrently with the execution of this letter agreement, Charter
National Bank-Houston (the "Bank") has extended by renewal a personal
line of credit (the "Line of Credit") to Anthony R. Pierno ("Pierno")
in the principal amount of $150,000.00 pursuant to that certain
promissory note of even date herewith (the "Note" which term as used
herein shall include any and all renewals, extensions and
modifications of the Note, if any). To secure payment of the Note, and
any and all indebtedness, obligations liabilities Pierno arising in
connection therewith, Pierno has granted, assigned and conveyed to the
Bank a first lien and security interest in and to any bonus or similar
payments which are to be paid to Pierno (the "Bonus") by MAXXAM, Inc.
("MAXXAM") at any time there is any indebtedness outstanding on the
Note pursuant to that certain Employment Agreement dated May 23, 1990,
by and between MAXXAM and Pierno (the "Employment Agreement" a copy of
which is attached hereto as Exhibit A). The Bank's first lien and
security interest in the Bonus shall include any bonus and/or
severance payments (as defined herein below) that may be made to
Pierno in the event of termination of Pierno's employment in
accordance with Section 8 of the Employment Agreement. If Pierno's
employment is terminated, Pierno agrees that if any bonus and/or
severance payments to which he may be entitled under the Employment
Agreement are less than the Payoff Amount, the entire amount of such
payments shall be paid to the Bank in partial satisfaction of the
Note.
MAXXAM hereby acknowledges that the Bank has been granted a first
lien and security interest in and to the Bonus. Prior to payment of
the Bonus to Pierno, MAXXAM shall contact the Bank to determine the
amount necessary to satisfy and discharge the Note in full (the
"Payoff Amount"). In accordance with the Bank's instructions, Pierno
hereby authorizes and instructs MAXXAM, and MAXXAM agrees, to deduct
the Payoff Amount from the Bonus and to remit such Payoff Amount in
immediately available funds directly to the Bank. The payment may be
accomplished in such other manner as may be mutually agreeable between
Pierno and the Bank, for example, by MAXXAM making a direct deposit of
the full bonus amount to Pierno's account with the Bank when assured
by the Bank that Bank holds Pierno's check or other instrument
satisfactory to the Bank drawn against the account in the Payoff
Amount. Upon payment of the Payoff Amount and discharge of the Note,
the Line of Credit shall terminate and the Note shall be returned to
Pierno marked "Paid in Full."
<PAGE>
Pierno and MAXXAM jointly and severally represent and warrant to
the Bank that, as of the date hereof, (i) the base salary payable to
Pierno under the Employment Agreement for the calendar year of 1994 is
$331,511,00; (ii) the total directorship fees, if any, to paid to
Pierno for calendar year of 1994 do not exceed $75,000.00; (iii) to
the best of our knowledge, there is no event that warrants, or the
passage of the time will warrant, termination of Pierno's employment;
and (iv) there has been no amendment or modification, either oral or
written, to the terms and provisions of the Employment Agreement.
This letter agreement shall be and remain in full force and
effect until all of Pierno's obligations under the Note and all
documents have been satisfied.
Anthony R. Pierno
MAXXAM Inc.
By:
Name: Charles E. Hurwitz
Title: Chairman of the Board,
President and
Chief Executive Officer
AGREED TO AND ACCEPTED
this ____ day of January, 1994
CHARTER NATIONAL BANK-HOUSTON
By:___________
Name:_________
Title:________
<PAGE>
<TABLE>
<CAPTION>
NOTICE OF FINAL AGREEMENT
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$150,000.00 01-28-1994 01-28-1995 54656-003 62 24 SSJ15
ReferencesintheshadedareaareforLender'suseonlyanddonotlimittheapplicabilityofthisdocumenttoanyparticular
loan or item.
</TABLE>
<TABLE>
<C> <C> <C>
Borrower: Anthony R.Pierno Lender: Charter National Bank-Houston (SSN: ###-##-####)
5374 Tilbury Drive P.O. Box 4525
Houston, TX 77056 Houston, TX 77210
</TABLE>
THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
As used in this Notice, the following terms have the following
meanings:
Loan: The term "Loan" means the following described loan: a
Chapter 4 non-precomputed Variable Rate (2.000% over Charter National
Bank - Houston Base, with an interest rate ceiling of 18.000%, making an
initial rate of 9.250%), Nondisclosable Revolving Line of Credit Loan to
an individual for $150,000.00 due on January 28, 1995. This is a secured
renewal of the following described indebtedness: PROMISSORY NOTE DATED
JANUARY 28, 1993 IN THE PRINCIPAL AMOUNT OF $150,000.00 EXECUTED BY
ANTHONY R. PIERNO PAYABLE TO THE ORDER OF CHARTER NATIONAL BANK HOUSTON.
Parties. The term "Parties" means Charter National Bank-Houston
and any and all entities or individuals who are obligated to repay the
loan or have pledged property as security for the Loan, including without
limitation the following:
Borrower: Anthony R. Pierno
Guarantor: MAXXAM Inc.
Loan Agreement. The term "Loan Agreement" means one or more
promises, promissory notes, agreements, undertakings, security
agreements, deeds of trust or other documents, or commitments, or any
combination of those actions or documents, relating to the Loan,
including without limitation the following:
Corporate Res. to Guarantee/Grant Coll.
Promissory Note / Change in Terms Agr.
Commercial Guaranty
Security Agreement
Assignment of Life Insurance
UCC - 1
Disbursement Request and Authorization
Notice of Final Agreement
Insurance Policy Verification
This Notice of Final Agreement is given by Charter National Bank-Houston
pursuant to Section 26.02 of the Texas Business and Commerce
Code. Each Party who signs below, other than Charter National Bank-
Houston, acknowledges, represents, and warrants to Charter National
Bank-Houston that it has received, read and understood this Notice of
Final Agreement. This Notice is dated January 28, 1994.
BORROWER:
Anthony R. Pierno
GUARANTOR:
MAXXAM, INC.
By:________
CHARLES HURWITZ, PRESIDENT AND CHIEF EXECUTIVE OFFICER
LENDER:
Charter National Bank-Houston
By:________
Authorized Officer
PROMISSORY NOTE
Houston, Texas
July 20, 1993
For value received, the undersigned (hereinafter called
"Employee"), together with the undersigned Co-Borrower hereby
promises(s) to pay to MAXXAM Inc., a Delaware corporation, or order at
the principal offices of MAXXAM Inc., the sum of Fifty Thousand
Dollars ($50,000), together with interest on the unpaid principal
balance at the rate of six percent (6%) per annum. Interest shall be
payable monthly in arrears on the twentieth day of each month.
This note shall be payable in full, without presentment, grace,
demand or notice upon the earliest to occur of:
(i) July 20, 1998, or
(ii) immediately upon employee's separation from Employment
with MAXXAM Inc.
Should default be made in payment of any sum due hereunder the
whole sum of principal and accrued interest shall become immediately
due and payable. After default, interest shall accrue on all unpaid
amounts due at the highest rate then lawful in the State of Texas.
Principal and interest shall be payable in lawful money of the United
States. If action be instituted on this note, the undersigned agree
to pay such sums as a court of competent jurisdiction may fix as
reasonable attorney's fees.
EMPLOYEE
Byron L. Wade
CO-BORROWER
Carol Wade
August 20, 1993
Mr. Robert E. Cole
Vice President, Government Affairs
900 17th Street, N.W.
Washington, D.C. 20006
Dear Bob:
In order to help assure your retention and to provide a measure
of compensation that is competitive with the marketplace, Management
has agreed that it is in the best interest of Kaiser Aluminum &
Chemical Corp. ("the Company") to enter into the following agreement
with you. It is our purpose hereby to reinforce and encourage your
continued attention and dedication to your assigned duties. To that
end we have agreed as follows:
1. The Company will, immediately following execution of this
agreement, pay you a special payment of $33,000.00 and, provided you
remain in the employ of the Company until each of said dates, make
separate special payments to you of like amounts on or about August 1,
1994, August 1, 1995, and August 1, 1996.
2. If you remain in the employ of the Company through a date three
years from the date of this letter (the "Qualification Date") and you
hereby confirm that it is your present intention to do so, in addition
to your base salary and the above special payments during this period,
the Company will pay to you the aggregate of the amounts set aside as
retention payments in 1993, 1994 and 1995, to wit, on August 1 of each
respective year, $33,000; $25,000; and $25,000, or a total of $83,000,
provided you are a full-time employee of the Company on the
Qualification Date. This retention payment will be made 30 days after
the Qualification Date, and both it and the special payments will be
subject to standard payroll tax deductions and withholding, and will
be in addition to and have no effect upon any other bonus or benefit
plans for which you may be eligible. Such payments are not and will
not be made a part of your base salary.
Nothing contained herein is intended to impair the Company's
right to terminate your employment, either before or after the
Qualification Date, for any of the reasons set forth in the
termination policy of the Company including, without limitation, your
inability to perform your duties, nor to impair your right to resign
at any time. Should you resign, be discharged for serious cause, be
discharged for failure to accept another suitable
<PAGE>
position with the Company, or retire voluntarily prior to the
Qualification Date, no part of the retention payment shall be payable
to you. However, should you be terminated prior to the Qualification
Date under any other circumstances, including by reason of death or
permanent disability prior to the Qualification Date, you or your
estate will receive any retention payment credited up to the date of
termination and in addition such payment shall include a proration of
the retention payment for any partial year elapsed between the last
previous retention credit and the date of termination.
Your signature below signifies that you are in agreement with the
terms of this letter.
Sincerely,
A. Stephens Hutchcraft
Chairman of the Board &
Chief Executive Officer
/kl
Agreed to this 30th day
of August, 1993.
Robert E. Cole
